<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 16, 1996
REGISTRATION NO. 333-12185
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 4 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
MAGINET CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
4841 77-0407677
DELAWARE (PRIMARY STANDARD (I.R.S. EMPLOYER
(STATE OR OTHER INDUSTRIAL IDENTIFICATION NUMBER)
JURISDICTION OF CLASSIFICATION CODE
INCORPORATION OR NUMBER)
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... 6,325,000 $9.00 $56,925,000 $19,629.31(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 December 16, 1996
PROSPECTUS
5,500,000 SHARES
[LOGO OF MAGINET APPEARS HERE]
COMMON STOCK
------------
Of the 5,500,000 shares of Common Stock, $.001 par value ("Common Stock"), of
MagiNet Corporation ("MagiNet" or the "Company") being offered hereby,
4,400,000 shares are being offered initially in the United States and Canada by
the U.S. Underwriters (the "U.S. Offering") and 1,100,000 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 $8.00 and $9.00 per share. See "Underwriting"
for a discussion of factors to be considered in determining the initial public
offering price. The Common Stock has been approved for listing 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 7.
------------
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>
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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
$1,400,000 payable by the Company.
(3) The Company has granted to the U.S. Underwriters a 30-day option to
purchase up to 660,000 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 165,000 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]
[LOGO FOR MAGINET APPEARS HERE]
[ARTWORK APPEARS HERE]
----------------
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
America with the countries where there are MagiNet and Prodac 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.
With the acquisition of Prodac, installed rooms will total 103,000 (63% on-
demand, 37% scheduled).
MagiNet's full service offices provide local support.
[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 users are business and leisure guests at the world's leading hotels.
MagiNet has 238% 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 best 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, South Korea, Taiwan, Hong Kong, South Africa, Guam/Saipan,
Singapore, 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 September 30, 1996, MagiNet served 169 hotels having 59,529 rooms, with
an additional 16,783 rooms in backlog. In November 1996, the Company entered
into a definitive agreement to acquire Prodac Prozessdatentechnik GmbH, a
German corporation ("Prodac"), which substantially expands the Company's
geographic scope and immediately establishes the Company as a leading provider
of in-room entertainment services in Europe, the world's largest hotel market.
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.
Prodac's installed base includes certain hotels in the Accor, Dorint and
Maritim hotel chains, and Prodac has preferred vendor status with the Dorint,
Maritim and Novotel hotel 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
3
<PAGE>
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 has 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 and InterGame for in-room casino-style gaming.
The Company incorporated in California in July 1991, changed its name from
Pacific Pay Video Limited to MagiNet Corporation in August 1995 and
reincorporated into Delaware in December 1996. Unless the text otherwise
requires, references in this Prospectus to "MagiNet" and the "Company" refer to
MagiNet Corporation, a Delaware corporation, and its 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.
ACQUISITION OF PRODAC
On November 6, 1996, the Company entered into a definitive Share Purchase and
Transfer Agreement (the "Acquisition Agreement") to acquire all the outstanding
shares of Prodac (the "Prodac Shares"), which is headquartered in Cologne,
Germany. Prodac is one of the leading providers of video entertainment and
information systems in Europe and develops, manufactures and installs its own
proprietary scheduled broadcast and on-demand interactive video entertainment
systems. The Company believes that the acquisition of Prodac will provide
important competitive and strategic advantages to the Company. Europe
represents the world's largest hotel market with approximately 5.5 million
rooms, of which approximately 1.1 million represent rooms in the Company's
target market of hotels with greater than 100 rooms. MagiNet's acquisition of
Prodac will substantially expand the geographic scope of the Company's
operations and establish the Company as an industry leader in Europe. In
addition, the Company expects the acquisition to enhance its ability to pursue
contracts with leading hotels and hotel chains in Europe. As of September 30,
1996, Prodac served 242 hotels with 43,657 installed rooms, the majority of
which were located in Germany, and had 10,316 rooms in backlog. Scheduled
broadcast equipment represented approximately 87% of Prodac's installations and
70% of its backlog, and the balance of installations and backlog represented
installations and backlog of Prodac's Videoquest on-demand system.
Pursuant to the Acquisition Agreement, following the closings of the
Offerings, the Company will pay the shareholders of Prodac an aggregate
consideration of approximately $16.4 million, consisting of approximately $13.1
million in cash (plus interest at the rate of 6% per annum from November 6,
1996 through the date of the payment of the acquisition consideration) and
shares of MagiNet Common Stock with an aggregate value of approximately $3.3
million (based on a 10% discount to the initial public offering price). The
shareholders of Prodac are also entitled to a distribution of approximately
$393,000 to be paid from Prodac's retained earnings, calculated in accordance
with German generally accepted accounting principles ("German GAAP"). If the
closing of the Offerings occurs after December 31, 1996, such shareholders
shall be entitled to any additional retained earnings, calculated in accordance
with German GAAP, in excess of such $393,000. In addition, the Company will pay
up to an aggregate of approximately $9.8 million in cash and MagiNet Common
Stock contingent upon Prodac achieving certain financial targets in fiscal
1997, 1998 and 1999. The cash portion of the acquisition consideration will be
paid in Deutsche Marks out of the net proceeds of the Offerings based on the
applicable exchange rate on the Frankfurt am Main exchange on the closing date
of the Offerings. Any increase in the value of the Deutsche Mark relative to
the U.S. Dollar will increase the portion of the net proceeds of the Offerings
used in connection with the Prodac acquisition and will result in the Company's
issuing a greater number of shares of MagiNet Common Stock to the shareholders
of Prodac. See "Use of Proceeds," "Dilution," "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources" and "Acquisition of Prodac."
4
<PAGE>
THE OFFERINGS
<TABLE>
<S> <C>
Common Stock initially offered in:
The U.S. Offering................. 4,400,000 shares
The International Offering........ 1,100,000 shares
Total Common Stock offered....... 5,500,000 shares
Common Stock to be outstanding 18,531,041 shares(1)
after the Offerings...............
Use of proceeds.................... System installations, the cash portion of
the purchase price for the acquisition of
Prodac, working capital and general
corporate purposes. See "Use of Proceeds."
Nasdaq National Market symbol...... MGNT
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------- ------------------------------
1995 1996
------------------- -------------------
PRO PRO
1993 1994 ACTUAL FORMA(2) 1995 ACTUAL FORMA(3)
------- ------- -------- -------- -------- -------- --------
(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 $ 19,254 $ 5,655 $ 12,048 $ 23,941
Direct costs........... 294 1,156 3,731 9,903 2,586 6,232 11,792
Depreciation and
amortization.......... 171 957 3,682 9,936 2,564 4,747 9,366
Operations expenses,
selling, general and
administrative........ 1,961 7,170 11,528 13,806 7,808 8,455 10,729
Research and
development........... 1,320 856 1,247 1,525 890 1,599 1,809
------- ------- -------- -------- -------- -------- --------
Operating loss......... (3,351) (7,797) (11,499) (15,916) (8,193) (8,985) (9,755)
Interest expense and
other, net............ (28) (253) (991) (2,688) (379) (2,083) (4,019)
------- ------- -------- -------- -------- -------- --------
Loss before income
taxes and minority
interest in net losses
of consolidated
subsidiaries.......... (3,379) (8,050) (12,490) (18,604) (8,572) (11,068) (13,774)
Provision for income
taxes ................ -- -- (554) (680) (423) (681) (1,123)
Minority interest in
net losses of
consolidated
subsidiaries.......... -- 124 248 248 204 215 215
------- ------- -------- -------- -------- -------- --------
Net loss............... $(3,379) $(7,926) $(12,796) $(19,036) $ (8,791) $(11,534) $(14,682)
======= ======= ======== ======== ======== ======== ========
Pro forma net loss per
share(4).............. $ (1.03) $ (1.48) $ (0.93) $ (1.14)
======== ======== ======== ========
Shares used in
computation of pro
forma net loss per
share(4).............. 12,392 12,847 12,407 12,862
CONSOLIDATED STATEMENT
OF CASH FLOWS DATA(5):
Net cash used in
operating activities.. $(1,753) $(6,137) $ (7,619) $ (6,680) $ (9,510)
Net cash used in
investing activities.. (3,091) (9,361) (14,897) (10,967) (16,451)
Net cash provided by
financing activities.. 5,082 25,715 30,656 23,034 14,540
OTHER DATA:
EBITDA (In
thousands)(6)......... $(3,180) $(6,840) $ (7,817) $ (5,980) $ (5,629) $ (4,238) $ (389)
EBITDA margin.......... (805)% (292)% (90)% (31)% (100)% (35)% (2)%
New rooms installed.... 2,087 10,929 26,106 37,702 18,075 20,407 33,054
Total rooms served(7).. 2,087 13,016 39,122 70,132 31,091 59,529 103,186
Rooms in backlog(8).... -- 10,941 12,194 15,156 16,783 27,099
Average monthly gross
video revenue per
room(5)............... -- $ 32.39 $ 29.18 $ 28.74 $ 28.84
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
---------------------------------------
ACTUAL PRO FORMA(9) AS ADJUSTED(10)
--------- ------------ ---------------
(IN THOUSANDS)
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments.......................... $ 7,251 $ 1,278 $40,798
Working capital (deficit)............. 4,857 (15,879) 23,641
Total assets.......................... 49,484 74,424 113,944
Long-term debt........................ 25,829 40,142 40,142
Accumulated deficit................... (37,008) (49,208) (49,208)
Total stockholders' equity............ 15,969 7,069 46,589
</TABLE>
5
<PAGE>
- --------
(1) Based on shares outstanding as of September 30, 1996. Excludes as of
September 30, 1996, an aggregate of 1,702,080 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 $2.17. Also excludes as of September 30, 1996 an
additional 2,318,728 shares reserved for future issuance under the 1992 Key
Personnel Stock Option Plan, the 1996 Director Stock Option Plan and the
1996 Employee Stock Purchase Plan. Includes 455,373 shares of Common Stock
to be issued in connection with the Company's acquisition of Prodac within
10 business days after the closing of the Offerings. See "Management--Stock
Plans," "Acquisition of Prodac" and Note 5 of Notes to Consolidated
Financial Statements. Also excludes 40,000 shares of Common Stock issuable
upon exercise of an outstanding warrant issued in connection with the
Company's obtaining a commitment letter for up to $10 million of unsecured
subordinated debt. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
(2) Pro forma to give effect to the Company's acquisition of Prodac following
the closing of the Offerings as if such acquisition had taken place as of
January 1, 1995. See "Acquisition of Prodac," the Unaudited Pro Forma
Combined Condensed Financial Statements and Note 8 of Notes to Consolidated
Financial Statements.
(3) Pro forma to give effect to the Company's acquisition of Prodac following
the closing of the Offerings as if such acquisition had taken place as of
January 1, 1996. See "Acquisition of Prodac," the Unaudited Pro Forma
Combined Condensed Financial Statements and Note 8 of Notes to Consolidated
Financial Statements.
(4) See Note 1 of Notes to Consolidated Financial Statements for a discussion
of the computation of net loss per share.
(5) Data not available on a pro forma basis.
(6) 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. The primary differences between EBITDA and net
cash used in operating activities are that net cash used in operating
activities includes interest expense, income tax expense and changes in
operating assets and liabilities, which items are excluded from EBITDA. See
"Consolidated Statements of Cash Flows."
(7) Includes all rooms installed with Company-owned systems, except for pro
forma total rooms served, which also includes Prodac systems. A charge
relating to the acquisition of in-process technology of approximately $12.2
million is included in the pro forma balance sheet as a charge to retained
earnings. The Company expects to record this charge in its financial
results during the three month period ended December 31, 1996.
(8) Data not available on a pro forma basis as of December 31, 1995.
(9) Pro forma to give effect to the Company's acquisition of Prodac following
the closing of the Offerings as if such acquisition had taken place as of
September 30, 1996.
(10) 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 $8.00
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 effected in December 1996,
(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 1,158,918 shares of
Common Stock in connection with the Offerings at an assumed fair market value
of $8.00 per share, (v) assumes the approval by the Company's Board of
Directors of the acquisition of Prodac and the issuance of 455,373 shares of
Common Stock in connection with such acquisition and (vi) assumes that the U.S.
Underwriters' and International Managers' over-allotment options are not
exercised. See "Description of Capital Stock," "Underwriting," "Acquisition of
Prodac" and Note 5 of Notes to Consolidated Financial Statements. For purposes
of calculating the U.S. Dollar cash consideration and number of shares issuable
pursuant to the Acquisition Agreement in connection with the Prodac
acquisition, an assumed exchange rate of DM 1.525 per U.S. Dollar, representing
the closing price in New York trading on September 30, 1996, and an assumed
initial public offering price of $8.00 per share less a ten percent discount
have been used throughout this Prospectus. The exchange rate determined on the
Frankfurt am Main Exchange on the date of the closing of the Offerings will be
used to determine the actual number of shares initially issued in connection
with the Prodac acquisition. See "Dilution" and "Acquisition of Prodac."
----------------
MagiNet and iLook are trademarks of the Company. Prodac and Videoquest are
registered in Germany as trademarks of Prodac. This Prospectus also contains
trademarks and tradenames of other companies.
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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 either a comparatively small one-time fee or small flat-rate fee based on
the number of rooms served. 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. The imposition of censorship of adult
theme movies in currently uncensored markets where the Company has
installations would have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, the imposition of
censorship in target markets of the Company could deter the Company from
entering those 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. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
ACQUISITION OF PRODAC
On November 6, 1996, MagiNet entered into the Acquisition Agreement to
acquire Prodac, which is one of the leading providers in Europe of video
entertainment and information systems to the hospitality industry. The Company
has no history of acquiring companies, and there can be no assurance that the
Company will be able to realize the anticipated benefits of the Prodac
acquisition, or that the Company can be successful in integrating the
operations and personnel of Prodac into its business, operating under the
agreements in effect between Prodac and others, incorporating the Prodac
products and any other acquired technologies and technologies under
development into its product lines, establishing and maintaining uniform
standards, controls, procedures and policies, avoiding the impairment of
relationships with employees and customers as a result of changes in
management, or overcoming other problems that may be encountered in connection
with the integration of Prodac. Prodac's employees have established a workers'
council, which represents the employees for purposes of negotiating certain
terms and conditions of employment and which has certain rights of co-
determination with respect to management policy, in particular with regard to
personnel measures. In addition, certain of Prodac's employees are members of
trade unions. Any future failure to reach agreements with its employees or
their representatives could result in a work stoppage at Prodac, which could
have a material adverse effect on the Company's business, financial condition
and results of operations. Under applicable German law, in order to
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effect certain operational changes, including significant reductions in
employment, employers are required to adopt "equalization of interest" and
social plans designed to compensate dislocated employees. Although the Company
has no present plans to implement such changes, if the Company were required
to do so, including in connection with the integration of Prodac into the
Company, it could be required to make substantial payments to such employees,
which could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, there can be no
assurance that, even if Prodac is successfully integrated into the Company,
the Company could successfully compete against Prodac's competitors, including
EMI Group plc ("EMI"), Video Management Services, Inc. ("VMS") and Granada
Group Plc ("Granada") in the European or other markets. In October 1996,
Prodac sold its United Kingdom operations to U.K. Consumer Electronics Limited
("UKCEL"), a division of Granada, and agreed to a non-competition provision
for three years in the United Kingdom and Ireland that may be enforceable
against both MagiNet and Prodac. This provision could prevent the Company from
expanding installations into the United Kingdom and Ireland. The Company may
be obligated under a contract with Hyatt International (Europe, Africa and
Middle East) Ltd. to install rooms in the United Kingdom using the Company's
licensed Guestserve technology, which could conflict with the non-competition
provision of the UKCEL agreement. Any resulting breach of either the Company's
agreement with Hyatt or the non-competition provision of the UKCEL agreement
could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company is obligated to pay within 10
days after the closing of the Offerings DM 20 million for the cash portion of
the consideration for the acquisition of Prodac (plus interest at the rate of
6% per annum from November 6, 1996 through the date of payment of the
acquisition consideration) and to issue shares of MagiNet Common Stock with an
aggregate value of DM 5 million based on a 10% discount to the initial public
offering price. The Acquisition Agreement also provides that the shareholders
of Prodac will be entitled to a cash distribution of DM 600,000 (approximately
$393,000) from the retained earnings of Prodac, calculated based on German
GAAP. In addition, in the event the Offerings have not closed on or prior to
December 31, 1996, Prodac's shareholders will be entitled to receive an
additional cash payment equal to all retained earnings in excess of DM
600,000, calculated under German GAAP, as of December 31, 1996. As of
September 30, 1996, Prodac's retained earnings, calculated on a German GAAP
basis, totalled approximately DM 2 million (approximately $1.3 million), which
will be adjusted for the quarter ending December 31, 1996. The cash
consideration payable in connection with the acquisition of Prodac, including
the potential distributions from retained earnings, is payable in Deutsche
Marks, and any increase in the value of the Deutsche Mark relative to the U.S.
Dollar would increase the portion of the net proceeds of the Offerings used in
connection with the acquisition of Prodac as well as the number of shares of
MagiNet Common Stock to be issued to Prodac's shareholders. See "Acquisition
of Prodac."
HISTORY OF LOSSES; FUTURE CAPITAL NEEDS; ANTICIPATED FUTURE LOSSES
MagiNet has recorded cumulative net losses of approximately $37,008,000
since its inception, including a loss of approximately $11,534,000 for the
nine months ended September 30, 1996. Prodac has recorded cumulative net
losses, calculated based on generally accepted accounting principles in the
United States, of approximately $5,113,000 since its inception, including a
loss of approximately $1,219,000 for the nine months ended September 30, 1996.
The Company's business requires substantial investment on a continuing basis
for the installation of the Company'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 pay the cash portion of the consideration for the acquisition of
Prodac and 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. See "Selected
Consolidated Financial and Other Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
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RELIANCE ON NEW HOTEL CONTRACTS AND INSTALLATIONS
The Company'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 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 MagiNet's master hotel contracts, MagiNet must install the interactive
video entertainment and information system specified in the contract with the
hotel chain. Pursuant to its hotel contracts, Prodac is required to install
its scheduled broadcast or on-demand video systems. The inability to provide
the particular system specified, including the inability of Prodac to
manufacture sufficient quantities of its systems, 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,
to manufacture sufficient quantities of its systems or to install systems at
the rate it currently anticipates for these or other reasons could have a
material adverse effect on the Company's results of operations.
MagiNet historically has obtained contracts and installed systems in large
city-center hotel properties, primarily in Asia. With the acquisition of
Prodac, the Company will be seeking to consistently obtain contracts and
install systems in Europe. Many hotel properties in Europe are installed with
either free-to-guest or scheduled broadcast systems, and European hotels tend
to be smaller and older than the business and resort hotels in Asia in which
the Company has historically installed its systems. Obtaining contracts and
installing systems in Europe may require significant additional capital and
personnel resources, which could have a material adverse effect on the
Company's results of operations. The inability of the Company to obtain new
contracts and install systems in Europe at the rate they currently anticipate
for these or other reasons could have a material adverse effect on the
Company's results of operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Business--Installed Base and
Backlog" and "Acquisition of Prodac."
FLUCTUATIONS IN OPERATING RESULTS
The Company'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 large 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 seasonality in the markets in which Prodac is operating, the
timing of orders from UKCEL and shipments to UKCEL of Prodac systems, the
ability of Prodac to manufacture its systems, general economic and other
conditions affecting the timing of contracts and installations, capital
spending, and order cancellations or rescheduling. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
SUBSTANTIAL FIXED COMMITMENTS
Funds generated by MagiNet's and Prodac's existing operations are not
sufficient to enable the Company to meet its debt service obligations on the
Senior Secured Notes due 2000 (the "Notes") and Prodac's obligations
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under lease financing arrangements for Prodac systems, together with other
fixed charges. Net proceeds from the Offerings will be used by the Company
primarily to pay the cash portion of the consideration for the acquisition of
Prodac and 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 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 amendments of
the covenants in exchange for the Company issuing additional warrants to the
holders of the Notes. 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. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
IMPORTANCE OF POTENTIAL NEW SOURCES OF REVENUE; COMPATIBILITY
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. New services may require the Company to devote resources to
software or other development to enable the new services to be provided over
the Company's systems. There can be no assurance that the Company's new
products or any products being developed by Prodac or MagiNet 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 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. The
Company's ability to provide in-room casino-style gaming is dependent upon
obtaining the necessary licenses, approvals, findings of suitability and
product approvals in all jurisdictions in which it intends to provide this
service. The licensing and approval processes can involve significant
expenditures of time and resources by the Company. There can be no assurance
such approvals will be obtained. In addition, to the extent that new services
introduced by MagiNet 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.
The Company holds an exclusive license to provide an on-demand interactive
video system developed by On Command Video Corporation ("OCV") to certain
countries outside North America and a license to provide an on-demand
interactive video system developed by Guestserve Development Group
("Guestserve") to all countries outside North America. The Company's OCV and
Guestserve-based systems are not compatible with Prodac's scheduled broadcast
or on-demand systems. Accordingly, additional development resources will be
required to provide either the Company's existing or new products over
Prodac's systems.
EXPANSION OF BUSINESS THROUGH ACQUISITIONS
Part of MagiNet's business strategy is to pursue additional acquisitions
that will complement its existing business. The Company has had preliminary
discussions with, or has evaluated the potential acquisition of, several
companies in addition to Prodac. Although no transaction other than Prodac is
being considered at this
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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 additional acquisitions will occur, that the Company can be
successful in integrating the operations and personnel of any 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 an additional
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 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. MagiNet 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, including Prodac'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 a substantial majority of the Company's revenue is derived from video
equipment installations, 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. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Business--
Manufacturing."
DEPENDENCE ON LOCAL PARTNERS; INTERNATIONAL BUSINESS
All of MagiNet's and Prodac'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. MagiNet and Prodac have each entered
into joint ventures or similar arrangements in certain markets with local
businesses and individuals believed by MagiNet or Prodac 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 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 the revenue of MagiNet and Prodac 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
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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.
Prodac manufactures its scheduled broadcast and on-demand systems at its
manufacturing facility in Cologne, Germany. The manufacturing process involves
the integration of Prodac-produced components with commercially-sourced parts
such as modulators, video players, racks and wiring. Certain of these
components are currently available from single or limited supply sources.
Although Prodac has not experienced any difficulty obtaining such components
to date, there can be no assurance that Prodac will not face shortages of one
or more necessary components in the future. Any failure to obtain components
on a timely basis could have a material adverse effect on the Company's
business, financial condition and results of operations. Prodac also relies on
Philips N.V. ("Philips") to produce televisions incorporating the Prodac
television control module ("TCM"). The arrangement with Philips is the only
arrangement Prodac has established for the production of the TCM-equipped
televisions that Prodac installs in hotels. Any disruption of the supply of
components for the TCMs or disruption in Philips' manufacturing process could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Acquisition of Prodac."
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
The Company's success depends upon the continued contributions of certain
senior corporate managers and key employees, including those of Prodac, 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
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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 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 EMI, VMS and Granada, and Granada
has a supply agreement with Prodac pursuant to which Prodac must supply
Granada with Prodac's on-demand systems. The Company may be precluded from
competing in the United Kingdom and Ireland by a non-competition provision in
an asset sale agreement executed by Prodac in connection with Prodac's sale of
its U.K. operations to UKCEL, a division of Granada.
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
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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 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
its Guestserve or OCV license agreements or otherwise, were to be successfully
challenged by these or other companies, the Company's business, financial
condition and results of operations could be materially adversely affected. As
a result of the Company's acquisition of Prodac, the Company has obtained
Prodac's technologies and technologies under development, including digital
server technology related to Prodac's Videoquest product and Prodac's
television-enabled personal computer technology. The laws of some foreign
countries do not protect the Company's proprietary technology to the same
extent as do the laws of the United States. There can be no assurance that
third parties will not claim infringement by the Company with respect to
Prodac's or MagiNet's proprietary technology. The loss or the inability of the
Company to maintain any of the Company's licenses could result in delays or
reductions in system installations until equivalent technology could be
identified, tested, licensed, and integrated. Any such delays or reductions in
installations would materially adversely affect the Company's business
financial condition, and results of operations. 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 refused by the U.S. Patent and Trademark Office
as likely to be confused with "ImagiNet," a mark for which a prior application
was made, if "ImagiNet" is ultimately registered. The registration of ImagiNet
is being opposed by three parties. In addition, the right to use the name
"Prodac" in the United Kingdom was granted to UKCEL in connection with the
sale by Prodac of its operations in the United Kingdom. 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."
14
<PAGE>
ENVIRONMENTAL REGULATION
Prodac's facility in Cologne, Germany serves as an administrative and
manufacturing facility and, as a result, may contain hazardous substances.
Prodac is subject to a variety of environmental statutes and regulations
relating to the use, storage, handling and disposal of certain hazardous
substances used in the manufacturing and assembly of its products. The Company
believes that Prodac is currently in compliance with all material
environmental regulations in connection with its manufacturing operations. Any
failure by Prodac to comply with present or future regulations could subject
the Company and/or Prodac to the imposition of substantial fines, suspension
of production, alteration of manufacturing processes or cessation of
operations, any of which could have a material adverse effect on the Company's
business, financial condition and results of operations. Compliance with such
regulations could require Prodac and/or the Company to acquire expensive
remediation equipment or to incur substantial expenses. Any failure of Prodac
to control the use, disposal, removal or storage of, or to adequately restrict
or discharge of, or assist in the cleanup of hazardous or toxic substances,
could subject the Company to significant liabilities. The imposition of such
liabilities could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Acquisition of Prodac."
CONTROL BY CURRENT STOCKHOLDERS
MagiNet's officers, directors and principal stockholders and their
affiliates, totaling 12 stockholders, will in the aggregate beneficially own
approximately 46.1% 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 5,505,000 shares of Common Stock, including the 5,500,000 shares
offered hereby, will be eligible for immediate sale in the public market
without restriction. Beginning 90 days after the date of this Prospectus,
approximately 31,000 additional shares will become eligible for sale in the
public market pursuant to Rule 144 or Rule 701 under the Securities Act of
1933, as amended. Beginning 180 days after the date of this Prospectus,
approximately 9,100,000 additional shares subject to lock-up agreements will
become available for sale in the public market. Of the approximately 9,100,000
shares that will become available for sale in the public market beginning 180
days after the date of this Prospectus, approximately 7,200,000 shares will be
subject to certain volume limitations and other resale restrictions pursuant
to Rule 144. Thereafter, approximately 3,500,000 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. In addition, the shares of Common Stock to be issued in
connection with the acquisition of Prodac will be subject to certain
registration rights beginning one year after the closing of the Offerings. 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 Rule
2720 of the Conduct Rules 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."
15
<PAGE>
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 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. The Company is obligated to
deliver to the shareholders of Prodac, following the closing of the Offerings,
Common Stock of the Company with an aggregate value of DM 5 million based on a
discount of 10% to the initial public offering price. The number of such
shares to be issued in connection with the acquisition of Prodac will depend
on applicable exchange rates on the date of the closing of the Offerings. Any
increase in the value of the Deutsche Mark relative to the U.S. Dollar would
cause the Company to issue additional shares of Common Stock, thereby
resulting in additional dilution to existing shareholders. See "Dilution" and
"Acquisition of Prodac."
16
<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 $39,520,000 (approximately
$45,658,000 if the U.S. Underwriters' and International Managers' over-
allotment options are exercised in full) assuming an initial public offering
price of $8.00 per share and after deducting the estimated underwriting
discounts and commissions and estimated offering expenses.
The Company currently anticipates that approximately $13.1 million of the
net proceeds of the Offerings will be used to pay the cash portion of the
consideration for the acquisition of Prodac. The cash consideration of DM 20
million (plus interest at the rate of 6% per annum from November 6, 1996
through the date of the payment of the acquisition consideration) is payable
in Deutsche Marks, however, and any increase in the value of the Deutsche Mark
relative to the U.S. Dollar would increase the portion of the net proceeds of
the Offerings used in connection with the Prodac acquisition. The balance of
the net proceeds of the Offering will be used for system installations by the
Company and Prodac, working capital and for general corporate purposes,
including the possible repayment of future indebtedness, if any. 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, in addition to Prodac, 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 "Acquisition of Prodac" and "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.
17
<PAGE>
CAPITALIZATION
The following table sets forth as of September 30, 1996 (a) the total
capitalization of the Company, (b) the pro forma total capitalization to
reflect (i) the reincorporation of the Company into Delaware, (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
and (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 1,158,918 shares of
Common Stock in connection with the Offerings, at an assumed fair market value
of $8.00 per share, and (c) the pro forma total capitalization adjusted to
reflect (i) the sale by the Company of 5,500,000 shares of Common Stock in the
Offerings at an assumed offering price of $8.00 per share and the application
of the net proceeds therefrom assuming that the U.S. Underwriters' and
International Managers' over-allotment options are not exercised, (ii) the
assumed issuance of 455,373 shares of Common Stock in connection with the
Company's acquisition of Prodac and (iii) an increase in long-term debt of
$14,313,000 and an increase of $12,200,000 in accumulated deficit (decrease in
total stockholders' equity) due to the completion of the Prodac acquisition
and the estimated related charge for acquired in-process technology. See
"Unaudited Pro Forma Condensed Combined Financial Statements." 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>
SEPTEMBER 30, 1996
--------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS, EXCEPT SHARE
DATA)
<S> <C> <C> <C>
Long-term debt(1).............................. $ 25,829 $ 25,829 $40,142
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, pro forma and pro forma as
adjusted..................................... 53,241 -- --
Common Stock, no par value; 20,000,000 shares
authorized, 507,872 shares issued and
outstanding, actual; $.001 par value, and
45,000,000 shares authorized, pro forma and
pro forma as adjusted, 12,575,668 and
18,531,041 shares issued and outstanding, pro
forma and pro forma as adjusted,
respectively(2).............................. 504 13 19
Additional paid in capital.................... -- 53,833 96,647
Warrants to purchase Common Stock............. 101 -- --
Deferred compensation......................... (218) (218) (218)
Accumulated deficit........................... (37,008) (37,008) (49,208)
Cumulative translation adjustment............. (651) (651) (651)
-------- -------- -------
Total stockholders' equity................... 15,969 15,969 46,589
-------- -------- -------
Total capitalization......................... $ 41,798 $ 41,798 $86,731
======== ======== =======
</TABLE>
- --------
(1) See Note 3 of Notes to Consolidated Financial Statements.
(2) Excludes an aggregate of 1,702,080 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 September 30, 1996 at a
weighted average exercise price of $2.17. Also excludes as of September
30, 1996 an additional 2,318,728 shares reserved for future issuance 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" and Note 5 of Notes to Consolidated
Financial Statements. Also excludes 40,000 shares of Common Stock issuable
upon exercise of an outstanding warrant issued in connection with the
Company's obtaining a commitment letter for up to $10 million of unsecured
subordinated debt. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
18
<PAGE>
DILUTION
The pro forma net tangible book value (deficit) of the Company as of
September 30, 1996, assuming the acquisition of Prodac on such date, was
approximately $(3,305,000) or $(0.25) per share of Common Stock. Pro forma net
tangible book value per share represents the Company's pro forma total
tangible assets less total liabilities, divided by the number of outstanding
shares of Common Stock then outstanding assuming (i) 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 1,158,918 shares of Common Stock and Preferred Stock assuming, for
purposes of such net exercises, a fair market value of $8.00 per share of
Common Stock and (ii) the issuance of 455,373 shares of Common Stock in
connection with the Company's acquisition of Prodac. See "Unaudited Pro Forma
Condensed Combined Financial Statements." 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 5,500,000 shares in the Offerings (at an assumed initial public
offering price of $8.00 per share and after deducting the estimated
underwriting discounts and commissions and offering expenses payable by the
Company), the Company's pro forma net tangible book value as of September 30,
1996 would have been $36,215,000 or $1.95 per share of Common Stock. This
represents an immediate increase in pro forma net tangible book value of $2.20
per share to existing stockholders and an immediate dilution in pro forma net
tangible book value of $6.05 per share to new investors. The following table
illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................. $8.00
Pro forma net tangible book value (deficit) per share as of
September 30, 1996............................................ $(0.25)
Increase in pro forma net tangible book value per share
attributable to new investors................................. 2.20
------
Pro forma net tangible book value per share after offering....... 1.95
-----
Dilution per share to new investors.............................. $6.05
=====
</TABLE>
The following table summarizes, on a pro forma basis as of September 30,
1996, the number of shares of Common Stock purchased from the Company,
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, and the shares
issued in connection with the Company's acquisition of Prodac, 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 $8.00 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......... 13,031,041 70.3% $ 56,789,000 56.3% $4.36
New investors................. 5,500,000 29.7 44,000,000 43.7 8.00
---------- ----- ------------ -----
Total....................... 18,531,041 100.0% $100,789,000 100.0%
========== ===== ============ =====
</TABLE>
The foregoing computations assume no exercise of stock options after
September 30, 1996, the issuance of 455,373 shares of Common Stock in
connection with the Company's acquisition of Prodac 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 1,158,918 shares of Common Stock,
assuming, for purposes of such net exercises, a fair market value of $8.00 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 September
30, 1996, there were outstanding options to purchase 1,702,080 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 $2.17 per share. At September
30, 1996, an additional 2,318,728 shares were reserved for issuance under the
Company's 1992 Key Personnel Stock Option Plan, the Company's 1996 Director
Stock Option Plan and the Company's 1996 Employee Stock Purchase Plan. After
September 30, 1996, the Company issued a warrant to acquire 40,000 shares of
Common Stock at an exercise price per share of $.01 in connection with
obtaining a commitment letter for up to $10 million of unsecured subordinated
debt. 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. The number of shares of Common Stock to be
issued in connection with the acquisition of Prodac will depend on applicable
currency exchange rates on the date of the Closing of the Offerings. Any
increase in the value of the Deutsche Mark relative to the U.S. Dollar would
cause the Company to issue additional shares of Common Stock, thereby
resulting in additional dilution to new investors. See "Acquisition of
Prodac," "Management--Stock Plans," "Description of Capital Stock" and Note 5
of Notes to Consolidated Financial Statements.
19
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The selected consolidated statement of operations, cash flows 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, 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 for each of the years in the three-year period ended December 31,
1995, and the report thereon of Ernst & Young LLP, independent auditors, are
included elsewhere in this Prospectus. The selected consolidated statement of
operations, cash flows and balance sheet data set forth below for the nine
months ended September 30, 1995 and 1996 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 nine months ended September
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. The pro forma financial information set forth below was
derived from the Unaudited Pro Forma Condensed Combined Financial Statements,
which are included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------- ------------------------------
1995 1996
------------------- --------------------
PRO PRO
1991 1992 1993 1994 ACTUAL FORMA(1) 1995 ACTUAL FORMA (2)
----- ------- ------- ------- -------- -------- ------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AND OTHER DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Revenue................ $ -- $ -- $ 395 $ 2,342 $ 8,689 $ 19,254 $ 5,655 $ 12,048 $ 23,941
Direct costs........... -- -- 294 1,156 3,731 9,903 2,586 6,232 11,792
Depreciation and
amortization.......... -- 2 171 957 3,682 9,936 2,564 4,747 9,366
Operations expenses,
selling, general and
administrative........ 149 514 1,961 7,170 11,528 13,806 7,808 8,455 10,729
Research and
development........... -- 665 1,320 856 1,247 1,525 890 1,599 1,809
----- ------- ------- ------- -------- -------- ------- -------- --------
Operating loss......... (149) (1,181) (3,351) (7,797) (11,499) (15,916) (8,193) (8,985) (9,755)
Interest expense and
other, net............ -- (43) (28) (253) (991) (2,688) (379) (2,083) (4,019)
----- ------- ------- ------- -------- -------- ------- -------- --------
Loss before income
taxes and minority
interest in net losses
of consolidated
subsidiaries.......... (149) (1,224) (3,379) (8,050) (12,490) (18,604) (8,572) (11,068) (13,774)
Provision for income
taxes................. -- -- -- -- (554) (680) (423) (681) (1,123)
Minority interest in
net losses of
consolidated
subsidiaries.......... -- -- -- 124 248 248 204 215 215
----- ------- ------- ------- -------- -------- ------- -------- --------
Net loss............... $(149) $(1,224) $(3,379) $(7,926) $(12,796) $(19,036) $(8,791) $(11,534) $(14,682)
===== ======= ======= ======= ======== ======== ======= ======== ========
Pro forma net loss per
share(3).............. $ (1.03) $ (1.48) $ (0.93) $ (1.14)
======== ======== ======== ========
Shares used in
computation of pro
forma net loss per
share(3).............. 12,392 12,847 12,407 12,862
CONSOLIDATED STATEMENT
OF CASH FLOWS DATA:(4)
Net cash used in
operating activities.. $(1,753) $(6,137) $ (7,619) $(6,680) $ (9,510)
Net cash used in
investing activities.. (3,091) (9,361) (14,897) (10,967) (16,451)
Net cash provided by
financing activities.. 5,082 25,715 30,656 23,034 14,540
OTHER DATA:
EBITDA (In
thousands)(5)......... $(149) $(1,179) $(3,180) $(6,840) $ (7,817) $ (5,980) $(5,629) $ (4,238) $ (389)
EBITDA margin.......... -- -- (805)% (292)% (90)% (31)% (100)% (35)% (2)%
New rooms installed.... -- -- 2,087 10,929 26,106 37,702 18,075 20,407 33,054
Total rooms served(6).. -- -- 2,087 13,016 39,122 70,132 31,091 59,529 103,186
Rooms in backlog(7).... -- -- -- 10,941 12,194 15,156 16,783 27,099
Average monthly gross
video revenue per
room(4)............... -- -- -- $ 32.39 $ 29.18 $ 28.74 $ 28.84
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, 1996
------------------------------------------- -------------------------------------
1991 1992 1993 1994 1995 ACTUAL PRO FORMA(8) AS ADJUSTED(9)
----- ------- ------- -------- -------- -------- ------------ --------------
(IN THOUSANDS)
<S> <C> <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 $ 7,251 $ 1,278 $ 40,798
Working capital
(deficit)............. (24) (386) (1,652) 7,751 14,542 4,857 (15,879) 23,641
Total assets........... 2 1,458 4,711 23,999 46,540 49,484 74,424 113,944
Long-term debt......... 125 349 1,400 -- 24,900 25,829 40,142 40,142
Accumulated deficit.... (149) (1,373) (4,752) (12,678) (25,474) (37,008) (49,208) (49,208)
Total stockholders'
equity (net deficit).. (149) 648 1,208 19,924 14,611 15,969 7,069 46,589
</TABLE>
- --------
(1) Pro forma to give effect to the Company's acquisition of Prodac following
the closing of the Offerings as if such acquisition had taken place as of
January 1, 1995. See "Acquisition of Prodac," the Unaudited Pro Forma
Condensed Combined Financial Statements and Note 8 of Notes to
Consolidated Financial Statements.
(2) Pro forma to give effect to the Company's acquisition of Prodac following
the closing of the Offerings as if such acquisition had taken place as of
January 1, 1996. See "Acquisition of Prodac," the Unaudited Pro Forma
Condensed Combined Financial Statements and Note 8 of Notes to
Consolidated Financial Statements.
(3) 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.
(4) Data not available on a pro forma basis.
(5) 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. The primary differences between EBITDA and net
cash used in operating activities are that net cash used in operating
activities includes interest expense, income tax expense, and changes in
operating assets and liabilities, which items are excluded from EBITDA.
See "Consolidated Statements of Cash Flows."
(6) Includes all rooms installed with Company-owned systems, except for pro
forma total rooms served, which also includes Prodac systems. A charge
relating to the acquisition of in-process technology of approximately
$12.2 million is included in the pro forma balance sheet as a charge to
retained earnings. The Company expects to record this charge in its
financial results during the three month period ended December 31, 1996.
(7) Data not available on a pro forma basis as of December 31, 1995.
(8) Pro forma to give effect to the Company's acquisition of Prodac following
the closing of the Offerings as if such acquisition had taken place as of
September 30, 1996.
(9) 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 $8.00
per share and the application thereof. See "Use of Proceeds."
21
<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 September
30, 1996, the Company had 59,529 rooms installed with its systems in 169
hotels and had an installation backlog of 16,783 rooms in 46 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.
On November 6, 1996, the Company entered into the Acquisition Agreement to
acquire all of the outstanding shares of Prodac, which is headquartered in
Cologne, Germany. Prodac develops, manufactures and installs scheduled
broadcast and on-demand interactive video entertainment systems for use in
hotels and also sells such systems to other in-room video service providers.
Prior to 1991, Prodac exclusively sold its scheduled broadcast systems to
distributors and hotels, and in 1991, began installing such systems in hotels
under its own contracts. In 1994, Prodac introduced its Videoquest on-demand
video system, and as of September 30, 1996, Prodac served 242 hotels with
43,657 installed rooms, including 5,891 rooms installed with on-demand video
systems, and had an installation backlog of 10,316 rooms.
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
22
<PAGE>
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. See Note 7 of Notes to Consolidated Financial Statements for
financial information concerning foreign and domestic operations.
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 $651,000 in accumulated translation losses, which are reflected in
stockholders' equity as of September 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>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 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 46 52
Depreciation and amortiza-
tion....................... 43 41 42 45 39
Operations expenses......... 118 123 36 38 13
Selling, general and admin-
istrative.................. 379 183 97 100 58
Research and development.... 334 37 14 16 13
------- ------- ------- ------- ------
Total costs and expenses... 948% 433% 232% 245% 175%
------- ------- ------- ------- ------
Operating loss............... (848) (333) (132) (145) (75)
Interest income (expense),
net......................... (7) (11) (11) (7) (17)
Provision for income taxes... -- -- (6) (7) (6)
Minority interest in net
losses of consolidated
subsidiaries................ -- 5 3 4 2
------- ------- ------- ------- ------
Net loss..................... (855)% (339)% (146)% (155)% (96)%
======= ======= ======= ======= ======
EBITDA....................... (805)% (292)% (90)% (100)% (35)%
======= ======= ======= ======= ======
</TABLE>
23
<PAGE>
NINE MONTHS ENDED SEPTEMBER 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 nine months
ended September 30, 1995 and 1996.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------
1995(1) 1996(1)
--------------- ----------------
<S> <C> <C>
Revenue.................................... $5,655,000 $12,048,000
Average monthly gross video revenue per
room...................................... $ 28.74 $ 28.84
Average movie price........................ $ 11.03 $ 10.84
Average movie buy rate..................... 11.6% 12.1%
Average hotel occupancy.................... 74% 73%
Installed base of rooms.................... 31,091 59,529
</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.
Revenue Analysis
During the nine months ended September 30, 1996, the Company installed its
systems in an additional 20,407 hotel rooms, bringing the total number of
installed rooms to 59,529. The Company's revenue for the first nine months of
1996 increased 113% to $12,048,000 compared to $5,655,000 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.
Average monthly gross video revenue per room has increased slightly during
the nine months ended September 30, 1996, compared to that of the same period
in 1995, partially due to increased movie buy rates which are principally a
result of installations in new countries and improved buy rates in certain
existing countries, offset by lower buy rates in other existing countries,
slightly lower occupancy rates and 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.
Expense Analysis
The following table sets forth information regarding the Company's costs and
expenses for the nine months ended September 30, 1995 and 1996.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------
1995 1996
---------------------- ----------------------
% OF % OF
AMOUNT REVENUE AMOUNT REVENUE
----------- ---------- ----------- ----------
(IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C>
Costs and expenses
Direct costs.................... $ 2,586 46% $ 6,232 52%
Depreciation and amortization... 2,564 45 4,747 39
Operations expenses............. 2,161 38 1,514 13
Selling, general and
administrative................. 5,647 100 6,941 58
Research and development........ 890 16 1,599 13
----------- ------- ----------- -------
Total costs and expenses......... $ 13,848 245% $ 21,033 175%
=========== ======= =========== =======
</TABLE>
Direct costs. Direct costs increased by $3,646,000 for the first nine months
of 1996 compared to the same period in 1995, and also increased as a
percentage of revenue. These increases are principally due to increased
maintenance expenses associated with repairing or replacing faulty equipment
installed in hotel rooms during
24
<PAGE>
prior quarters 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. As a
percentage of revenue, maintenance expenses have been partially offset by
lower film royalties and licensing fees resulting from greater efficiencies
achieved through expanded operations and direct management of film contracts.
Prior to July 1995, the Company obtained substantially all of its programming
through Comsat Corporation which charged the Company higher royalties and
fees.
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 $2,183,000 for the first nine months of 1996 compared to
the same period in 1995 primarily 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 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 $647,000 for the first
nine months of 1996 compared to the same period in 1995 due to write-downs of
certain video system equipment taken in the first nine 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 38% for the first nine 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 $1,294,000 for the first nine months of 1996 compared to
the same period in 1995 due primarily to significant increases in local
country activities to support the Company's larger installed base of rooms and
increases in headquarters administrative expenses to support expanded
operations. 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 69 employees at September 30, 1995 to 114 employees at
September 30, 1996. 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. Headquarters marketing expenses increased
to support promotion and merchandising initiatives as well as to provide
leadership for new product development. Selling, general and administrative
expenses decreased as a percentage of revenue from 100% for the first nine
months of 1995 to 58% 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
$709,000 for the first nine months of 1996 compared to the same period in 1995
due to increases in engineering personnel, materials and related expenses.
Research and development expenses decreased as a percentage of revenue from
16% for the first nine months of 1995 to 13% 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. Interest expense, net increased by
$1,704,000 for the first nine months of 1996 compared to the same period in
1995 as a result of the issuance in August 1995 of the Company's Senior
Secured Notes due 2000 with an aggregate principal amount of $24.9 million.
25
<PAGE>
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.
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.
26
<PAGE>
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>
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
27
<PAGE>
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.
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.
28
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth certain unaudited consolidated financial
information for the seven quarters ended September 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, SEPT. 30,
1995 1995 1995 1995 1996 1996 1996
-------- -------- --------- -------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue................. $ 1,287 $ 2,015 $ 2,353 $ 3,034 $ 3,549 $ 4,374 $ 4,125
Costs and expenses
Direct costs........... 700 987 899 1,145 1,827 2,027 2,378
Depreciation and
amortization.......... 646 864 1,054 1,118 1,388 1,761 1,598
Operations expenses.... 665 548 948 947 468 548 498
Selling, general and
administrative........ 1,524 2,039 2,084 2,773 2,074 2,578 2,289
Research and
development........... 314 257 319 357 421 516 662
------- ------- ------- ------- ------- ------- -------
Total costs and
expenses............... 3,849 4,695 5,304 6,340 6,178 7,430 7,425
------- ------- ------- ------- ------- ------- -------
Operating loss.......... (2,562) (2,680) (2,951) (3,306) (2,629) (3,056) (3,300)
Interest income
(expense), net......... 77 (73) (383) (612) (667) (715) (701)
Provision for income
taxes.................. (148) (152) (123) (131) (213) (170) (298)
Minority interest in net
losses of consolidated
subsidiaries........... 67 86 51 44 78 46 91
------- ------- ------- ------- ------- ------- -------
Net loss................ $(2,566) $(2,819) $(3,406) $(4,005) $(3,431) $(3,895) $(4,208)
======= ======= ======= ======= ======= ======= =======
EBITDA.................. $(1,916) $(1,816) $(1,897) $(2,188) $(1,241) $(1,295) $(1,702)
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1995 1995 1995 1995 1996 1996 1996
-------- -------- --------- -------- -------- -------- ---------
(AS A PERCENTAGE OF REVENUE)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue................. 100% 100% 100% 100% 100% 100% 100%
Costs and expenses
Direct costs........... 55 49 38 38 52 46 58
Depreciation and
amortization.......... 50 43 45 37 39 40 39
Operations expenses.... 52 27 40 31 13 13 12
Selling, general and
administrative........ 118 101 89 91 58 59 55
Research and
development........... 24 13 14 12 12 12 16
----- ----- ----- ----- ---- ---- ----
Total costs and
expenses............... 299 233 226 209 174 170 180
----- ----- ----- ----- ---- ---- ----
Operating loss.......... (199) (133) (126) (109) (74) (70) (80)
Interest income
(expense), net......... 6 (4) (16) (20) (19) (16) (17)
Provision for income
taxes.................. (12) (8) (5) (4) (6) (4) (7)
Minority interest in net
losses of consolidated
subsidiaries........... 5 4 2 1 2 1 2
----- ----- ----- ----- ---- ---- ----
Net loss................ (200)% (141)% (145)% (132)% (97)% (89)% (102)%
===== ===== ===== ===== ==== ==== ====
EBITDA.................. (149)% (90)% (81)% (72)% (35)% (30)% (41)%
===== ===== ===== ===== ==== ==== ====
</TABLE>
29
<PAGE>
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, SEPT. 30,
1995 1995 1995 1995 1996 1996 1996
-------- -------- --------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue (in thousands).. $ 1,287 $ 2,015 $ 2,353 $ 3,034 $ 3,549 $ 4,374 $4,125
Average monthly gross
video revenue per
room................... $ 29.56 $ 30.16 $ 27.03 $ 30.08 $ 30.00 $ 29.24 $27.64
Average movie price..... $ 11.16 $ 11.18 $ 10.83 $ 10.83 $ 10.83 $ 10.87 $10.83
Average movie buy rate.. 11.6% 12.3% 11.0% 11.9% 12.0% 12.5% 11.7%
Average hotel
occupancy.............. 76% 72% 73% 75% 76% 71% 71%
Installed base of
rooms.................. 18,424 27,648 31,091 39,122 42,940 49,683 59,529
</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 seven quarters ended September 30, 1996, the Company installed an
average of 6,645 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
$550,000. 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 three quarters of 1996, compared
to the first three 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 for 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 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 in 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 were
46% and 58% of revenue in the second and third quarters of 1996, respectively,
reflecting increases 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. Depreciation
expense has trended downwards, as a percentage of revenue, over the last seven
quarters, reflecting marginally lower installed costs of rooms during these
periods and a system sale in the second quarter of 1996 for which there was no
depreciation expense, partially offset by seasonally lower average monthly
gross video revenue per room in the third quarters of 1995 and 1996.
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<PAGE>
Operations expenses. Operations expenses, as a percentage of revenue,
fluctuated from an average of 36% in 1995 to 13% in the first three quarters
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, as a percentage
of revenue, increased slightly to 91% in the fourth quarter of 1995 before
decreasing to 58%, 59% and 55% in the first three quarters of 1996. The
decreases as a percentage of revenue are primarily attributed to subsidiary
and headquarters expenses spread over a larger revenue base.
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
relatively constant over the four quarters ended September 30, 1996 as
increases in research and development expenses were proportional to revenue
increases.
ACQUISITION OF PRODAC
Prodac operates under a financial model similar to MagiNet, installing its
systems with minimal cost to the hotels pursuant to exclusive contracts, and
charging guests for usage of the system. Prodac's systems include a head-end
computer and video storage module, a television with an integrated television
control module ("TCM") and a hand-held remote control. Commencing in 1995,
Prodac has generally provided television systems as part of its installations
in larger hotels. Since inception, Prodac's cost per installed room has
averaged approximately $530.
Prodac's revenue is generated primarily from (i) fees paid by guests for
viewing Prodac's scheduled broadcast and on-demand video programming, (ii) the
sale of video systems to other in-room video service providers and (iii) the
provision of programming services to purchasers of Prodac video systems. For
the nine months ended September 30, 1996, Prodac generated revenue of $12.9
million, of which approximately $7.0 million related to in-room movie viewing,
$4.0 million related to sales of video systems and $1.9 million related to
programming and other services. Total costs and expenses include (i) direct
costs such as royalties and fees paid for programming, hotel commissions,
video materials, maintenance expenses and cost of equipment and systems sold,
(ii) depreciation and amortization and (iii) operations, selling, research and
development and general and administrative expenses.
In connection with the Prodac acquisition, the Company expects to recognize
a charge relating to the acquisition of certain in-process research and
development technology totalling approximately $12.2 million, which represents
the fair value of such technology as determined by an independent appraisal
firm. The acquired in-process research and development technology consists of
three separate identified development projects, a digital file server intended
to replace Prodac's current scheduled broadcast system, a super digital file
server intended to replace Prodac's current Videoquest on-demand system and
PC/TV, which will offer new services currently unavailable with Prodac's
current product offerings.
Prodac's digital file server development effort is presently focused on
developing hardware architecture and specifying software functionality to
provide a cost-effective entry into the small hotel market by offering better
price performance than the current scheduled broadcast system. The development
effort for the super digital file server is similar to that for Prodac's
digital file server but the super digital file server is intended to replace
Videoquest systems in the large hotel market. If Prodac's development effort
is successful, the super digital file server system will offer greater
interactivity and viewing quality than the Videoquest system. Along with video
revenues, it is intended that these systems will also be able to provide other
services and entertainment products to hotel guests, including video games,
in-room casino gaming and database information systems. With its PC/TV
development project, Prodac is attempting to define the communication and
computing architecture required for delivery of Internet-based information and
entertainment products. The ultimate commercial viability and acceptance of
PC/TV is predicated upon the assumption that business travelers are
increasingly heavy users of
31
<PAGE>
computing and communications services. The estimated cost associated with the
remaining development effort for these three projects is approximately $1.4
million, which the Company expects to incur principally during 1997. These
costs are estimated to be incurred primarily in 1997 and 1998. Significant
development hurdles still exist for each of the development projects. The
Company currently anticipates that both the digital file server and PC/TV
products will be commercially viable in 1997 and that the super digital file
server will be commercially viable in 1998. Once available, the Company plans
to introduce these products to new Prodac customers and then to existing
Prodac customers as their contracts are renewed. The cost of converting
existing Prodac customers to the new products will not be significant when
compared to the initial installation costs. It is anticipated that, beginning
in 1998, the Company could achieve significant revenues from these products if
they are successfully completed. The Company has no present plans to install
Prodac's new technology in the Pacific Rim market for either current
installations or for new installations.
Prodac has recorded cumulative net losses of approximately $5.1 million
since its inception, including a net loss of approximately $1.2 million for
the nine months ended September 30, 1996. Prodac's operations in the United
Kingdom produced a net loss of $228,000 for the nine months ended September
30, 1996. In October 1996, Prodac sold its United Kingdom operating assets to
UKCEL. In connection with the sale of its United Kingdom operating assets,
Prodac entered into a supply agreement to supply its Videoquest on-demand
system to UKCEL for a period of three years.
Prodac has financed its installed base of equipment principally through
lease financing. To date, substantially all of Prodac's installed systems have
been sold to one of several leasing companies and leased back to Prodac for a
period of five years or less. The primary leasing company is affiliated with
Philips N.V., from whom Prodac acquires televisions incorporating its TCMs. In
accordance with United States generally accepted accounting principles, such
leases have been accounted for as financing leases and the principal amount of
the lease liability is reflected in the Prodac consolidated balance sheet as
long-term debt. Such debt has been collateralized by various obligations of
the two principals of Prodac aggregating approximately $5 million. In
connection with the acquisition of Prodac, MagiNet will provide substitute
collateral for such loans. The equipment financed by such leases is reflected
as video systems on the Prodac consolidated balance sheet.
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 September 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 amendments 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 $7.00 per share, subject to
adjustments of the exercise price as set forth in the applicable warrants.
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.
In addition to the proceeds of the Offerings, the Company has obtained a
binding commitment letter from a lender pursuant to which the Company may
borrow up to $10 million on an unsecured subordinated basis at a 12% annual
interest rate. In the event the Company borrows such funds, it will be
required to issue the lender warrants to acquire up to 1,333,333 shares of
Common Stock at an exercise price of $7.50, exercisable over seven years. As
consideration
32
<PAGE>
for such commitment letter, the Company is obligated to pay $350,000 and issue
a warrant to purchase 40,000 shares of its Common Stock at an exercise price
of $.01 per share, exercisable over seven years. The Company believes that the
net proceeds from the Offerings and such committed unsecured subordinated debt
financing, 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 $9,510,000 for the
nine months ended September 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 $15,697,000 for the nine months ended September 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 nine months ended
September 30, 1996, financing activities provided $14,540,000. Financing
activities provided $30,656,000, $25,715,000 and $5,082,000 for 1995, 1994 and
1993, respectively.
33
<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 September 30, 1996 served 59,529
rooms in 169 hotels with an additional 16,783 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 and InterGame for
in-room casino-style gaming.
On November 6, 1996, the Company entered into the Acquisition Agreement to
acquire Prodac, which substantially expands the Company's geographic scope and
immediately establishes the Company as a leading provider of in-room
entertainment services in Europe, the world's largest hotel market. As of
September 30, 1996, Prodac served 43,657 rooms in 242 hotels in Europe with an
additional 10,316 rooms in backlog. See "Acquisition of Prodac."
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.
34
<PAGE>
European Hospitality Industry
Europe represents the largest hotel market in the world. Between 1985 and
1994, room growth in Europe outpaced growth in North America. Hotels in Europe
tend to be smaller and older in comparison to the city-center hotels found in
many Pacific Rim business centers. Nevertheless, in Europe there are
approximately 1.1 million rooms in the Company's target market of hotels with
100 or more rooms. Europe's major hotel chains include Accor, Forte Hotels,
Hilton International, Holiday Inns, Novotel and Sheraton International.
Video Entertainment and Information Services
Leading hotels throughout the Pacific Rim and Europe 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 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. 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. 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.
35
<PAGE>
The Company targets high-growth markets outside of North 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
Europe.................. 5,500,000 4.0% 1,108,000 5,637
Middle East and Africa.. 600,000 3.9% 288,000 1,272
</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.
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, and the
Middle East directly. Prior to acquiring Prodac, the Company had
installed a limited number of rooms in France and determined that
acquiring Prodac represented an attractive opportunity to establish an
immediate leading position in Europe. The Company intends to continue to
evaluate potential acquisitions in order to further penetrate its target
markets.
. 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
36
<PAGE>
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 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 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 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
37
<PAGE>
"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 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
in hotels using MagiNet systems. 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 developed its "yellow page" style iLook
advertising directory for guests in hotels utilizing the Company's systems.
The Company expects to initiate this service in Thailand in early 1997 and
later identify local partners to assist the Company in soliciting advertisers
for the system in other markets. The Company is currently working with a
marketing partner in Thailand to assist with this product offering and
believes that an agreement with such a partner can be reached on terms
favorable to the Company. There can be no assurances that such a partnership
will be established on favorable terms, if at all. 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,
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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 Company has separate distribution agreements in place with major film
distributors. The distribution agreements relating to first-run motion
pictures generally provide for a specified license period and percentage of
revenue of each motion picture, 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.
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. For the nine months
ended September 30, 1996, such programming accounted for approximately 64% of
the Company's revenue.
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 September 30, 1996
are set forth below:
<TABLE>
<CAPTION>
ROOMS INSTALLED BACKLOG
------------------ ------------------
COUNTRY ROOMS # OF HOTELS ROOMS # OF HOTELS
------- ------ ----------- ------ -----------
<S> <C> <C> <C> <C>
Australia.............................. 7,935 33 2,906 9
France................................. 384 1 -- --
Guam/Saipan............................ 4,310 14 -- --
Hong Kong.............................. 4,635 9 1,049 2
Israel................................. 3,090 11 2,326 5
Japan.................................. 6,732 18 1,987 6
New Zealand............................ 1,794 7 275 1
The Philippines........................ -- -- 1,767 4
Singapore.............................. 3,115 6 1,578 2
South Africa........................... 4,603 17 2,183 11
South Korea............................ 5,916 11 1,015 3
Taiwan................................. 5,132 13 332 1
Thailand............................... 11,883 29 1,365 2
------ --- ------ ---
Total.................................. 59,529 169 16,783 46
====== === ====== ===
</TABLE>
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SALES, DISTRIBUTION AND MARKETING
The Company currently targets leading hotels generally in excess of 100
rooms in the Pacific Rim, Europe, the Middle East and Africa. 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 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 September 30, 1996, contracts for approximately 5% of the Company's
installed rooms expire on or before December 31, 1998, 17% of the Company's
installed rooms expire during 1999 and 24% 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 South
Korea, Taiwan
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and Thailand, and expects to establish further ventures with local partners as
and when the need and opportunity arise.
In Australia, Hong Kong, Israel, Japan, 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.
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
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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.
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.
MANUFACTURING
Although under its technology agreements with OCV and Guestserve, the
Company has the right to manufacture the components and sub-assemblies of its
systems, the Company currently subcontracts the manufacture of such 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
September 30, 1996, the Company's installation and service organization
consisted of 49 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
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<PAGE>
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.
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. The Company believes that SpectraVision has approximately 8,000 rooms
installed with on-demand video systems outside of North America. 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.
The Company estimates that Movielink has approximately 10,000 rooms installed
with on-demand video systems. 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 EMI, VMS and Granada. Granada
has a supply agreement with Prodac pursuant to which Prodac must supply
Granada with Prodac's on-demand video systems. The Company may be precluded
from competing in the United Kingdom and Ireland by a non-competition
provision in an asset sale agreement executed by Prodac in connection with
Prodac's sale of its U.K. operations to UKCEL, a division of Granada.
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.
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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.
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
its Guestserve or OCV license agreements or otherwise, were to be successfully
challenged by these or other companies, the Company's business, financial
condition and results of operations could be materially adversely affected. As
a result of the acquisition of Prodac, the Company has obtained Prodac's
technologies and technologies under development including digital server
technology related to Prodac's Videoquest product and Prodac's television-
enabled personal computer technology, all of which will become part of the
Company's proprietary rights. The laws of some foreign countries do not
protect the Company's proprietary technology to the same extent as do the laws
of the United States. There can be no assurance that third parties will not
claim infringement by the Company with respect to Prodac's or MagiNet's
proprietary technology. The loss or the inability of the Company to maintain
any of the Company's licenses could result in delays or reductions in system
installations until equivalent technology could be identified, tested,
licensed and integrated. Any such delays or reductions in installations would
materially adversely affect the Company's business, financial condition and
results of operations. 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 refused by the U.S. Patent and Trademark Office
as likely to be confused with "ImagiNet," a mark for which a prior application
was made, if "ImagiNet" is ultimately registered. The registration of ImagiNet
is being opposed by three parties. In addition, the right to use the name
"Prodac" in the United Kingdom was transferred to UKCEL in connection with the
sale by Prodac of its operation in the United Kingdom. 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.
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EMPLOYEES
As of September 30, 1996, the Company had 178 employees, of which 114 were
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.
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ACQUISITION OF PRODAC
BUSINESS OF PRODAC
Prodac is one of the leading suppliers of video entertainment and
information services in Europe. Prodac develops, manufactures and installs
proprietary on-demand video and scheduled broadcast systems which allow guests
to order and view movies and which provide other interactive services. As of
September 30, 1996, Prodac served 242 hotels with approximately 43,657 rooms,
the majority of which were located in Germany, and had a contracted backlog of
10,316 rooms. Approximately 87% of Prodac's installations and 70% of its
backlog were scheduled broadcast, and the balance of installations and backlog
represented installations and backlog of Prodac's Videoquest on-demand system.
The Company believes that the acquisition of Prodac will provide important
competitive and strategic advantages. The Prodac acquisition will
substantially expand the geographic scope of the Company's operations and
establish the Company as an industry leader in Europe. The Company intends to
leverage Prodac's relationships with leading hotels to expand the Company's
installed base of rooms. The increase in the Company's installed base of rooms
may also further the Company's ability to acquire programming on more
favorable terms. In addition, Prodac has developed and implemented a
proprietary on-demand video system technology, which the Company intends to
evaluate for use in its systems.
Prodac develops, manufactures and installs a scheduled broadcast system as
well as its proprietary Videoquest on-demand system. Prodac's systems consist
of a TCM integrated into the television set, a hand-held remote and a central
"head-end" video storage unit. The scheduled systems provide up to eight
movies available at scheduled intervals for a daily flat fee. Prodac's
Videoquest on-demand video system allows hotel guests to choose, at their
convenience, from a selection of up to 16 movies. In addition, Prodac's
systems offer video and informational services such as guest checkout, in-room
billing, room service, mini-bar charging and room status. The OCV and
Guestserve systems currently installed by the Company are not compatible with
Prodac's scheduled broadcast or on-demand systems. Accordingly, additional
development resources will be required to provide either the Company's
existing or new products over Prodac's systems.
Prodac manufactures its video equipment at its facility in Cologne, Germany.
The manufacturing process involves the integration of Prodac-produced
components with commercially-sourced parts such as modulators, video players,
racks and wiring. Certain of these components are currently available from
single or limited supply sources. Prodac estimates that it would require three
to six months to find and integrate suitable alternative components in the
event existing sources proved to be unavailable. Although Prodac has not
experienced any difficulty obtaining such components to date, there can be no
assurance that Prodac will not face shortages of one or more necessary
components in the future. Any failure to obtain components on a timely basis
could delay shipments of Prodac's equipment and could have a material adverse
effect on the Company's business, financial condition and results of
operations. Prodac believes that its maximum production capacity under its two
shift system is approximately 30 systems per month.
For the last four years, Prodac has had a manufacturing relationship with
Philips N.V. pursuant to which Philips integrates Prodac's TCM into Philips
television sets. Philips delivers the integrated television sets either
directly to the hotel for installation or to Prodac. In addition, Philips'
leasing subsidiary has provided a significant portion of Prodac's equipment
lease financing. The arrangement with Philips is the only arrangement Prodac
has established for the production of the TCM-equipped televisions that Prodac
sells to hotels. Any disruption of the supply of components for the TCMs or
disruption in Philips' manufacturing process could have a material adverse
effect on the Company's business, financial condition and results of
operations.
In addition to installing its systems in hotels, Prodac sells its video
systems and components to other in-room video service providers and
occasionally enters into film supply agreements with hotels and hotel chains.
In connection with the sale of its United Kingdom operating assets, Prodac
entered into a supply agreement to supply its Videoquest system to UKCEL and
licensed certain software to UKCEL. Pursuant to the supply agreement, Prodac
agreed to supply such quantities of Prodac's Videoquest system as UKCEL may
order from time to time for a period of three years and to supply parts for a
period of seven years thereafter.
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Prodac obtains first-run motion pictures and other programming through a
distribution agreement with the authorized distributor of certain major movie
studios in the United States, including MGM, United Artists and Universal, in
addition to other independent studios and movie production companies. Prodac
prepares monthly line-ups for video titles at its hotels, arranges the
ordering and duplication of those titles and changes actual video cassettes
for new movies monthly. Prodac obtains English, French, German, Greek and
Spanish language programming. Typically, Prodac broadcasts movies in English
and the language of the country in which the hotel is located.
The distribution agreements relating to first-run motion pictures generally
provide for a specified license period and percentage of revenue of each
motion picture, with the studio receiving a percentage generally ranging from
30% to 45% of Prodac's gross revenue from such motion picture. In addition to
first-run motion pictures, all of Prodac's installations also offer
programming independent of the major movie studios, including titles
considered appropriate for adult audiences only. Such programming is typically
obtained for a comparatively small flat-rate fee based on the number of rooms
served. For the nine months ended September 30, 1996, such independent
programming accounted for approximately 46% of Prodac's total revenues, which
includes revenues generated from film rentals, system sales and film
programming arrangements.
Prodac targets leading hotels generally in excess of 100 rooms in Europe. As
of September 30, 1996, Prodac had room installations in Albania, Austria,
Belgium, France, Germany, Greece, Luxembourg, the Netherlands and Spain. A
substantial majority of Prodac's rooms are located in Germany. Prodac's
installed base of rooms consists of rooms installed in hotels that have signed
exclusive contracts with Prodac for a fixed term of five to ten years, with
the typical contract providing for a seven year term. Based upon contracts
entered into as of September 30, 1996, contracts for approximately 7% of
Prodac's installed base of rooms expire on or before December 31, 1997, 5% of
the Company's installed rooms expire during 1998, 7% during 1999 and 7% during
2000.
Prodac has also entered master hotel agreements with certain large hotel
chains in Europe, including Dorint AG, Maritim Hotel GmbH and Novotel
Hoteltriebs GmbH. These master contracts establish Prodac as a preferred
vendor of Prodac's scheduled broadcast or Videoquest entertainment systems
without guaranteeing any commitments from individual hotels within the chain.
Prodac must sign agreements with individual hotels within the chain to install
its systems in such hotels. Prodac also has individual contracts within
recognized chains with which it does not have master contracts, including
Holiday Inns, Hotel Sofitel and Ramada.
Prodac manufactures, sells, markets and installs its products directly
through most of Europe using Prodac personnel. In Austria, Prodac operates
through a wholly-owned subsidiary. Hotel employees or local maintenance
contractors specifically trained by Prodac perform routine maintenance and
repairs. Because Prodac's TCM is integrated with the television set, local
maintenance personnel are able to remove the module, when necessary, and
return it to Prodac's Cologne manufacturing facility for repairs.
As of September 30, 1996, Prodac had 97 employees, 35 of which served in
operations, 9 of which served in engineering, 25 of which served in sales,
marketing and administrative positions and 28 of which served in manufacturing
positions. Prodac's employees have established a workers' council, which
represents the employees for purposes of negotiating certain terms and
conditions of employment and which has certain rights of co-determination with
regard to management policy, in particular with regard to personnel issues. In
addition, certain of Prodac's employees may be members of trade unions.
Although Prodac has not experienced any labor problems to date and believes
its relations with employees to be good, any future failure to reach
agreements with its employees or their representatives could result in a work
stoppage at Prodac, which could have a material adverse effect on the
Company's business, financial condition and results of operations. Under
applicable German law, in the event Prodac were to effect significant
operational changes in its business, including significant reductions in
employment, it would be required to implement an "equalization of interest"
and social plan designed to compensate dislocated employees. Although the
Company has no current plan to implement any such operational changes at
Prodac, if Prodac were required to pay substantial amounts in connection with
such a plan, including in connection with its integration with the Company,
such payments could have an adverse effect on the Company's business,
financial condition and results of operations.
47
<PAGE>
Prodac's administrative, sales, marketing and product development
headquarters are located in Cologne, Germany, where Prodac leases
approximately 41,010 square feet under a lease expiring in December 2008. The
lessor of such space is a civil law partnership consisting of the two
shareholders of Prodac and their wives. See "Certain Transactions." Prodac
also leases space in Milton Keynes, England under a real property lease
expiring in 2001. The annual rent under the lease is approximately
(Pounds)5,000. Prodac intends to continue payments under the lease through
December 31, 1996 at which time UKCEL will determine whether it wishes to
sublet or seek an assignment of the lease. If UKCEL determines not to lease
the space, Prodac will seek a sublessee or assignee.
TERMS OF ACQUISITION
On November 6, 1996, the Company entered into the Acquisition Agreement to
acquire all of the Prodac Shares from Heinrich R. Wirt and Reiner Kaesbach,
Prodac's founders and sole shareholders (the "Prodac Founders"). The
Acquisition Agreement provides that the transfer of the Prodac Shares from the
Prodac Founders to MagiNet GmbH, the Company's German subsidiary, will become
effective upon the Company's delivery of acquisition consideration consisting
of cash and MagiNet Common Stock with an aggregate value of DM 25 million.
Pursuant to the Acquisition Agreement, the Company is obligated to deliver to
the Prodac Founders within ten days of the closing of the Offerings cash in
the amount of DM 20 million (plus interest at the rate of 6% per annum from
November 6, 1996 through the date of the payment of the acquisition
consideration) and the aggregate number of shares of MagiNet Common Stock that
DM 5 million would purchase at a per share purchase price equal to the initial
public offering price, discounted by ten percent. The relevant exchange rates
will be determined according to the official middle rate of exchange between
the Deutsche Mark and the U.S. Dollar on the Frankfurt am Main exchange on the
closing date of the Offerings. Assuming an initial public offering price of
$8.00 and an estimated exchange rate of 1.525 DM per U.S. Dollar (the
applicable exchange rate at the close of trading in New York on September 30,
1996), MagiNet would be obligated to pay approximately $13.1 million in cash
and deliver approximately 455,373 shares of MagiNet Common Stock to the Prodac
Founders. The cash consideration for the acquisition is payable in Deutsche
Marks, however, and the number of shares of Common Stock issuable to the
Prodac Founders is dependent on applicable exchange rates at the time of the
closing of the Offerings. Any increase in the value of the Deutsche Mark
relative to the U.S. Dollar would increase the Company's U.S. Dollar cash
obligation to the Prodac Founders and would increase the number of shares of
Common Stock issuable in connection with the acquisition.
In addition to the consideration deliverable in connection with the closing
of the Offerings, in the event that Prodac achieves certain financial
milestones in its fiscal years 1997, 1998 and 1999, the Prodac Founders will
be entitled to receive additional consideration of DM 5 million for each year
in which such milestones are achieved. The milestones relate to new room
installations, average monthly revenue per room, operating costs and per-room
installation costs. Such additional consideration will be payable on the date
on which the financial audit results for the relevant fiscal year are first
published in a combination of cash and MagiNet Common Stock based on the fair
market value of MagiNet Common Stock and the exchange rate between the
Deutsche Mark and the U.S. Dollar in Frankfurt trading on the payment date.
The Acquisition Agreement also provides that the Prodac Founders will be
permitted to pay themselves an aggregate of DM 600,000 (approximately
$393,000) from the retained earnings of Prodac, calculated based on German
GAAP. In addition, in the event the Offerings have not closed on or prior to
December 31, 1996, the Prodac Founders will be entitled to receive an
additional cash payment equal to all retained earnings in excess of such DM
600,000, calculated under German GAAP, as of December 31, 1996. As of
September 30, 1996, Prodac's retained earnings, calculated on a German GAAP
basis, totalled approximately DM 2 million (approximately $1.3 million), which
will be adjusted for the quarter ending December 31, 1996.
In connection with the acquisition, MagiNet has agreed to assume from the
Prodac Founders certain guarantees of Prodac indebtedness provided by the
Prodac Founders in an aggregate amount of DM 4.6 million and to repay certain
loan obligations of Prodac owed to the Prodac Founders in the amount of DM
130,000. Pursuant to the Acquisition Agreement, the Company is obligated to
appoint one of the Prodac Founders to its Board of Directors immediately after
the effectiveness of the transfer of the Prodac Shares and for so long as the
48
<PAGE>
Prodac Founders collectively hold 1% or more of the Company's outstanding
Common Stock. The Company expects that Mr. Kaesbach will become a member of
its Board of Directors following the Offerings. See "Management" and "Certain
Transactions."
In connection with the Prodac acquisition, each of the Prodac Founders has
entered into an employment agreement with Prodac that will become effective
upon the Company's payment of the initial acquisition consideration. Pursuant
to the employment agreements, each of the Prodac Founders will be entitled to
an annual base salary of DM 338,000 (approximately $222,000). In addition,
each of the Prodac Founders is eligible to receive a yearly bonus of up to DM
101,400 (approximately $66,492) if certain business targets are achieved.
After December 31, 1999, either of the Prodac Founders may terminate their
respective agreement with six months prior notice. Prior to December 31, 1999,
the Company may terminate the agreements in any event for cause and on three
months prior notice in the event that certain minimum financial targets are
not achieved.
As employees of Prodac, each of the Prodac Founders will be granted, at the
time of the effectiveness of the transfer of the Prodac Shares, an option to
acquire 150,000 shares of MagiNet Common Stock at an exercise price per share
of $8.00. The option will be issued pursuant to the Company's 1992 Key
Personnel Stock Option Plan, will have a five year term, and will be subject
to vesting over four years with 25% of the shares vesting one year after the
date of grant and the remaining shares vesting ratably over the succeeding 36
months.
Prodac is obligated as lessee under a 15-year lease for certain real
property owned by a civil law partnership consisting of the Prodac Founders
and their wives. The lease relates to Prodac's office and manufacturing
facilities in Cologne, Germany. The lease agreement provides for monthly
rental payments of DM 79,000 (approximately $52,000), subject to periodic
adjustments for inflation based on changes in the Cost of Living Index
prepared by Germany's Federal Office of Statistics. The lease expires in
December 2008 and provides for automatic one-year extensions thereafter unless
terminated in advance of such extension with 6 months notice. See "Certain
Transactions."
In October 1996, Prodac sold its business operations in the United Kingdom,
consisting of approximately 6,700 installed rooms operated by Prodac's English
operating subsidiary, to UK Consumer Electronics Limited ("UKCEL"), a
subsidiary of Granada Group Plc, a competitor of the Company. In connection
with the asset sale, Prodac entered a supply agreement pursuant to which it
agreed to supply UKCEL with its requirements of Prodac's interactive video
system, Videoquest, for a period of three years, and to continue to supply
parts for seven years thereafter. In addition, Prodac agreed that it would not
compete with UKCEL in the United Kingdom or Ireland for a period of three
years from the date of the asset sale. Pursuant to a master hotel contract
with Hyatt International (Europe Africa Middle East) Ltd., the Company is
obligated to install Guestserve systems in Hyatt hotels in the United Kingdom
and plans to perform such obligations through either a U.K. operating
subsidiary or a U.S. subsidiary which is the contracting party to the
Guestserve license agreement. In the United Kingdom and Ireland, the Company
may be precluded from entering these markets by a non-competition provision in
an asset sale agreement executed by Prodac in connection with Prodac's sale of
its U.K. operations to UKCEL.
49
<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.
<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. ................... 55 Executive Vice President and Chief Operating Officer
Pang T. Ho, Ph.D........ 51 Vice President of Engineering
Reiner Kaesbach(1)...... 45 Director Nominee and Managing Director of Prodac GmbH
Stuart J. Ellman(2)(3).. 30 Director
Michael D. Granoff(2)... 38 Director
Michael Ramsay(3)....... 44 Director
James D. Robinson
IV(3).................. 34 Director
</TABLE>
- --------
(1) Mr. Kaesbach is expected to become a director of the Company following the
Offerings upon payment of the acquisition consideration for Prodac.
(2)Member of the Audit Committee.
(3)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
50
<PAGE>
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 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.
Reiner Kaesbach is expected to become a member of the Company's Board of
Directors following the closing of the Offerings upon the Company's delivery
of the acquisition consideration for Prodac. In addition, upon such payment,
Mr. Kaesbach will be employed as a Managing Director of Prodac pursuant to a
Managing Director's Service Agreement dated November 5, 1996. Prior to joining
MagiNet, Mr. Kaesbach served as a Managing Director of Prodac since founding
Prodac in 1979. Pursuant to the Acquisition Agreement, for so long as the
Prodac Founders continue to hold at least 1% of the outstanding Common Stock
of the Company and to serve as Managing Directors of Prodac, they will
together have the right to one seat on the Company's Board of Directors to be
filled by either Mr. Wirt or Mr. Kaesbach on an annual, rotating basis.
Following the closing of the Offerings, the Company anticipates that Mr.
Kaesbach will become a member of the Board of Directors to serve for the first
such rotation. Mr. Kaesbach holds an undergraduate degree in engineering from
Siegen 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,
51
<PAGE>
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,
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 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.
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").
52
<PAGE>
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.
(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.
53
<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.
54
<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 ......... 135,917 213,583 951,419 1,495,081
James A. Barth............. 32,292 117,708 222,919 777,081
Gordon E. (Ned) Druehl,
Jr.(3).................... -- -- -- --
Pang T. Ho, Ph.D. ......... 29,583 75,417 205,831 509,169
Former Executive Officers
Jeffrey A. Bixler(4)....... -- -- -- --
Eric S. Hass(5)............ 73,000 146,000 511,000 1,022,000
</TABLE>
- --------
(1) Based on an initial public offering price of $8.00 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
55
<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 47,986 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 more than 10% of the voting power of all classes of the Company's
outstanding capital stock at the date of grant,
56
<PAGE>
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-employee directors not
entitled to receive a First Option, will also be granted an option to purchase
5,000 shares
57
<PAGE>
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 401(k) 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. In addition, in connection with its
acquisition by MagiNet, Prodac entered into employment agreements with each of
the Prodac Founders. Pursuant to the Acquisition Agreement, the Prodac
Founders are together entitled to one seat on the Board of Directors; the
Prodac Founder who will serve on the board will alternate annually. Following
the closing of the Offerings, Reiner Kaesbach will serve as a member of the
Board of Directors for the first rotation.
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.
58
<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.
On November 5, 1996, Prodac entered into a Managing Director's Service
Agreement with Reiner Kaesbach pursuant to which Prodac retained his services
as Managing Director effective upon the Company's payment of the acquisition
consideration for Prodac. The agreement provides for an annual base salary of
DM 338,000 (approximately $222,000). In addition, Mr. Kaesbach is eligible to
receive a yearly bonus of up to DM 101,400 (approximately $66,492) if certain
business targets are achieved. After December 31, 1999, either Mr. Kaesbach or
Prodac may terminate the service agreement with six months prior notice. Prior
to December 31, 1999, the Company may terminate the agreements in any event
for cause and on three months prior notice in the event that certain minimum
financial targets for Prodac are not achieved. Prodac and Heinrich R. Wirt are
parties to a separate Managing Director's Service Agreement containing
substantially equivalent terms.
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.
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<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) 339,887 shares and 100,181 shares of Series B Preferred Stock in October
1992 at prices of $4.00 and $4.50 per share, respectively; (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 and December 1994 at a price of $4.50 per share and warrants to
acquire 1,111,111 shares of Series C Preferred Stock in September 1994 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. Stuart J. Ellman and James D. Robinson IV,
members of the Company's Board of Directors, are Managing Directors of RRE
Investors, L.L.C.
(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
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<PAGE>
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 directors
and officers of the Company. See "Management--Employment Agreements and Change
in Control Arrangements."
On November 6, 1996, the Company entered into the Acquisition Agreement
pursuant to which the Company agreed to acquire all the outstanding shares of
Prodac from the Prodac Founders for an aggregate consideration of DM 25
million, consisting of DM 20 million in cash (plus interest at the rate of 6%
per annum from November 6, 1996 through the date of the payment of the
acquisition consideration) and shares of MagiNet Common Stock with an
aggregate value of DM 5,000,000 based on a 10% discount to the initial public
offering price. The Prodac Founders are also entitled to a distribution of
approximately DM 600,000 to be paid from Prodac's retained earnings. If the
closing of the Offerings occurs after December 31, 1996, the Prodac Founders
will be entitled to any additional retained earnings in excess of such DM
600,000, calculated based on German GAAP. In addition, the Company will pay up
to an aggregate of DM 15 million in cash and MagiNet Common Stock contingent
upon Prodac achieving certain financial targets in fiscal 1997, 1998 and 1999.
The Company will also assume from the Prodac Founders certain guarantees of
Prodac indebtedness provided by the Prodac Founders in the amount of DM 4.6
million and will repay certain loan obligations of Prodac owed to the Prodac
Founders in the amount of DM 130,000. The cash portion of the acquisition
consideration will be paid in Deutsche Marks out of the net proceeds of the
Offerings based on the applicable exchange rate on the Frankfurt am Main
exchange on the closing date of the Offerings. Any increase in the value of
the Deutsche Mark relative to the U.S. Dollar will increase the portion of the
net proceeds of the Offerings used in connection with the Prodac acquisition
and will result in the Company's issuing a greater number of shares of MagiNet
Common Stock to the shareholders of Prodac. See "Use of Proceeds," "Dilution,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Acquisition of Prodac."
Prodac leases approximately 41,010 square feet of office and manufacturing
space in Cologne, Germany from a civil law partnership consisting of each of
the Prodac Founders and their wives. The lease agreement provides for monthly
rental payments of DM 79,000 (approximately $52,000), subject to periodic
adjustments for inflation based on changes in the Cost of Living Index
prepared by Germany's Federal Office of Statistics. The lease expires in
December 2008 and provides for automatic one-year extensions thereafter unless
terminated in advance of such extension with 6 months notice. See "Acquisition
of Prodac."
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of September 30, 1996 and as
adjusted to reflect the sale of the 5,500,000 shares of Common Stock offered
hereby and the assumed issuance of 455,373 shares of Common Stock in
connection with the Company's acquisition of Prodac 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 and director nominee of
the Company; (iii) each of the Named Executive Officers and (iv) all
directors, including one nominee, 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).... 4,486,109 34.4% 24.2%
126 East 56th Street, 22nd
Floor
New York, NY 10022
Equity-Linked Investors II 1,511,931 11.6% 8.2%
(4).........................
c/o Desai Capital
Management, Inc.
540 Madison Avenue, 36th
Floor
New York, NY 10022
Festival Company, Inc. ..... 1,007,954 7.7% 5.4%
Wisma Barito Pacific, Tower
B
Lt. 11, J1 S. Paman Kav.
62-63 Jakarta 11410
Indonesia
Pomona Capital, L.P.(5)..... 731,649 5.6% 3.9%
780 Third Avenue
New York, NY 10017-7076
Kenneth B. Hamlet(6)........ 237,979 1.8% 1.3%
Robert R. Creager(7)........ 432,708 3.3% 2.3%
James A. Barth(8)........... 88,762 * *
Gordon E. (Ned) Druehl, Jr.
............................ -- -- --
Pang T. Ho, Ph.D.(9) ....... 53,645 * *
Reiner Kaesbach(10)......... 227,687 1.7% 1.2%
Stuart J. Ellman(11)........ 4,486,109 34.4% 24.2%
Michael D. Granoff(12)...... 731,649 5.6% 3.9%
Michael Ramsay(13).......... 7,500 * *
James D. Robinson IV(14).... 4,486,109 34.4% 24.2%
Jeffrey A. Bixler(15)....... -- -- --
Eric S. Hass(16)............ 131,698 1.0% *
All current executive
officers and directors as a
group
(10 persons)(17)............ 6,266,039 46.2% 32.9%
</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 13,031,041 shares of Common
Stock outstanding as of September 30, 1996 and 18,531,041 shares
immediately following the completion of the Offerings (assuming no
exercise of the Underwriters' over-allotment option), together with
applicable options for such stockholder and including the assumed
issuance of 455,373 shares of Common Stock in connection with the
Company's acquisition of Prodac within 10 business days after the closing
of the Offerings. 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 September 30, 1996 are deemed to be beneficially owned by the
person holding such options for the purpose of computing the percentage
of ownership of 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.
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<PAGE>
(3) Includes 1,716,907 shares held by Sunset Partners, L.P. ("Sunset"),
1,510,474 shares held by Sunset Partners II, L.P. ("Sunset II") and
1,258,728 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"). Stuart J. Ellman, James D.
Robinson III and James D. Robinson IV may exercise voting control over
the shares held by the Sunset Partnerships. Stuart J. Ellman and James D.
Robinson IV are currently directors of the Company.
(4) Rohit Desai may exercise voting control over the shares held by Equity-
Linked Investors II.
(5) Includes 243,883 shares held by Pomona Capital, L.P. ("Pomona"), 195,106
shares held by SOF Venture Capital, L.P. ("SOF Venture"), 175,596 shares
held by SP Offshore Venture Capital, L.P. ("SP Offshore") and 117,064
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. Mr. Granoff,
Francis Janis and Steve Futrell may exercise voting control over the
shares held by Pomona, SOF Venture, SP Offshore and SP Venture.
(6) Includes 181,757 shares of Common Stock issuable upon exercise of stock
options which are presently exercisable or will become exercisable within
60 days of September 30, 1996. Mr. Hamlet is the Company's President and
Chief Executive Officer and Chairman of its Board of Directors.
(7) Includes 242,708 shares of Common Stock issuable upon exercise of stock
options which are presently exercisable or will become exercisable within
60 days of September 30, 1996. Mr. Creager is the Company's founder and
Executive Vice President of Corporate Development.
(8) Includes (i) 66,667 shares of Common Stock issuable upon exercise of
stock options which are presently exercisable or will become exercisable
within 60 days of September 30, 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.
(9) Includes 29,645 shares of Common Stock issuable upon exercise of stock
options which are presently exercisable or will become exercisable within
60 days of September 30, 1996 and 4,000 shares held by Dr. Ho's children.
Dr. Ho is the Company's Vice President of Engineering.
(10) Upon the Company's delivery of acquisition consideration for Prodac and
for so long as the Prodac Founders continue to hold collectively at least
1% of the Company's outstanding Common Stock and serve as Managing
Directors of Prodac, the Prodac Founders have the right to one seat on
the Company's Board of Directors to be filled by either of them on an
annual, rotating basis. Following the closing of the Offerings, the
Company anticipates that Mr. Kaesbach will serve as a member of the Board
of Directors for the first such rotation. In connection with the Prodac
acquisition, Mr. Kaesbach will initially receive an assumed 227,687
shares of Common Stock, subject to additional issuances in the event
Prodac achieves certain financial milestones. In addition, in connection
with his employment by Prodac, the Company has agreed to grant Mr.
Kaesbach an option to acquire 150,000 shares of Common Stock at an
exercise price of $8.00 per share under the 1992 Key Personnel Stock
Option Plan, subject to vesting over four years, with 25% of the shares
vesting one year after the date of grant and the remaining shares vesting
ratably over the succeeding 36 months.
(11) Includes 1,716,907 shares held by Sunset, 1,510,474 shares held by Sunset
II and 1,258,728 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.
(12) Includes 243,883 shares held by Pomona, 195,106 shares held by SOF
Venture, 175,596 shares held by SP Offshore and 117,064 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.
(13) Includes 7,500 shares of Common Stock issuable upon exercise of stock
options which are presently exercisable or will become exercisable within
60 days of September 30, 1996. Mr. Ramsay is a member of the Company's
Board of Directors.
(14) Includes 1,716,907 shares held by Sunset, 1,510,474 shares held by Sunset
II and 1,258,728 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.
(15) Mr. Bixler resigned from the Company effective in December 1995.
(16) Includes 43,706 shares held by Mr. Hass individually and 87,992 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.
(17) Includes 528,277 shares of Common Stock issuable upon exercise of
outstanding stock options which are presently exercisable or will become
exercisable within 60 days of September 30, 1996. Excludes 131,698 shares
beneficially held by Eric S. Hass, who resigned as an officer of the
Company effective in March 1996. Includes an assumed 227,687 shares
issuable to Reiner Kaesbach in connection with the Company's acquisition
of Prodac within 10 business days after the closing of the Offerings.
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<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 and prior to the issuance of the
Common Stock in connection with the Offering and the acquisition of Prodac,
there will be 12,575,668 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
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<PAGE>
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.
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 4,020,000 shares of Common
Stock and the holder of a warrant to acquire 40,000 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.
In addition to the 4,060,000 shares indicated above as being subject to
registration rights, the Company has granted certain registration rights to
the Prodac Founders with respect to the Prodac Shares and any shares
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<PAGE>
subsequently issued to the Prodac Founders upon achievement of certain
financial milestones enumerated in the Acquisition Agreement. See "Acquisition
of Prodac." Upon expiration of a one-year lock-up agreement included in the
Acquisition Agreement, the Company is obligated to register the Prodac Shares
and any subsequently issued shares on a Registration Statement on Form S-3 at
the Company's expense.
TRANSFER AGENT
The Transfer Agent and Registrar for the Common Stock is The First National
Bank of Boston.
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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
18,531,041 shares of Common Stock based upon shares outstanding as of
September 30, 1996. In addition to the 5,500,000 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 13,031,041 shares of Common Stock
outstanding, including the assumed issuance of 455,373 shares of Common Stock
in connection with the acquisition of Prodac, 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 under the
Securities Act. Beginning 180 days after the Effective Date, approximately
9,100,000 additional Restricted Shares of Common Stock subject to lock-up
agreements will become eligible for sale in the public market. Of the
approximately 9,100,000 Restricted Shares that will become available for sale
in the public market beginning 180 days after the Effective Date,
approximately 7,200,000 shares will be subject to certain volume and other
resale restrictions pursuant to Rule 144. Thereafter, approximately 3,500,000
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. In addition, the shares of Common Stock
to be issued in connection with the acquisition of Prodac will be subject to
certain registration rights beginning one year after the closing of the
Offerings. See "Description of Capital Stock--Registration Rights."
As of September 30, 1996, options to purchase 1,702,080 shares were
outstanding, of which options to purchase approximately 521,933 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, approximately 802,000 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.
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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
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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.
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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........................................................... 4,400,000
=========
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........................................................... 1,100,000
=========
</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 reallow a concession not in excess of $ per share to certain
brokers and dealers.
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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.
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 660,000 and 165,000
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
71
<PAGE>
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.
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.
The U.S. Underwriters and International Managers have reserved for sale, at
the initial public offering price, up to 5% of the shares of Common Stock
offered hereby for certain employees, customers and vendors of the Company,
and certain other individuals and entities, who have expressed an interest in
purchasing such shares of Common Stock in the Offerings. The number of shares
available for sale to the general public will be reduced to the extent such
persons purchase such reserved shares. Any reserved shares not so purchased
will be offered by the U.S. Underwriters and International Managers to the
general public on the same basis as other shares offered hereby.
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 17,314 shares of the Company's Common Stock.
72
<PAGE>
EXPERTS
The consolidated financial statements of MagiNet Corporation at December 31,
1994 and 1995 and for each of the three years in the period ended December 31,
1995, 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.
The consolidated financial statements of PRODAC Prozessdatentechnik GmbH at
December 31, 1994 and 1995 and for each of the three years in the period ended
December 31, 1995 appearing in this Prospectus and Registration Statement have
been audited by Ernst & Young GmbH, 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.
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.
73
<PAGE>
MAGINET CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
MagiNet Corporation Consolidated Financial Statements:
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
PRODAC Prozessdatentechnik GmbH Consolidated Financial Statements:
Report of Ernst & Young GmbH, Independent Auditors..................... F-20
Consolidated Balance Sheets............................................ F-21
Consolidated Statements of Operations.................................. F-22
Consolidated Statements of Shareholders' Deficiency.................... F-23
Consolidated Statements of Cash Flows.................................. F-24
Notes to Consolidated Financial Statements............................. F-25
MagiNet Corporation Unaudited Pro Forma Condensed Combined Financial
Statements:
Unaudited Pro Forma Condensed Combined Financial Information........... F-36
Unaudited Pro Forma Condensed Combined Balance Sheets.................. F-38
Unaudited Pro Forma Condensed Combined Statements of Operations........ F-39
Notes to Unaudited Pro Forma Condensed Combined Financial Statements... F-41
</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 the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1995. 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 the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995 in conformity with generally accepted accounting principles.
Ernst & Young LLP
Palo Alto, California
February 16, 1996
F-2
<PAGE>
MAGINET CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
UNAUDITED PRO
FORMA
STOCKHOLDERS'
DECEMBER 31, EQUITY
------------------ SEPTEMBER 30, SEPTEMBER 30,
1994 1995 1996 1996
-------- -------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents.............. $ 10,532 $ 18,672 $ 7,251
Short-term investments.... 429 151 --
Accounts receivable....... 347 1,191 2,081
Other current assets...... 351 624 1,679
-------- -------- --------
Total current assets....... 11,659 20,638 11,011
Video systems, net......... 10,704 20,961 31,683
Property and equipment,
net....................... 638 1,376 1,745
Prepaid royalties.......... 876 1,095 1,478
Other assets............... 122 2,470 3,567
-------- -------- --------
Total assets............... $ 23,999 $ 46,540 $ 49,484
======== ======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt........... $ 374 $ 97 $ 288
Accounts payable.......... 2,327 1,738 1,999
Accrued compensation...... 54 340 650
Accrued interest.......... 16 1,016 392
Other accrued
liabilities.............. 1,137 2,905 2,825
-------- -------- --------
Total current liabilities.. 3,908 6,096 6,154
Deferred tax liability..... -- 544 1,211
Long-term debt............. -- 24,900 25,829
Minority interests in
consolidated
subsidiaries.............. 167 389 321
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
September 30, 1996,
respectively, all of
which are convertible;
aggregate liquidation
preference of $56,572 at
September 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 508 shares
issued and outstanding at
December 31, 1994 and
1995, and September 30,
1996, respectively (pro
forma: $.001 par value,
45,000 shares authorized,
11,417 shares issued and
outstanding)............. 9 23 504 11
Additional paid-in
capital.................. -- -- -- 53,734
Warrants to purchase
common stock............. -- 101 101 101
Deferred compensation..... -- -- (218) (218)
Accumulated deficit....... (12,678) (25,474) (37,008) (37,008)
Cumulative translation
adjustment............... -- (270) (651) (651)
-------- -------- -------- --------
Total stockholders'
equity................... 19,924 14,611 15,969 $ 15,969
-------- -------- -------- ========
Total liabilities and
stockholders' equity...... $ 23,999 $ 46,540 $ 49,484
======== ======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
MAGINET CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------- -------------------
1993 1994 1995 1995 1996
------- ------- -------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue....................... $ 395 $ 2,342 $ 8,689 $ 5,655 $ 12,048
Costs and expenses:
Direct costs................ 294 1,156 3,731 2,586 6,232
Depreciation and
amortization............... 171 957 3,682 2,564 4,747
Operations expenses......... 464 2,876 3,108 2,161 1,514
Selling, general and
administrative............. 1,497 4,294 8,420 5,647 6,941
Research and development.... 1,320 856 1,247 890 1,599
------- ------- -------- -------- ---------
Total costs and expenses...... 3,746 10,139 20,188 13,848 21,033
------- ------- -------- -------- ---------
Operating loss................ (3,351) (7,797) (11,499) (8,193) (8,985)
Interest expense.............. (49) (319) (1,297) (517) (2,710)
Interest income and other,
net.......................... 21 66 306 138 627
------- ------- -------- -------- ---------
Loss before income taxes and
minority interest in net
losses of consolidated
subsidiaries................. (3,379) (8,050) (12,490) (8,572) (11,068)
Provision for income taxes.... -- -- (554) (423) (681)
Minority interest in net
losses of consolidated
subsidiaries................. -- 124 248 204 215
------- ------- -------- -------- ---------
Net loss...................... $(3,379) $(7,926) $(12,796) $ (8,791) $ (11,534)
======= ======= ======== ======== =========
Pro forma net loss per share.. $ (1.03) $ (0.93)
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
---------------- ------------- DEFERRED ACCUMULATED TRANSLATION STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT WARRANTS COMPENSATION DEFICIT ADJUSTMENT EQUITY
------- -------- ------ ------ -------- ------------ ----------- ----------- -------------
<S> <C> <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 (unaudited)... -- -- 136 133 -- -- -- -- 133
Issuance of Common
Stock (unaudited)..... -- -- 65 130 -- -- -- -- 130
Issuance of Series D
Convertible Preferred
Stock (net of issuance
costs of $314)
(unaudited)........... 1,904 13,010 -- -- -- -- -- -- 13,010
Deferred compensation
related to grant of
stock options
(unaudited)........... -- -- -- 218 -- (218) -- -- --
Translation adjustment
(unaudited)........... -- -- -- -- -- -- -- (381) (381)
Net loss (unaudited)... -- -- -- -- -- -- (11,534) -- (11,534)
------- -------- --- ---- ----- ----- -------- ----- -------
BALANCES AT SEPTEMBER
30, 1996 (unaudited)... 10,909 $ 53,241 508 $504 $ 101 $(218) $(37,008) $(651) $15,969
======= ======== === ==== ===== ===== ======== ===== =======
</TABLE>
See accompanying notes.
F-5
<PAGE>
MAGINET CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------- -------------------
1993 1994 1995 1995 1996
------- ------- -------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss.................. $(3,379) $(7,926) $(12,796) $ (8,791) $(11,534)
Adjustments to reconcile
net loss to net cash used
in operating activities:
Depreciation............. 153 851 3,212 2,222 4,335
Amortization of prepaid
royalties............... 18 106 479 342 412
Amortization of Senior
Secured Note financing
costs................... -- -- 145 37 348
Interest on convertible
subordinated debt....... -- 192 -- -- --
Minority interests....... -- (124) (248) (204) (215)
Changes in operating
assets and liabilities:
Accounts receivable...... (46) (301) (844) (762) (890)
Other current assets..... (90) (261) (273) (280) (1,055)
Other assets............. 43 (105) (303) (437) (1,445)
Accounts payable and
other accrued
liabilities............. 1,548 1,431 3,009 1,193 534
------- ------- -------- -------- ---------
Total adjustments........ 1,626 1,789 5,177 2,111 2,024
------- ------- -------- -------- ---------
Net cash used in
operating activities.... (1,753) (6,137) (7,619) (6,680) (9,510)
------- ------- -------- -------- ---------
INVESTING ACTIVITIES
Redemption (purchase) of
available-for-sale
securities............... -- (429) 278 429 151
Investment in video
systems.................. (2,590) (8,670) (13,262) (10,838) (14,826)
Investment in property and
equipment................ (501) (262) (1,215) (558) (871)
Nonrefundable prepaid
royalty.................. -- -- (698) -- (905)
------- ------- -------- -------- ---------
Net cash used in investing
activities............... (3,091) (9,361) (14,897) (10,967) (16,451)
------- ------- -------- -------- ---------
FINANCING ACTIVITIES
Proceeds from debt........ -- 374 6,000 6,000 1,120
Payment on debt........... (257) -- (6,277) (6,261) --
Proceeds (payment) of note
payable to stockholders.. 1,400 (1,400) -- -- --
Proceeds from Senior
Secured Notes, net of
issuance costs........... -- -- 22,811 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 14 263
Proceeds from minority
investors................ -- 291 470 470 147
------- ------- -------- -------- ---------
Net cash provided by
financing activities..... 5,082 25,715 30,656 23,034 14,540
------- ------- -------- -------- ---------
Net increase (decrease) in
cash and cash
equivalents.............. 238 10,217 8,140 5,387 (11,421)
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 $ 15,919 $ 7,251
======= ======= ======== ======== =========
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 $ 101 $ --
======= ======= ======== ======== =========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
Interest paid............. $ 18 $ 319 $ 187 $ 174 $ 2,986
======= ======= ======== ======== =========
</TABLE>
See accompanying notes.
F-6
<PAGE>
MAGINET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 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.
Upon completion of the IPO, all of the Company's 10,908,878 shares of
convertible Preferred Stock outstanding as of September 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 September 30, 1996.
On August 8, 1996, the Board of Directors approved the reincorporation of
the Company in the State of Delaware, which was approved by the shareholders
in October 1996 and effected in December 1996. In addition, effective upon the
closing of the IPO, the Board of Directors and stockholders of the Company
have approved the filing of a restated certificate of incorporation to
authorize 45,000,000 shares of Common Stock and 5,000,000 shares of
Undesignated Preferred Stock.
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.
In order for the Company to remain in compliance with the amended senior
note covenants (see Note 3) through September 1997, the Company must achieve
its operating plan and/or raise new capital. If the Company is unable to
achieve the revenue element of its operating plan it may have to substantially
reduce its level of spending in order to remain in compliance with the amended
senior note covenants through September 1997. Management believes it can
achieve its operating plan and/or raise additional equity. The accompanying
financial statements have been prepared assuming that the Company will
continue as a going concern, which contemplates the realization of assets and
the satisfaction of liabilities in the normal course of business.
INTERIM FINANCIAL DATA
The interim financial data for the nine months ended September 30, 1995 and
1996 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 periods ended
September 30, 1995, and 1996. Results for the nine months ended September 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 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 NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS
UNAUDITED)
Historical net loss per share information is as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------- ------------------
1993 1994 1995 1995 1996
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Net loss per share.......... $(0.73) $(1.72) $(2.77) $(1.90) $(2.49)
Shares used in computing
historical net loss per
share (in thousands)....... 4,598 4,606 4,626 4,620 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 NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 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 nine months ended
September 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,
--------------- SEPTEMBER 30,
1994 1995 1996
------- ------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash........................................... $ 908 $ 2,623 $ 1,814
Money market................................... 3,496 12,768 4,306
Certificates of deposit........................ 599 3,432 1,131
U.S. treasury obligation....................... 3,000 -- --
U.S. commercial paper.......................... 2,958 -- --
------- ------- -------
Total.......................................... $10,961 $18,823 $ 7,251
======= ======= =======
Disclosed as:
Cash and cash equivalents.................... $10,532 $18,672 $ 7,251
Short-term investments....................... 429 151 --
------- ------- -------
Total........................................ $10,961 $18,823 $ 7,251
======= ======= =======
</TABLE>
During the nine months ended September 30, 1995 and 1996, there were no
gross cash flows from the purchases of available-for-sale securities. During
the nine months ended September 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 September 30, 1996, the Company held approximately $256,000 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 December 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, SEPTEMBER 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 $493 at September 30,
1996.......................................... $2,045 $1,697
====== ======
</TABLE>
F-9
<PAGE>
MAGINET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS
UNAUDITED)
VIDEO SYSTEMS
Video systems are stated at cost, net of accumulated depreciation, and
consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- SEPTEMBER 30,
1994 1995 1996
------- -------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Installed video systems.............. $ 7,592 $20,845 $31,097
Uninstalled video systems and
installations-in-progress........... 3,935 3,674 7,871
------- ------- -------
11,527 24,519 38,968
Less accumulated depreciation........ (823) (3,558) (7,285)
------- ------- -------
$10,704 $20,961 $31,683
======= ======= =======
</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,
-------------------- SEPTEMBER 30,
1994 1995 1996
---- -------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Computer and video testing equipment.... $703 $1,758 $2,578
Furniture and fixtures.................. 117 277 328
---- ------ ------
820 2,035 2,906
Less accumulated depreciation........... (182) (659) (1,161)
---- ------ ------
$638 $1,376 $1,745
==== ====== ======
</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 September 30,
1996, such owner's share of total outstanding voting securities had declined
to approximately 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
September 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 NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 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 fourth quarter 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
$962,000 at September 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 September 30, 1996 was approximately 8%
per annum. The amount of restricted cash collateralized against the South
Korean equipment lease line was $256,000 at September 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 and contains specific
financial covenants. At September 30, 1996 the Company was not in compliance
with a financial covenant but has obtained a waiver from the Secured Senior
Note holders. In addition the Senior Secured Note financial covenants have
been amended in exchange for the elimination of a 100,000 share adjustment
provision in outstanding warrants and a commitment to issue new warrants for
up to 1,000,000 additional shares at an exercise price of $7 per share if the
Company does not raise additional equity capital of at least $40 million by
March 31, 1997, such as an IPO.
The carrying value of the Senior Secured Notes approximates fair value at
September 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 September 30,
1996, minimum lease commitments are as follows:
<TABLE>
<CAPTION>
OPERATING
LEASES
--------------
(IN THOUSANDS)
<S> <C>
Three months ending December 31, 1996...................... $147
Years ending December 31, 1997............................. 324
1998..................................................... 159
1999..................................................... 27
2000..................................................... 8
----
Total minimum payments required............................ $665
====
</TABLE>
F-11
<PAGE>
MAGINET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS
UNAUDITED)
Rent expense was approximately $235,000 and $454,000 for the nine months
ended September 30, 1995 and 1996 and $59,000, $222,000 and $320,000 for the
years ended December 31, 1993, 1994 and 1995, respectively.
5. STOCKHOLDERS' EQUITY
PREFERRED STOCK
Preferred Stock authorized and outstanding at September 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 and certain other
conditions. At September 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 September 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
F-12
<PAGE>
MAGINET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS
UNAUDITED)
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 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 3,800,000 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 NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 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...................................... 962,824 $2.97
Exercised.................................... (135,810) $0.97
Canceled..................................... (137,384) $0.99
--------------
Balance at September 30, 1996.................. 1,702,080 $2.17
==============
</TABLE>
As of September 30, 1996, 1,918,728 shares of Common Stock reserved under
the Plans were available for granting of additional options. The price range
at September 30, 1996 of options outstanding under the Plans is $0.45 to
$8.00. The weighted average contractual life of the outstanding options at
September 30, 1996 is 46 months.
The Company has recorded deferred compensation expense of $218,000 for the
difference between the grant price and the deemed fair value of certain of the
Company's stock options granted in the second and third quarters of 1996. This
amount is being amortized over the options' 48 month vesting periods.
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. At September 30,
1996, the Company has reserved 4,020,808 shares of authorized Common Stock for
issuance under all of the Company's stock option plans.
F-14
<PAGE>
MAGINET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS
UNAUDITED)
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
September 30, 1996.............................. 521,933 $1.37
</TABLE>
WARRANTS
As of September 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
September 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
September 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.
6. INCOME TAXES
The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS
------------------------- ENDED
1993 1994 1995 SEPTEMBER 30, 1996
-------- -------- ------- ------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
State
Current...................... $ -- $ -- $ 2 $ 4
Foreign
Current...................... -- -- 8 10
Deferred..................... -- -- 544 667
-------- -------- ------- ----
$ -- $ -- $ 554 $681
======== ======== ======= ====
</TABLE>
F-15
<PAGE>
MAGINET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS
UNAUDITED)
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, NINE MONTHS
------------------------- ENDED
1993 1994 1995 SEPTEMBER 30, 1996
------- ------- ------- ------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Expected benefit at federal
statutory rate............. $(1,149) $(2,695) $(4,162) $(3,690)
Net operating losses not
benefitted................. 1,149 2,695 4,162 3,690
State taxes................. -- -- 2 4
Foreign withholding taxes... -- -- 544 667
Other, net.................. -- -- 8 10
------- ------- ------- -------
Provision for income taxes.. $ -- $ -- $ 554 $ 681
======= ======= ======= =======
</TABLE>
For the years ended December 31, 1993, 1994 and 1995 and the nine months
ended September 30, 1996 the Company had pre-tax losses from foreign
operations of $408,000, $1,239,000, $3,990,000 and $3,628,000, 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-16
<PAGE>
MAGINET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 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, NINE MONTHS
------------------------ ENDED
1994 1995 SEPTEMBER 30, 1996
----------- ----------- ------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred tax assets:
Federal and state net
operating losses........... $ 3,450 $ 6,090 $ 8,620
Foreign net operating
losses..................... 540 1,890 3,324
Research credit
carryforwards.............. 150 200 220
Capitalized research &
development................ 90 130 170
Video systems reserves...... 520 600 590
Other....................... 50 90 85
----------- ----------- --------
Total deferred tax assets... 4,800 9,000 13,009
Valuation allowance for
deferred tax assets........ (4,800) (9,000) (13,009)
----------- ----------- --------
Net deferred tax assets..... -- -- --
----------- ----------- --------
Deferred tax liabilities:
Foreign withholding taxes... -- (544) (1,211)
----------- ----------- --------
Net deferred tax liability.. $ -- $ (544) $ (1,211)
=========== =========== ========
</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-17
<PAGE>
MAGINET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS
UNAUDITED)
7. GEOGRAPHIC DATA
Geographic information for the years ended December 31, 1993, 1994 and 1995
and the nine months ended September 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, NINE MONTHS
-------------------------- ENDED
1993 1994 1995 SEPTEMBER 30, 1996
------- ------- -------- ------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net revenue
United States.............. $ -- $ -- $ -- $ 146
Pacific Rim................ 395 2,342 8,520 11,000
Other...................... -- -- 169 902
------- ------- -------- --------
$ 395 $ 2,342 $ 8,689 $ 12,048
======= ======= ======== ========
Operating loss
United States.............. $(3,111) $(6,763) $ (5,637) $ (3,772)
Pacific Rim................ (240) (941) (3,763) (2,877)
Other...................... -- (10) (508) (828)
Intercompany elimination... -- (83) (1,591) (1,508)
------- ------- -------- --------
$(3,351) $(7,797) $(11,499) $ (8,985)
======= ======= ======== ========
Identifiable assets
United States.............. $ 4,752 $23,925 $ 49,266 $ 54,456
Pacific Rim................ 1,050 6,308 22,689 32,675
Other...................... -- 15 1,701 5,673
Intercompany elimination... (1,091) (6,249) (27,116) (43,320)
------- ------- -------- --------
$ 4,711 $23,999 $ 46,540 $ 49,484
======= ======= ======== ========
</TABLE>
8. EVENTS SUBSEQUENT TO DATE OF AUDITOR'S REPORT
In November 1996, the Company signed a definitive agreement to acquire all
of the outstanding shares of Prodac Prozessdatentechnik GmbH (Prodac).
Pursuant to the agreement, following the closing of an equity offering of at
least $40 million by January 10, 1997 and subsequent to the Board of Directors
approval of the acquisition within ten days of the minimum equity offering,
MagiNet will pay approximately 25.8 million Deutsche Marks (DM) in stock and
cash. In addition the shareholders/founders of Prodac will be eligible to
receive as compensation DM 5 million in cash and stock in each of 1997, 1998
and 1999 based on the achievement of annual financial and performance
milestones. The merger will be accounted for using the purchase method of
accounting.
In December 1996, the Company entered into a commitment letter pursuant to
which a lender agreed to lend the Company up to $10 million on a senior
subordinated basis. In the event the Company borrows any funds under the
commitment letter, the related notes will bear interest at 12% per annum,
payable semi-annually, with the principal repayable in full in 2004. In
connection with the issuance of these notes, the Company will be required to
issue warrants to acquire up to an aggregate of 1,333,333 shares of Common
Stock, on a pro-rata basis equal to the principal amount of notes ultimately
issued. These warrants would have an exercise price of $7.50 per share,
subject to certain dilution adjustments, and would expire seven years from the
date of issuance.
F-18
<PAGE>
In connection with obtaining the lender's commitment letter, the Company
issued a warrant to acquire up to 40,000 shares of common stock at an exercise
price of $.01 per share and further agreed to issue, in the event it borrowed
any funds under the commitment letter and upon each annual anniversary of the
issuance of the notes for so long as they are outstanding, warrants to acquire
200,000 shares of common stock. These warrants have a nominal exercise price
and also expire 7 years from the date of their issuance.
The lender's commitment terminates on January 15, 1997 but contains one and
two month extension options, exercisable by the Company upon the payment of a
commitment fee and delivery of warrants to acquire 50,000 and 75,000 shares of
common stock, respectively. These warrants would have an exercise price of
$7.50 per share, subject to certain dilution adjustments, and would expire
seven years from the date of issuance.
F-19
<PAGE>
REPORT OF ERNST & YOUNG GMBH, INDEPENDENT AUDITORS
Board of Directors
PRODAC Prozessdatentechnik GmbH.
We have audited the accompanying consolidated balance sheets of PRODAC
Prozessdatentechnik GmbH (a German Limited Liability Company) and subsidiaries
as of December 31, 1994 and 1995, and the related consolidated statements of
operations, shareholders' deficiency and cash flows for each of the three
years in the period ended December 31, 1995. 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 auditing standards generally
accepted in the United States of America. 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 PRODAC
Prozessdatentechnik GmbH and subsidiaries at December 31, 1994 and 1995, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1995 in conformity with
accounting principles generally accepted in the United States of America.
Ernst & Young GmbH
Dusseldorf, Germany
August 30, 1996
F-20
<PAGE>
PRODAC PROZESSDATENTECHNIK GMBH AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN DM THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- SEPTEMBER 30,
1994 1995 1996
------ ------ -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................... 300 857 353
Accounts receivable, net (Note 3).............. 1,750 2,867 6,051
Prepaid expenses............................... 34 65 30
Other current assets........................... 116 674 697
------ ------ ------
Total current assets............................. 2,200 4,463 7,131
Inventory (Note 4)............................... 1,131 3,187 3,380
Video systems:
Cost of systems................................ 20,200 28,786 40,409
Less accumulated depreciation.................. 7,428 12,386 17,922
------ ------ ------
12,772 16,400 22,487
Property and equipment:
Machinery and equipment........................ 50 60 60
Office furniture and equipment................. 2,611 2,514 3,073
------ ------ ------
2,661 2,574 3,133
Less accumulated depreciation.................. 1,724 1,607 1,964
------ ------ ------
937 967 1,169
Deferred tax asset, net (Note 8)................. -- -- 1,409
------ ------ ------
Total assets..................................... 17,040 25,017 35,576
====== ====== ======
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current liabilities:
Bank overdrafts................................ -- -- 1,058
Accounts payable............................... 785 3,909 4,353
Accrued compensation........................... 331 725 1,109
Accrued income taxes........................... 76 230 2,129
Other accrued liabilities...................... 1,323 1,791 2,042
Current portion of long term debt (Note 7)..... 4,177 6,076 7,253
------ ------ ------
Total current liabilities........................ 6,692 12,731 17,944
Accrued pension liability (Note 12).............. 368 434 486
Long term debt (Note 7).......................... 11,163 16,709 23,965
Commitments (Note 5)
Shareholders' deficiency:
Registered capital............................. 1,000 1,000 1,000
Retained earnings--restricted.................. -- 500 500
Accumulated deficit............................ (2,206) (6,478) (8,297)
Cumulative translation adjustment.............. 23 121 (22)
------ ------ ------
Shareholders' deficiency......................... (1,183) (4,857) (6,819)
------ ------ ------
Total liabilities and shareholders' deficiency... 17,040 25,017 35,576
====== ====== ======
</TABLE>
See accompanying notes.
F-21
<PAGE>
PRODAC PROZESSDATENTECHNIK GMBH AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN DM THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
---------------------- --------------
1993 1994 1995 1995 1996
------ ------ ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue................................ 12,269 13,836 16,879 11,777 19,238
Costs and expenses:
Direct costs......................... 6,792 6,623 9,557 6,779 8,966
Depreciation and amortization........ 2,516 3,965 5,479 3,734 5,749
Operating, selling, general and
administrative...................... 3,140 2,974 3,714 2,079 3,823
Research and development............. 338 357 398 298 314
------ ------ ------ ------ ------
Total costs and expenses............... 12,786 13,919 19,148 12,890 18,852
------ ------ ------ ------ ------
Operating profit (loss)................ (517) (83) (2,269) (1,113) 386
Interest expense, net.................. 1,176 1,384 1,713 1,166 1,933
Foreign exchange (gain) loss........... (99) 146 23 -- (216)
Other (income) expense, net............ (438) (242) (414) (103) (172)
------ ------ ------ ------ ------
Loss before income taxes............... (1,156) (1,371) (3,591) (2,176) (1,159)
Provision (benefit) for income taxes:
Current.............................. 12 68 181 138 2,069
Deferred............................. (51) -- -- -- (1,409)
------ ------ ------ ------ ------
(39) 68 181 138 660
------ ------ ------ ------ ------
Net loss............................... (1,117) (1,439) (3,772) (2,314) (1,819)
====== ====== ====== ====== ======
</TABLE>
See accompanying notes.
F-22
<PAGE>
PRODAC PROZESSDATENTECHNIK GMBH AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIENCY
(IN DM THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
RETAINED CUMULATIVE SHAREHOLDERS'
REGISTERED EARNINGS-- ACCUMULATED TRANSLATION EQUITY
CAPITAL RESTRICTED DEFICIT ADJUSTMENT (DEFICIENCY)
---------- ---------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1,
1993................... 260 -- 844 -- 1,104
Capital contribution... 740 -- -- -- 740
Net loss............... -- -- (1,117) -- (1,117)
Dividends.............. -- -- (494) -- (494)
Foreign currency
translation
adjustment............ -- -- -- (20) (20)
----- --- ------ ---- ------
BALANCE AT DECEMBER 31,
1993................... 1,000 -- (767) (20) 213
Net loss............... -- -- (1,439) -- (1,439)
Foreign currency
translation
adjustment............ -- -- -- 43 43
----- --- ------ ---- ------
BALANCE AT DECEMBER 31,
1994................... 1,000 (2,206) 23 (1,183)
Net loss............... -- -- (3,772) -- (3,772)
Transfer to Retained
Earnings--Restricted.. -- 500 (500) -- --
Foreign currency
translation
adjustment............ -- -- -- 98 98
----- --- ------ ---- ------
BALANCE AT DECEMBER 31,
1995................... 1,000 500 (6,478) 121 (4,857)
Net loss (unaudited)... -- -- (1,819) -- (1,819)
Foreign currency
translation adjustment
(unaudited)........... -- -- -- (143) (143)
----- --- ------ ---- ------
BALANCE AT SEPTEMBER 30,
1996
(unaudited)............ 1,000 500 (8,297) (22) (6,819)
===== === ====== ==== ======
</TABLE>
See accompanying notes.
F-23
<PAGE>
PRODAC PROZESSDATENTECHNIK GMBH AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN DM THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
---------------------- ---------------
1993 1994 1995 1995 1996
------ ------ ------ ------ -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss............................. (1,117) (1,439) (3,772) (2,314) (1,819)
Adjustments to reconcile net loss to
net cash provided by operating
activities:
Depreciation and amortization...... 2,516 3,965 5,479 3,734 5,749
Deferred taxes..................... (51) -- -- -- (1,409)
Exchange gain (loss)............... (99) 146 23 -- (216)
Changes in operating assets and
liabilities:
Accounts receivable.............. 977 47 (1,117) (1,330) (3,184)
Inventory........................ (970) 523 (2,056) (752) (193)
Prepaid expenses and other
current assets.................. 482 467 (589) (1,215) 12
Accounts payable, accrued and
other liabilities............... 489 (1,759) 4,206 5,321 4,088
------ ------ ------ ------ -------
Net cash provided by operating
activities.......................... 2,227 1,950 2,174 3,444 3,028
INVESTING ACTIVITIES
Purchase of property, plant, and
equipment, net...................... (76) (269) (468) (241) (557)
Purchase and manufacture of video
systems............................. (4,375) (8,438) (8,669) (5,205) (11,481)
Sale of investments.................. -- 133 -- -- --
------ ------ ------ ------ -------
Net cash used in investing
activities.......................... (4,451) (8,574) (9,137) (5,446) (12,038)
FINANCING ACTIVITIES
Proceeds from issuance of new debt... 4,617 9,040 12,175 6,546 13,752
Repayment of debt.................... (1,778) (3,026) (4,730) (3,550) (5,319)
Capital contribution from
shareowners......................... 740 -- -- -- --
Dividends paid....................... (494) -- -- -- --
------ ------ ------ ------ -------
Net cash provided by financing
activities.......................... 3,085 6,014 7,445 2,996 8,433
Effect of exchange rate changes on
cash................................ 120 (102) 75 73 73
------ ------ ------ ------ -------
Net increase (decrease) in cash...... 981 (712) 557 1,067 (504)
Cash and cash equivalents at
beginning of period................. 31 1,012 300 300 857
------ ------ ------ ------ -------
Cash and cash equivalents at end of
period.............................. 1,012 300 857 1,367 353
====== ====== ====== ====== =======
</TABLE>
See accompanying notes.
F-24
<PAGE>
PRODAC PROZESSDATENTECHNIK GMBH AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS
UNAUDITED)
1. ORGANIZATION OF BUSINESS AND BASIS OF PRESENTATION
ORGANIZATION AND NATURE OF OPERATIONS
PRODAC Prozessdatentechnik GmbH (the "Company" or "PRODAC") was merged
effective January 1, 1993, with Protronic Electronicgerate GmbH with an
original capitalization of TDM 260 ("TDM" is thousands of Deutsche Mark). In
1993, the shareowners contributed an additional TDM 740 in capital to bring
the registered capital to DM 1.0 million.
In 1991 the Company purchased a 17% interest in Hogodata Deutschland GmbH,
located in Bad Wiessee, Germany. The Company sold its investment in June 1994
for a net book value of TDM 133.
The Company formed a subsidiary, PRODAC Hotelvideo-Communicationssystems
Ltd., ("PRODAC Ltd.") located in Bedford, UK, in 1992 whereby it obtained a
75% ownership interest. PRODAC Ltd. is included in the consolidated financial
statements.
Also in 1992, the Company founded a subsidiary, PRODAC Hotelvideosysteme
Vertriebs-GmbH ("PRODAC Austria") located in Vienna, Austria and originally
obtained a 75% ownership interest. In 1996, the Company acquired the remaining
25% of PRODAC Austria for TOS 100 (TDM 15), ("TOS" is thousands of Austrian
Schilling). PRODAC Austria is included in the consolidated financial
statements.
The Company is one of the leading providers to the hospitality industry in
Europe of interactive video entertainment and information systems. The Company
develops, manufactures and installs its own scheduled broadcast and
interactive video entertainment and information systems.
On November 6, 1996, the shareowners and directors have entered into an
agreement with MagiNet Corporation for the sale of the Company.
The Company's continued level of operations is dependent upon continuing to
grow its business and obtaining additional financing for that growth.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in accordance with
United States generally accepted accounting principles ("U.S. GAAP"). The
Company maintains its financial records in accordance with the German
Commercial Code, which represents generally accepted accounting principles in
Germany ("German GAAP"). Generally accepted accounting principles in Germany
vary in certain respects from U.S. GAAP. Accordingly, the Company has recorded
certain adjustments in order that these financial statements be in accordance
with U.S. GAAP.
INTERIM FINANCIAL DATA
The interim financial information for the nine months ended September 30,
1995 and 1996 is unaudited, however, in the opinion of management, the interim
data included all adjustments, consisting only of normal
F-25
<PAGE>
PRODAC PROZESSDATENTECHNIK GMBH AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS
UNAUDITED)
recurring adjustments, necessary for a fair presentation of the results for
the interim periods ended September 30, 1995 and 1996. Results for the nine
months ended September 30, 1996 are not necessarily indicative of the results
that may be expected for the entire year ending December 31, 1996.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its majority owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
CASH EQUIVALENTS
All highly liquid investments purchased with an original maturity of three
months or less are considered cash equivalents.
REVENUE RECOGNITION
The Company owns, installs and operates its video systems in hotels
primarily in Germany, the United Kingdom and Austria and issues invoices to
hotels and recognizes revenue, less an allowance for denials, each month based
on reported viewings.
The Company recognizes revenue on video systems it sells directly to
distributors upon shipment. Revenues for direct sales to hotels are recognized
upon installation. The hotels are not required to enter into service
agreements with the Company upon installation and there are no circumstances
under which the video systems cannot be operated without video service
agreements with the Company.
CONCENTRATION OF CREDIT RISK
The Company performs ongoing credit evaluations of its installed hotels and
generally requires no 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 Deutsche Mark 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 shareholders'
deficiency.
INVENTORY
Inventories are stated at the lower of cost or market, with cost principally
determined on an average basis. Goods awaiting installation in hotels are
classified as finished goods until installation is complete. While the Company
does directly sell a portion of its inventory, this inventory is not
segregated until a sales contract has been signed and the level of inventory
that will be recovered within the next year is not ascertainable at the
balance sheet date.
F-26
<PAGE>
PRODAC PROZESSDATENTECHNIK GMBH AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS
UNAUDITED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed on the
straight-line method for financial statement purposes based on the following
estimated useful lives:
<TABLE>
<S> <C>
Machinery and equipment......................................... 5 to 8 years
Office furniture and equipment.................................. 3 to 5 years
Purchased software.............................................. 3 to 5 years
</TABLE>
VIDEO SYSTEMS
Video systems are stated at historical cost and/or cost to produce equipment
plus costs to install the system at hotel locations. Video systems are
depreciated using the straight-line method over five years.
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.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes", which
has been applied for all periods presented. Under this method, deferred tax
assets and liabilities are based on differences between financial reporting
and tax bases of assets and liabilities and are measured using the enacted tax
rates and laws that will be in effect when the differences are expected to
reverse. The effect of a change in tax rates on deferred tax assets and
liabilities is recognized in the period that includes the enactment date.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of financial instruments such as cash, accounts
receivable and accounts payable approximate their fair value based on the
short-term maturities of these instruments. The carrying value of bank debt
approximates fair value based on quoted market prices for the same or similar
issues as well as the current rates offered to the Company.
The Company uses forward exchange contracts to manage its exposure to
fluctuations in foreign currency exchange rates. The fair values of forward
exchange contracts, which approximate their carrying amount, are estimated
based on quoted market prices of comparable contracts. Realized gains and
losses from forward exchange contracts are included in operations.
F-27
<PAGE>
PRODAC PROZESSDATENTECHNIK GMBH AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS
UNAUDITED)
3. TRADE ACCOUNTS RECEIVABLE
Trade accounts receivable consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- SEPTEMBER 30,
1994 1995 1996
------ ------ -------------
(IN DM THOUSANDS)
<S> <C> <C> <C>
Trade accounts receivable...................... 1,967 3,185 6,582
Reserve for doubtful accounts.................. (217) (318) (531)
------ ------ -----
1,750 2,867 6,051
====== ====== =====
</TABLE>
4. INVENTORY
Inventory of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------- SEPTEMBER 30,
1994 1995 1996
------ ------ -------------
(IN DM THOUSANDS)
<S> <C> <C> <C>
Raw materials.................................... 1,099 1,598 2,693
Work in process and finished goods............... 32 1,589 687
------ ------ -----
1,131 3,187 3,380
====== ====== =====
</TABLE>
5. COMMITMENTS
GERMAN FACILITIES
The Company leases its facilities in Germany from a related party, Kasbach &
Wirt GbR, which is owned by the same share-owners of the Company. The
Company's lease agreement expires in 2008. The lease provides for minimum
monthly rental payments of TDM 79 per month and is subject to a cost of living
adjustment. In addition to the minimum rental, the Company pays taxes,
insurance and maintenance relating to the leased property. The Company has an
option at the end of the current lease to renew the lease on a yearly basis.
The agreement is treated as an operating lease. Rental expense for this lease
was TDM 948 for each of the years ending December 31, 1993, 1994, and 1995 and
TDM 711 for the nine months ended September 30, 1995 and 1996, respectively.
As the Company is currently unable to utilize all of the facility, it has
entered into several sublease agreements with various clients. Rental income
from these sublease agreements was TDM 308, TDM 218, and TDM 345, in 1993,
1994, and 1995 and TDM 228 and TDM 277 for the nine months ended September 30,
1995 and 1996, respectively.
F-28
<PAGE>
PRODAC PROZESSDATENTECHNIK GMBH AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS
UNAUDITED)
Future minimum lease payments for the above described facilities due to a
related party and future minimum lease payments due from clients under
noncancelable operating subleases with initial or remaining terms in excess of
one year consisted of the following at September 30, 1996:
<TABLE>
<CAPTION>
FUTURE FUTURE
MINIMUM MINIMUM
LEASE SUBLEASE NET FUTURE
PAYMENTS PAYMENTS MINIMUM
DUE TO DUE FROM LEASE
RELATED PARTY CLIENTS PAYMENTS
------------- -------- ----------
(IN DM THOUSANDS)
<S> <C> <C> <C>
Three months ending December 31, 1996........ 237 (83) 154
Years ending December 31,
1997....................................... 948 (326) 622
1998....................................... 948 (279) 669
1999....................................... 948 (125) 823
2000....................................... 948 (8) 940
2001....................................... 948 (8) 940
Thereafter................................... 6,636 (55) 6,581
------ ---- ------
11,613 (884) 10,729
====== ==== ======
</TABLE>
OTHER COMMITMENTS
The Company leases certain technical and office equipment. Lease terms
generally range up to 3 years. Rental expense was TDM 189, TDM 182, and TDM
226, in 1993, 1994, and 1995 and TDM 149 and TDM 194 for the nine months ended
September 30, 1995 and 1996, respectively.
Future minimum lease payments under noncancelable operating leases with
initial or remaining terms in excess of one year consisted of the following at
September 30, 1996:
<TABLE>
<CAPTION>
OPERATING
LEASES
-----------------
(IN DM THOUSANDS)
<S> <C>
Three months ending December 31, 1996...................... 72
Years ending December 31,
1997..................................................... 193
1998..................................................... 61
1999..................................................... 6
---
332
===
</TABLE>
6. FINANCIAL INSTRUMENTS
The Company uses forward exchange contracts to manage its exposure to
fluctuations in foreign currency exchange rates. These contracts involve the
exchange of one currency for another at a future date and generally mature
within three months.
At December 31, 1995 and September 30, 1996, the Company had a notional
principal amount of approximately TDM 748 and TDM 789, respectively, in
contracts to buy sterling in the future. Realized gains and losses from such
contracts were immaterial.
F-29
<PAGE>
PRODAC PROZESSDATENTECHNIK GMBH AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS
UNAUDITED)
7. DEBT
SHORT TERM BORROWINGS AND BANK OVERDRAFTS
The Company has established short-term secured overdraft facilities under
which the Company and its subsidiaries could borrow up to DM 2.6 million.
Substantially all of the facilities are denominated in Deutsche Mark. The
weighted average interest rate on amounts outstanding at September 30, 1996
was 6.73%. As of September 30, 1996, the Company had available approximately
DM 1.5 million under these facilities.
LONG TERM DEBT
Long term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------- SEPTEMBER 30,
1994 1995 1996
------ ------ -------------
(IN DM THOUSANDS)
<S> <C> <C> <C>
Bank borrowings:
Sale and leaseback............................. 14,978 22,517 31,108
Term loans..................................... 362 268 110
------ ------ ------
15,340 22,785 31,218
Current portion thereof.......................... 4,177 6,076 7,253
------ ------ ------
11,163 16,709 23,965
====== ====== ======
</TABLE>
The Company enters into financing arrangements with various banks whereby
the video systems are sold to the bank and subsequently leased back over a
period of 54 to 80 months. The amount available for financing is based on the
estimated cash flow from equipment installation. The current portfolio bears
interest rates ranging from 8.2% to 13.3%. At the end of the lease term, the
Company is required to repurchase the equipment for a predetermined residual
value. The asset is pledged as security for the lease.
Generally, for statutory purposes the sale and leaseback financing
arrangement is treated as a sale, whereas for U.S. GAAP purposes the
transaction is treated as a financing. Under U.S. GAAP the funds received are
recorded as an obligation and equipment is recorded on the books of the
Company. The obligation is reduced through the lease payments using the
effective interest method.
Interest paid totalled TDM 896, TDM 1,298, and TDM 1,575 during the years
ended December 31, 1993, 1994, and 1995 and TDM 1,116 and TDM 1,538 during the
nine months ended September 30, 1995 and 1996, respectively.
F-30
<PAGE>
PRODAC PROZESSDATENTECHNIK GMBH AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS
UNAUDITED)
Scheduled maturities of long term debt at September 30, 1996 (assuming no
further borrowings) are as follows:
<TABLE>
<CAPTION>
(IN DM THOUSANDS)
<S> <C>
Three months ending December 31, 1996...................... 2,137
Years ending December 31,
1997..................................................... 7,014
1998..................................................... 6,649
1999..................................................... 5,428
2000..................................................... 4,000
Thereafter................................................. 5,990
------
31,218
======
</TABLE>
8. INCOME TAXES
The Company and its consolidated subsidiaries each file separate tax returns
in accordance with the tax laws in the respective countries. Under German
corporate tax law, taxes on income are composed of corporate taxes and trade
taxes and effective January 1, 1995 an additional surtax. For financial
reporting purposes, the Company and its consolidated subsidiaries calculate
their respective tax liabilities on a separate return basis which are combined
in the accompanying consolidated financial statements.
Additionally, corporation tax rates vary as to whether earnings are
reinvested or distributed. Current corporation income taxes were computed on
the basis that dividends will not be distributed. Deferred taxes have been
provided at rates assuming non-distribution of earnings.
The provision (benefit) for income taxes consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED
--------------- SEPTEMBER 30,
1993 1994 1995 1996
---- ---- ---- -------------
(IN DM THOUSANDS)
<S> <C> <C> <C> <C>
Current......................................... 12 68 181 2,069
Deferred........................................ (51) -- -- (1,409)
--- --- --- ------
(39) 68 181 660
=== === === ======
</TABLE>
The Company's statutory tax rates ranged between 56% and 58% for the years
ended December 31, 1993, 1994 and 1995 and September 30, 1996, respectively.
F-31
<PAGE>
PRODAC PROZESSDATENTECHNIK GMBH AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS
UNAUDITED)
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities are presented
below:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- SEPTEMBER 30,
1994 1995 1996
------ ------ -------------
(IN DM THOUSANDS)
<S> <C> <C> <C>
Deferred tax assets:
Sale and leaseback obligation................ 6,729 10,922 16,820
Net operating loss carryforwards............. 51 157 395
------ ------ ------
6,780 11,079 17,215
Deferred tax liabilities:
Property and equipment....................... 164 146 100
Video systems................................ 5,503 7,508 10,883
Other........................................ 73 385 413
------ ------ ------
5,740 8,039 11,396
------ ------ ------
1,040 3,040 5,819
Less valuation allowance..................... (1,040) (3,040) (4,410)
------ ------ ------
Net deferred tax asset......................... -- -- 1,409
====== ====== ======
</TABLE>
The Company paid income taxes in Germany of TDM 157, TDM 115, and TDM 96 in
1993, 1994, and 1995 and TDM 73 and TDM 81 during the nine months ended
September 30, 1995 and 1996, respectively.
As of December 31, 1995, the Company has temporary differences which it
believes that there is substantial doubt as to the future realization of a
portion of its net deferred tax asset. Therefore the Company has provided a
valuation allowance for the amounts currently estimated to be unrealizable.
As of December 31, 1995, the Company's subsidiary in the United Kingdom had
available cumulative tax loss carry-forwards for income tax purposes of
approximately TDM 666. Under current UK tax laws, these loss carryforwards may
be used to offset the subsidiary's future taxable income. The Company paid no
income taxes in the UK during 1993, 1994, and 1995 or the nine months ended
September 30, 1996. The Company currently believes that substantial doubt
exists as to the future realization of this deferred tax benefit and has
therefore provided a full valuation allowance on the deferred tax asset.
As of December 31, 1995, the Company's subsidiary in Austria had available
cumulative tax loss carry-forwards for income tax purposes of approximately
TDM 128. Under current Austrian tax laws, there is a restriction on the use of
these loss carryforwards in 1996 and 1997. From 1998 onwards, these losses can
be carryforward indefinitely and may be used to offset the subsidiary's future
taxable income. The Company paid no income taxes in Austria during the nine
months ended September 30, 1996 or in 1995, 1994, and 1993. The Company
currently believes that substantial doubt exists as to the future realization
of this deferred tax benefit and has therefore provided a full valuation
allowance on the deferred tax asset.
9. CONTINGENCIES
The Company is subject to legal proceedings and claims which arise in the
ordinary course of business. In the opinion of management, the ultimate
resolution of such legal proceedings and claims will not have a material
effect on the consolidated financial position and results of operations of the
Company.
F-32
<PAGE>
PRODAC PROZESSDATENTECHNIK GMBH AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS
UNAUDITED)
10. REGISTERED CAPITAL
The Company is a limited liability company (hereafter "GmbH") under German
law. Shareholders are generally not liable for the Company's obligations,
except to the extent of their capital investment. Registered capital of a GmbH
is not in the form of shares and does not represent negotiable securities. The
minimum capital requirement for a GmbH is TDM 50.
Capital contributions represent additional contributions made by the
shareholders in the form of cash or conversion of debt. During 1995, the
Company declared that TDM 500 of retained earnings would not be considered for
distribution of dividends. The Company does have the opportunity to reverse
this restriction in the future.
11. RELATED PARTY TRANSACTIONS
LOANS BY DIRECTORS
At September 30, 1996, the Company has a liability to its shareowners and
directors totalling TDM 129 relating to unpaid bonuses in 1991 and 1992 and
related accrued interest. These loans bear interest at 8% per annum. Loan
balances outstanding to its shareowners and directors at December 31, 1993,
1994, and 1995 were TDM 120, TDM 129, and TDM 129 respectively. Interest
charged on these loans was TDM 9 in both 1994 and 1995. No interest was
charged in 1993 or 1996. In 1994 the Company paid interest of TDM 9.
12. EMPLOYEE BENEFIT PLAN
The Company's defined benefit pension plan covers the two general managers,
who are also the two share-owners. Benefits are based on a monthly pension
benefit of DM 7.000 upon retirement with certain death benefits attached. It
is the Company's policy to fund the plan through an insurance contract with
periodic premium payments. Premium payments were TDM 40, TDM 81, and TDM 81,
in 1993, 1994, and 1995, and TDM 59 for the nine months ended September 30,
1996, respectively.
The following table sets forth the funded status and amount recognized for
the Company's defined benefit pension plan in the consolidated balance sheets:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- SEPTEMBER 30,
1994 1995 1996
------ ------ -------------
(IN DM THOUSANDS)
<S> <C> <C> <C>
Actuarial present value of accumulated
benefit obligation:
Vested.................................... 410 459 503
Nonvested................................. 108 113 124
------ ------ ---
518 572 627
====== ====== ===
Projected benefit obligation................ 518 572 627
Plan assets at fair value................... 183 206 209
------ ------ ---
Projected benefit obligation in excess of
plan assets................................ 335 366 418
Unrecognized net gain....................... 33 68 68
------ ------ ---
Accrued pension cost........................ 368 434 486
====== ====== ===
</TABLE>
F-33
<PAGE>
PRODAC PROZESSDATENTECHNIK GMBH AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS
UNAUDITED)
The Company's net periodic pension cost included the following components:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED
---------------- SEPTEMBER 30,
1993 1994 1995 1996
---- ---- ---- -------------
(IN DM THOUSANDS)
<S> <C> <C> <C> <C>
Service cost.................................... 32 34 36 28
Interest cost................................... 26 30 34 28
Actual return on plan assets.................... (2) (2) (4) (4)
--- --- --- ---
56 62 66 52
=== === === ===
</TABLE>
The weighted average discount rate and rate of increase in future pension
benefits due to cost of living increases used in determining the actuarial
present value of the projected benefit obligation were 6.5% and 3.0% for all
periods presented. The expected long-term rate of return on plan assets was 8%
for all periods presented.
13. SALE OF INTERESTS IN THE UNITED KINGDOM
The Company has entered into a definitive agreement to sell its interest in
the video systems and related leases of PRODAC Ltd. The agreement calls for
the transfer of its interest in the video systems and related leases on
October 1, 1996 with the Company retaining substantially all of the remaining
assets and liabilities. The Company is required to provide spare parts and
services for a period of up to six months. The Company's interest in the video
systems and related leases has a net book value at September 30, 1996 of
approximately negative GBP 148,000 and was sold for GBP 187,000.
Key financial data for the business of PRODAC Ltd. included in the
consolidated balance sheets and operating results of the Company are as
follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
------------------- --------------
1993 1994 1995 1995 1996
----- ----- ----- ------ ------
(IN DM THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net revenue............................. 623 1,742 1,844 1,349 1,520
Operating loss.......................... (663) (27) (154) (23) (287)
Net loss................................ (678) (469) (452) (184) (347)
Video system--net....................... 930 3,049 2,486 2,719 2,724
Total assets............................ 1,912 3,680 4,149 4,406 3,676
Total debt.............................. 992 3,241 2,779 3,009 3,149
</TABLE>
F-34
<PAGE>
PRODAC PROZESSDATENTECHNIK GMBH AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS
UNAUDITED)
14. GEOGRAPHIC DATA
Geographic information for the years ended December 31, 1993, 1994 and 1995
and the nine months ended September 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 NINE MONTHS
DECEMBER 31, ENDED
---------------------- SEPTEMBER 30,
1993 1994 1995 1996
------ ------ ------ -------------
(IN DM THOUSANDS)
<S> <C> <C> <C> <C>
Net revenue
Germany.............................. 11,188 11,865 14,522 16,274
United Kingdom....................... 623 1,742 1,844 1,520
Other................................ 458 229 513 1,444
------ ------ ------ ------
12,269 13,836 16,879 19,238
====== ====== ====== ======
Operating income (loss)
Germany.............................. (166) (381) (2,237) (87)
United Kingdom....................... (663) (27) (154) (287)
Other................................ (116) (18) (219) 234
Intercompany elimination............. -- -- (137) 137
------ ------ ------ ------
(945) (426) (2,747) (3)
====== ====== ====== ======
Identifiable assets
Germany.............................. 12,257 13,908 20,255 31,763
United Kingdom....................... 1,912 3,680 4,149 3,676
Other................................ 658 426 3,262 2,992
Intercompany elimination............. (646) (974) (2,649) (2,855)
------ ------ ------ ------
14,181 17,040 25,017 35,576
====== ====== ====== ======
</TABLE>
F-35
<PAGE>
MAGINET CORPORATION
UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL INFORMATION
On November 5, 1996, MagiNet, Corporation. ("MagiNet" or the "Company")
entered into a definitive Share Purchase and Transfer Agreement (the
Acquisition Agreement) to acquire all of the outstanding shares (the "Prodac
Shares") of Prodac Prozessdatentechnik GmbH, a corporation organized under
German law ("Prodac").
Pursuant to the Acquisition Agreement, and subject to certain conditions
described below, the Company will pay cash in the amount of approximately DM
20,800,000 (approximately $13,600,000) and an aggregate number of shares of
MagiNet Common Stock that DM 5 million (approximately $3,300,000) would
purchase at a per share price equal to ninety percent of the initial public
offering price per share (estimated to be approximately 455,000 shares). The
acquisition is expected to be completed in December 1996. A foreign exchange
rate of 1.525 Deutsche Marks per U.S. Dollar, the rate at September 30, 1996,
was used for translation purposes.
In addition, the Company has agreed to pay up to DM 15 million
(approximately $9,800,000) to the former employees/owners of Prodac,
contingent upon the achievement of certain financial and performance
milestones over the years 1997 through 1999. These contingent payments will be
treated as period expenses and are accordingly not included in the purchase
price.
The effectiveness of the Acquisition Agreement is subject to the completion
by the Company of a minimum equity offering of $40,000,000 and subsequent
approval of the Acquisition Agreement by the Company's Board of Directors.
Prodac, headquartered in Cologne, Germany and operating through subsidiaries
in Austria, and through distributors or sales representatives in other
countries, is one of the leading providers to the hospitality industry in
Europe of interactive video entertainment and information systems. The Company
intends to fund the acquisition primarily through the proceeds of the initial
public offering.
The unaudited pro forma condensed combined financial statements give effect
to the acquisition of Prodac under the purchase method of accounting. Under
the purchase method of accounting, the amount relating to acquired in-process
technology will be charged to operations as of the purchase date. The purchase
price allocations are based on preliminary appraisals received by MagiNet, and
will be finalized upon the closings to reflect the final balance sheet of
Prodac. The Company presently expects to record a charge of approximately
$12.2 million relating to the acquisition of in-process technology in the
quarter ending December 31, 1996.
The unaudited pro forma condensed combined financial statements also give
effect to the sale on October 1, 1996 of substantially all of the assets and
liabilities of Prodac's operations in Great Britain.
The unaudited pro forma condensed combined balance sheet assumes the
acquisition of Prodac occurred as of September 30, 1996 and presents the
combined financial position of MagiNet and Prodac. Such unaudited pro forma
information is based on the historical balance sheets for MagiNet and Prodac
and gives effect for the pro forma adjustments described in the notes
accompanying the unaudited pro forma condensed combined financial statements.
The charge relating to the acquisition of in-process technology described
above is included in the pro forma condensed combined balance sheet as a
charge to retained earnings.
The pro forma condensed combined statements of operations presents the
combined year and nine months results of MagiNet and Prodac and, assumes the
acquisition took place on January 1, 1995 and January 1, 1996. Such unaudited
pro forma information is based on the historical statements of operations for
MagiNet and Prodac and gives effect for the pro forma adjustments described in
the notes accompanying the unaudited pro forma condensed combined financial
statements. The charge relating to the acquisition of in-process technology
F-36
<PAGE>
MAGINET CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL INFORMATION--(CONTINUED)
described above is excluded from the pro forma statements of operations as it
represents a nonrecurring item directly related to the acquisition. The pro
forma condensed combined statement of operations for the year ended December
31, 1995 combines the historical statement of operations of MagiNet and Prodac
for the year ended December 31, 1995. The pro forma condensed combined
statement of operations for the nine months ended September 30, 1996 combines
the historical statement of operations information for MagiNet and Prodac for
the nine months ended September 30, 1996.
These pro forma statements may not be indicative of the results that
actually would have occurred if the combinations had been in effect on the
dates indicated or which may be realized in the future.
F-37
<PAGE>
MAGINET CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
SEPTEMBER 30, 1996 ADJUSTMENTS
------------------- -----------
INCREASE PRO FORMA
MAGINET PRODAC (DECREASE) COMBINED
--------- -------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents... $ 7,251 $ 230 $(6,203)(A)(J) $ 1,278
Accounts receivable......... 2,081 3,968 -- 6,049
Other current assets........ 1,679 477 -- 2,156
--------- -------- ------- -------
Total current assets.......... 11,011 4,675 (6,203) 9,483
Video systems, net............ 31,683 16,963 (1,786)(J) 47,200
340 (B)
Property and equipment, net... 1,745 767 (47)(J) 2,465
Other assets.................. 5,045 924 3,712 (B) 9,681
Goodwill...................... -- -- 5,595 (B) 5,595
--------- -------- ------- -------
Total assets.................. $ 49,484 $ 23,329 $ 1,611 $74,424
========= ======== ======= =======
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Short-term debt............. $ 288 $ 5,451 $ 8,106 (I) $13,180
(665)(J)
Other current liabilities... 5,866 6,316 -- 12,182
--------- -------- ------- -------
Total current liabilities..... 6,154 11,767 7,441 25,362
Long-term debt................ 25,829 15,714 (1,401)(J) 40,142
Other non-current
liabilities.................. 1,532 319 -- 1,851
Stockholders' equity:
Preferred stock............. 53,241 -- -- 53,241
Common stock................ 605 656 3,300 (A) 3,905
(656)(E)
Deferred compensation....... (218) -- -- (218)
Accumulated deficit......... (37,008) (5,113) (12,200)(F) (49,208)
5,113 (E)
Cumulative translation
adjustment................. (651) (14) 14 (E) (651)
--------- -------- ------- -------
Total stockholders' equity.. 15,969 (4,471) (4,429) 7,069
--------- -------- ------- -------
Total liabilities and
stockholders' equity......... $ 49,484 $ 23,329 $ 1,611 $74,424
========= ======== ======= =======
</TABLE>
See accompanying notes.
F-38
<PAGE>
MAGINET CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED PRO FORMA
DECEMBER 31, 1995 ADJUSTMENTS
------------------- -----------
INCREASE PRO FORMA
MAGINET PRODAC (DECREASE) COMBINED
--------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Revenue $ 8,689 $ 11,774 $(1,209)(K) $ 19,254
Costs and expenses:
Direct costs................. 3,731 6,667 (495)(K) 9,903
Depreciation and
amortization................ 3,682 3,822 2,934 (C) 9,936
(502)(K)
Operations expenses, selling,
general and administrative.. 11,528 2,591 (313)(K) 13,806
Research and development..... 1,247 278 -- 1,525
--------- -------- ------- --------
Total costs and expenses....... 20,188 13,358 1,624 35,170
Operating loss................. (11,499) (1,584) (2,833) (15,916)
Interest expense............... (1,297) (1,195) (971)(D) (3,258)
205 (K)
Interest income and other,
net........................... 306 273 (9)(K) 570
--------- -------- ------- --------
Loss before income taxes and
minority interest in net
losses of consolidated
subsidiaries.................. (12,490) (2,506) (3,608) (18,604)
Provision for income taxes..... (554) (126) -- (680)
Minority interest in net losses
of consolidated subsidiaries.. 248 -- -- 248
--------- -------- ------- --------
Net loss....................... $ (12,796) $ (2,632) $(3,608) $(19,036)
========= ======== ======= ========
Net loss per share............. $ (1.03) $ (1.48)
Shares used in computation of
net loss per share............ 12,392 12,847 (H)
</TABLE>
See accompanying notes.
F-39
<PAGE>
MAGINET CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED PRO FORMA
SEPTEMBER 30,1996 ADJUSTMENTS
------------------- -----------
INCREASE PRO FORMA
MAGINET PRODAC (DECREASE) COMBINED
--------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Revenue........................ $ 12,048 $ 12,890 $ (997)(L) $ 23,941
Costs and expenses:
Direct costs................. 6,232 6,008 (448)(L) 11,792
Depreciation and amortization 4,747 3,852 1,216 (C) 9,366
(449)(L)
Operations expenses, selling,
general and administrative.. 8,455 2,562 (288)(L) 10,729
Research and development..... 1,599 210 -- 1,809
--------- -------- ------- --------
Total costs and expenses....... 21,033 12,632 31 33,696
Operating loss................. (8,985) 258 (1,028) (9,755)
Interest expense............... (2,710) (1,295) (941)(D) (4,753)
193 (L)
Interest income and other,
net........................... 627 260 (153)(L) 734
--------- -------- ------- --------
Loss before income taxes and
minority interest in net
losses of consolidated
subsidiaries.................. (11,068) (777) (1,929) (13,774)
Provision for income taxes..... (681) (442) -- (1,123)
Minority interest in net losses
of consolidated subsidiaries.. 215 -- -- 215
--------- -------- ------- --------
Net loss....................... $ (11,534) $ (1,219) $(1,929) $(14,682)
========= ======== ======= ========
Net loss per share............. $ (0.93) $ (1.14)
Shares used in computation of
net loss per share............ 12,407 12,862 (G)
</TABLE>
See accompanying notes.
F-40
<PAGE>
MAGINET CORPORATION
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The pro forma information presented is theoretical in nature and not
necessarily indicative of the future consolidated results of operations of the
Company or the consolidated results of operations which would have resulted
had the Company purchased Prodac during the periods presented. The pro forma
condensed consolidated financial statements reflect the effects of the
acquisition, assuming the acquisition and related events occurred as of
September 30, 1996 for the purposes of the pro forma condensed combined
balance sheet and as of January 1, 1995 and January 1, 1996 for the purposes
of the pro forma condensed combined statements of operations for the year
ended December 31, 1995 and the nine months ended September 30, 1996,
respectively.
2. PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENT ADJUSTMENTS.
(A) The purchase price for the completion of the Prodac acquisition was
determined as follows (in thousands):
<TABLE>
<S> <C>
Cash............................................................. $13,600
Common stock..................................................... 3,300
Estimated transaction costs...................................... 1,000
Assumption of net liabilities.................................... 4,471
-------
$22,371
=======
</TABLE>
(B) Allocation of the purchase price for the completion of the Prodac
acquisition was determined as follows (in thousands):
<TABLE>
<S> <C>
Installed video systems, net at September 30, 1996............... $12,960
Installed video systems purchase price adjustment................ 340
Good will........................................................ 5,595
Acquired in-process technology................................... 12,200
Assembled workforce.............................................. 912
Non compete covenant............................................. 2,800
Other net liabilities............................................ (12,436)
-------
$22,371
=======
</TABLE>
(C) Amortization of the non-compete covenant, the assembled work force
intangible and the excess purchase price of $5,595,000 (goodwill) for
Prodac will each be amortized on a straight-line method over the
estimated useful lives of five years and will be included in
depreciation and amortization expense. depreciation of installed video
systems will be over an estimated useful life of three years on a
straight-line method.
(D) To increase net interest expense on the cash payments made to Prodac
and the assumed debt for the purchase price and related acquisition
costs. The assumed interest rate on the additional assumed debt was
10.5% in 1995 and 11.5% in 1996.
(E) Elimination of Prodac stockholders' equity amounts.
(F) The pro forma statement of operations excludes the charge of $12.2
million for purchased in-process technology which arose from the
acquisition. These charges will be included in the Company's
consolidated financial statements for the three month period ending
December 31, 1996.
(G) Shares used in the net loss per share calculation have been adjusted to
reflect the pro forma issuance of approximately 455,000 shares of
MagiNet Common Stock as if the transaction had occurred on January 1,
1996.
F-41
<PAGE>
MAGINET CORPORATION
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS)--(CONTINUED)
(H) Shares used in the net loss per share calculation have been adjusted to
reflect the pro forma issuance of approximately 455,000 shares of
MagiNet Common Stock as if the transaction had occurred on January 1,
1995.
(I) Short-term debt has been adjusted to reflect the excess of the cash
portion of the purchase price over the Company's cash balance at
September 30, 1996.
(J) The September 30, 1996 unaudited pro forma condensed combined balance
sheet has been adjusted as follows for the sale on October 1, 1996 of
substantially all of the net liabilities of Prodac's operations in Great
Britain of approximately $232,000 for approximately $292,000 in cash:
<TABLE>
<S> <C>
Cash and cash equivalents.................................. $ 291,000
Installed video systems, net............................... (1,786,000)
Property and equipment, net................................ (47,000)
Goodwill................................................... (524,000)
------------
$(2,066,000)
============
Short-term debt............................................ $ (665,000)
Long-term debt............................................. (1,401,000)
------------
$ (2,066,000)
============
</TABLE>
(K) The unaudited pro forma condensed combined Statement of Operations for
the year ended December 31, 1995 has been adjusted as follows for the
sale on October 1, 1996 of Prodac's operations in Great Britain:
<TABLE>
<S> <C>
Revenue..................................................... $(1,209,000)
Direct costs................................................ (495,000)
Depreciation and amortization............................... (502,000)
Selling, general and administrative......................... (313,000)
Interest expense............................................ (205,000)
Interest income and other, net.............................. (9,000)
-----------
Net loss.................................................... $ 297,000
===========
</TABLE>
(L) The unaudited pro forma condensed combined Statement of Operations for
the nine months ended September 30, 1996 has been adjusted as follows
for the sale on October 1, 1996 of Prodac's operations in Great Britain:
<TABLE>
<S> <C>
Revenue....................................................... $(997,000)
Direct costs.................................................. (448,000)
Depreciation and amortization................................. (449,000)
Selling, general and administrative........................... (288,000)
Interest expense.............................................. (193,000)
Interest income and other, net................................ (153,000)
---------
Net loss...................................................... $ 228,000
=========
</TABLE>
The purchase price for the Prodac acquisition was allocated to the tangible
and intangible assets of Prodac based on the fair market values of those
assets using a risk adjusted discounted cash flows approach. The evaluation of
the underlying technology acquired considered the inherent difficulties and
uncertainties in completing the development, and thereby achieving
technological feasibility, and the risks related to the viability of and
potential changes in future target markets. The underlying technology had no
alternative uses in other research and development projects or otherwise.
F-42
<PAGE>
MAGINET CORPORATION
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS)--(CONTINUED)
The 1995 Prodac statement of operations was converted to U.S. Dollars at an
average rate of 1.4336 Deutsche Marks per U.S. Dollar. The Prodac statement of
operations for the nine months ended September 30, 1996 was converted to U.S.
Dollars at an average rate of 1.4926 Deutsche Marks per U.S. Dollar. The
Prodac balance sheet at September 30, 1996 was converted to U.S. Dollars using
a rate of 1.525 Deutsche Marks per U.S. Dollar.
F-43
<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............................................................. 7
Use of Proceeds.......................................................... 17
Dividend Policy.......................................................... 17
Capitalization........................................................... 18
Dilution................................................................. 19
Selected Consolidated Financial and Other Data........................... 20
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 22
Business................................................................. 34
Acquisition of Prodac.................................................... 46
Management............................................................... 50
Certain Transactions..................................................... 60
Principal Stockholders................................................... 62
Description of Capital Stock............................................. 64
Shares Eligible for Future Sale.......................................... 67
Certain United States Federal Tax Considerations for Non-U.S. Holders of
Common Stock............................................................ 68
Underwriting............................................................. 70
Legal Matters............................................................ 72
Experts.................................................................. 73
Additional Information................................................... 73
Index to Consolidated Financial Statements............................... F-1
</TABLE>
------------------
UNTIL , 1997 (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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
5,500,000 SHARES
[LOGO OF MAGINET APPEARS HERE]
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. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion, dated December 16, 1996
PROSPECTUS
5,500,000 SHARES
[LOGO OF MAGINET APPEARS HERE]
COMMON STOCK
-------------
Of the 5,500,000 shares of Common Stock, $.001 par value ("Common Stock"), of
MagiNet Corporation ("MagiNet" or the "Company") being offered hereby,
1,100,000 shares are being offered initially outside the United States and
Canada by the International Managers (the "International Offering") and
4,400,000 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 $8.00 and $9.00 per share. See "Underwriting"
for a discussion of factors to be considered in determining the initial public
offering price. The Common Stock has been approved for listing 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 7.
-------------
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
$1,400,000 payable by the Company.
(3) The Company has granted to the International Managers a 30-day option to
purchase up to 165,000 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
660,000 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>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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. NEI-
THER 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
AFFAIRS 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............................................................. 7
Use of Proceeds.......................................................... 17
Dividend Policy.......................................................... 17
Capitalization........................................................... 18
Dilution................................................................. 19
Selected Consolidated Financial and Other Data........................... 20
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 22
Business................................................................. 34
Acquisition of Prodac.................................................... 46
Management............................................................... 50
Certain Transactions..................................................... 60
Principal Stockholders................................................... 62
Description of Capital Stock............................................. 64
Shares Eligible for Future Sale.......................................... 67
Certain United States Federal Tax Considerations for Non-U.S. Holders of
Common Stock............................................................ 68
Underwriting............................................................. 70
Legal Matters............................................................ 72
Experts.................................................................. 73
Additional Information................................................... 73
Index to Consolidated Financial Statements............................... F-1
</TABLE>
------------------
UNTIL , 1997 (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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
5,500,000 SHARES
[LOGO OF MAGINET APPEARS HERE]
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........................................... $ 30,534
NASD Filing Fee................................................ 9,355
Nasdaq National Market Listing Fee............................. 50,000
Printing Fees and Expenses..................................... 200,000
Legal Fees and Expenses........................................ 650,000
Accounting Fees and Expenses................................... 350,000
Blue Sky Fees and Expenses..................................... 10,000
Transfer Agent and Registrar Fees.............................. 15,000
Miscellaneous.................................................. 85,111
----------
Total........................................................ $1,400,000
==========
</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 July 7, 1992 to May 30, 1996, the Registrant issued and sold
328,680 shares of its Common Stock to certain executive officers, including
the Registrant's Chief Executive Officer and Chief Financial Officer, at
prices ranging from $0.01 to $2.00.
2. From March 31, 1994 to September 30, 1996, the Registrant issued and
sold 179,192 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.
3. 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.
4. On October 15, 1992, the Registrant issued and sold 339,887 and
100,181 shares of Series B Preferred Stock to 11 investors at sale prices
of $4.00 and $4.50 per share respectively.
5. 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>
6. 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.
7. 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.
8. 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.
9. 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.
10. 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.
11. 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.
12. 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.
13. 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.
14. 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 an
exercise price of $7.00 per share, subject to adjustment of the number of
shares and exercise price.
15. 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>
16. On December 11, 1993, the Registrant issued a warrant to purchase
40,000 shares of its Common Stock at an exercise price per share of $.01.
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.
2.1+** Share Purchase and Transfer Agreement by and among Registrant,
MagiNet GmbH i.G., Heinrich R. Wirt and Reiner Kaesbach, dated
November 6, 1996.
2.2** Amendment of the Share Purchase and Transfer Agreement by and
among Registrant, MagiNet GmbH i.G., Heinrich R. Wirt and Reiner
Kaesbach, dated November 19, 1996.
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 Pacific Pay Video Limited and
On Common Video Corporation.
10.6+** Technology License Agreement between MagiNet International
Corporation and Guestserve Development Group.
10.7** Exclusive License Agreement between Pacific Pay Video Limited and
Comsat Video Enterprises, Inc., dated March 15, 1993.
10.8** Exclusive Sublicense Agreement between Pacific Pay Video Limited
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 MagiNet (H.K.) Limited and Shangri-
la Hotel & Resorts (undated).
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S>
10.13+** Revised Installation Agreement between MagiNet (H.K.) Limited and
Shangri-La Hotel & Resorts, dated September 7, 1994.
10.14+** Guest Video Services Agreement between MagiNet Australia Pty
Limited and Southern Pacific Hotel Corporation Limited, dated
September 6, 1995.
10.15+ Master Guest Video Services Agreement by and among MagiNet
International Corporation, Hyatt International-Asia Pacific
Limited, Hyatt Chain Services Limited and Guestserve Development
Group, dated August 11, 1995.
10.16 Pledge Agreement between Registrant and The Chase Manhattan Bank,
N.A., dated
August 15, 1995.
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 Sunnyvale, 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 MagiNet
International Corporation, Hyatt International (Europe Africa
Middle East) Ltd., Hyatt Chain Services Limited and Guestserve
Development Group, dated November 15, 1995.
10.28 Summary of Terms for Second Amendment to Note Agreement, by and
among Registrant and New York Life Insurance Company, The Mutual
Life Insurance Company of New York, WASLIC Company II, and Namtor
BVC LP, dated November 21, 1996.
10.29 Agreement of Assignment as Collateral among Registrant, The Chase
Manhattan Bank, N.A., New York Life Insurance Company, The Mutual
Life Insurance Company of New York, WASLIC Company II, and Namtor
BVC LP, dated August 15, 1995.
10.30** Joint Venture Agreement by and among Registrant and Nag Yong Lee,
dated March 1, 1995.
10.31+** 1996 Annual Agreement between Prodac Prozessdatentechnik GmbH and
Philips Mietsystem GmbH, dated June 18, 1996.
10.32** Managing Director's Service Agreement between Prodac
Prozessdatentechnik GmbH and Reiner Kaesbach, dated November 5,
1996.
10.33** Managing Director's Service Agreement between Prodac
Prozessdatentechnik GmbH and Heinrich R. Wirt, dated November 5,
1996.
10.34** Lease Contract by and between Kaesbach & Wirt GbR and Prodac
Prozessdatentechnik GmbH, dated December 15, 1993.
10.35** Modification agreement of Lease Contract by and between Kaesbach &
Wirt GbR and Prodac Prozessdatentechnik GmbH, dated October 7,
1996.
10.36+** Agreement between Prodac Prozessdatentechnik GmbH and United
International Pictures GmbH, dated February 8, 1996.
10.37+** 1996 Bonus Agreement between Prodac Prozessdatechnik GmbH and
Philips Mietsystem
GmbH, dated October 25, 1996.
</TABLE>
II-4
<PAGE>
<TABLE>
<S> <C>
10.38** Form of standard Leasing Contract between Prodac Prozessdatentechnik GmbH and Philips
Mietsystem GmbH.
10.39+** Framework Distributor Contract between Prodac Prozessdatentechnik GmbH and Dorint
Aktiengesellschaft, dated May 5, 1994.
10.40+** Framework Operator Agreement between Prodac Prozessdatentechnik GmbH and Novotel
Hotelbetriebs mbH, dated October 10, 1996.
10.41+** Framework Distributor Contract between Prodac Prozessdatentechnik GmbH and Maritim
Hotelgesellschaft mbH, dated September 21, 1995.
10.42** Agreement for the Sale and Purchase of Part of the business of Prodac Prozessdatentechnik
GmbH and Prodac Hotelvideo Communicationsystems Limited between Prodac
Prozessdatentechnik GmbH, Prodac Hotelvideo Communicationsystems Limited and
UK Consumer Electronics Limited.
10.43+** Supply Agreement between Prodac Prozessdatentechnik GmbH and UK Consumer
Electronics Limited.
10.44** Software License and Technical Support Agreement between Prodac Prozessdatentechnik
GmbH and UK Consumer Electronics Limited.
10.45** Source Code Agreement by and among Prodac Prozessdatentechnik GmbH and UK
Consumer Electronics Limited.
10.46 Collateral Assignment Agreement between the Registrant and The Chase Manhattan Bank,
N.A., dated August 15, 1995.
10.47 Commitment Letter between Registrant and CIBC WG Argosy Merchant Fund 2, L.L.C.
11.1** Calculation of earnings per share.
21.1** List of Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of Ernst & Young GmbH, Independent Auditors.
23.3 Consent of Counsel (included in Exhibit 5.1).
24.1** Power of Attorney (see page II-5).
27.1 Financial Data Schedule.
</TABLE>
- --------
** 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
II-5
<PAGE>
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-6
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS AMENDMENT NO. 4 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 16TH DAY OF
DECEMBER, 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. 4 TO REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN
THE CAPACITIES AND ON THE DATES INDICATED
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
Kenneth B. Hamlet* Chairman of the
- ------------------------------------- Board, President December 16, 1996
(KENNETH B. HAMLET) and Chief Executive
Officer (Principal
Executive Officer)
/s/ James A. Barth Executive Vice
- ------------------------------------- President, Chief December 16, 1996
(JAMES A. BARTH) Financial Officer
and Secretary
(Principal
Financial and
Accounting Officer)
Robert R. Creager* Director
- ------------------------------------- December 16, 1996
(ROBERT R. CREAGER)
Stuart J. Ellman* Director
- ------------------------------------- December 16, 1996
(STUART J. ELLMAN)
Michael D. Granoff* Director
- ------------------------------------- December 16, 1996
(MICHAEL D. GRANOFF)
Michael Ramsay* Director
- ------------------------------------- December 16, 1996
(MICHAEL RAMSAY)
James D. Robinson IV* Director
- ------------------------------------- December 16, 1996
(JAMES D. ROBINSON IV)
/s/ James A. Barth
--------------------------------
* By:
(JAMES A. BARTH)
(ATTORNEY-IN-FACT)
</TABLE>
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<C> <S>
1.1** Form of U.S. Underwriting Agreement.
1.2** Form of International Underwriting Agreement.
2.1+** Share Purchase and Transfer Agreement by and among Registrant,
MagiNet GmbH i.G., Heinrich R. Wirt and Reiner Kaesbach, dated
November 6, 1996.
2.2** Amendment of the Share Purchase and Transfer Agreement by and
among Registrant, MagiNet GmbH i.G., Heinrich R. Wirt and Reiner
Kaesbach, dated November 19, 1996.
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 Pacific Pay Video Limited and
On Common Video Corporation.
10.6** Technology License Agreement between MagiNet International
Corporation and Guestserve Development Group.
10.7** Exclusive License Agreement between Pacific Pay Video Limited and
Comsat Video Enterprises, Inc., dated March 15, 1993.
10.8** Exclusive Sublicense Agreement between Pacific Pay Video Limited
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 MagiNet (H.K.) Limited and Shangri-
la Hotel & Resorts (undated).
10.13+** Revised Installation Agreement between MagiNet (H.K.) Limited and
Shangri-La Hotel & Resorts, dated September 7, 1994.
10.14+** Guest Video Services Agreement between MagiNet Australia Pty
Limited and Southern Pacific Hotel Corporation Limited, dated
September 6, 1995.
10.15+ Master Guest Video Services Agreement by and among MagiNet
International Corporation, Hyatt International-Asia Pacific
Limited, Hyatt Chain Services Limited and Guestserve Development
Group, dated August 11, 1995.
</TABLE>
<PAGE>
<TABLE>
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10.16 Pledge Agreement between Registrant and The Chase Manhattan Bank,
N.A., dated August 15, 1995.
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 Sunnyvale, 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 MagiNet
International Corporation, Hyatt International (Europe Africa
Middle East) Ltd., Hyatt Chain Services Limited and Guestserve
Development Group, dated November 15, 1995.
10.28 Summary of Terms for Second Amendment to Note Agreement by and
among Registrant and New York Life Insurance Company, The Mutual
Life Insurance Company of New York, WASLIC Company II, and Namtor
BVC LP, dated November 21, 1996.
10.29 Agreement of Assignment as Collateral among Registrant, The Chase
Manhattan Bank, N.A., New York Life Insurance Company, The Mutual
Life Insurance Company of New York, WASLIC Company II, and Namtor
BVC LP, dated August 15, 1995.
10.30** Joint Venture Agreement by and among Registrant and Nag Yong Lee,
dated March 1, 1995.
10.31+** 1996 Annual Agreement between Prodac Prozessdatentechnik GmbH and
Philip Mietsystem GmbH, dated June 18, 1996.
10.32** Managing Director's Service Agreement between Prodac
Prozessdatentechnik GmbH and Reiner Kaesbach, dated November 5,
1996.
10.33** Managing Director's Service Agreement between Prodac
Prozessdatentechnik GmbH and Heinrich R. Wirt, dated November 5,
1996.
10.34** Lease Contract by and between Kaesbach & Wirt GbR and Prodac
Prozessdatentechnik GmbH, dated December 15, 1993.
10.35** Modification agreement of Lease Contract by and between Kaesbach &
Wirt GbR and Prodac Prozessdatentechnik GmbH, dated October 7,
1996.
10.36+** Agreement between Prodac Prozessdatentechnik GmbH and United
International Pictures GmbH, dated February 8, 1996.
10.37+** 1996 Bonus Agreement between Prodac Prozessdatentechnik GmbH and
Philips Mietsystem GmbH, dated October 25, 1996.
10.38** Form of standard Leasing Contract between Prodac
Prozessdatentechnik GmbH and Philips Mietsystem GmbH.
</TABLE>
<PAGE>
<TABLE>
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10.39+** Framework Distributor Contract among Prodac Prozessdatentechnik
GmbH and Dorint Aktiengesellschaft, dated May 5, 1994.
10.40+** Framework Operator Agreement between Prodac Prozessdatentechnik
GmbH and Novotel Hotelbetriebs mbH, dated October 10, 1996.
10.41+** Framework Distributor Contract between Prodac Prozessdatentechnik
GmbH and Maritim Hotelgesellschaft mbH, dated September 21, 1995.
10.42** Agreement for the Sale and Purchase of Part of the business of
Prodac Prozessdatentechnik GmbH and Prodac Hotelvideo
Communicationsystems Limited between Prodac Prozessdatentechnik
GmbH, Prodac Hotelvideo Communicationsystems Limited and UK
Consumer Electronics Limited.
10.43+** Supply Agreement between Prodac Prozessdatentechnik GmbH and UK
Consumer Electronics Limited.
10.44+** Software License and Technical Support Agreement between Prodac
Prozessdatentechnik GmbH and UK Consumer Electronics Limited.
10.45** Source Code Agreement by and among Prodac Prozessdatentechnik GmbH
and UK Consumer Electronics Limited.
10.46 Collateral Assignment Agreement between the Registrant and The
Chase Manhattan Bank, N.A., dated August 15, 1995.
10.47 Commitment Letter between Registrant and CIBC WG Argosy Merchant
Fund 2, L.L.C.
11.1** Calculation of earnings per share.
21.1** List of Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of Ernst & Young GmbH, Independent Auditors.
23.3 Consent of Counsel (included in Exhibit 5.1).
24.1** Power of Attorney (see page II-5).
27.1 Financial Data Schedule.
</TABLE>
- --------
** 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 10.10
================================================================================
MAGINET CORPORATION
UP TO $30,000,000
10.5% SENIOR SECURED NOTES DUE 2000
______________________
NOTE AGREEMENT
______________________
Dated August 15, 1995
================================================================================
<PAGE>
TABLE OF CONTENTS
Page
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1.AUTHORIZATION OF ISSUE OF SECURITIES
1.1 Series A Notes.................................................... 1
1.2 Series B Notes.................................................... 1
1.3 Pledge Agreement.................................................. 2
1.4 Warrants.......................................................... 2
1.5 Reference to Notes................................................ 2
2. PURCHASE AND SALE OF SECURITIES......................................... 2
2.1 Purchase and Sale of Securities................................... 2
2.2 Purchase and Sale of Series B Notes............................... 3
3. CONDITIONS OF CLOSING................................................... 4
3.1 Representations and Warranties.................................... 4
3.2 Performance; No Default........................................... 4
3.3 Compliance Certificate............................................ 4
3.4 Opinion of Purchasers' Special Counsel............................ 4
3.5 Opinion of Company's Counsel...................................... 4
3.6 Opinions of Local Counsel......................................... 5
3.7 Opinion of Agent's Counsel........................................ 5
3.8 Pledge Agreement.................................................. 5
3.9 Collateral Assignment Agreement................................... 5
3.10 Shareholders' Agreement........................................... 5
3.11 Corporate Reorganization.......................................... 6
3.12 Purchase Permitted by Applicable Laws............................. 6
3.13 Payment of Closing Fees........................................... 6
3.14 Private Placement Number.......................................... 6
3.15 Proceedings....................................................... 6
3.16 Appointment of Agent.............................................. 6
3.17 Additional Financing.............................................. 6
3.18 Sale of Securities to other Initial Purchasers.................... 7
3.19 Conditions at Second Closing Date................................. 7
3.20 Principal Amount of Series B Notes................................ 7
3.21 Accession to Appointment Agreement................................ 7
4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY........................... 7
4.1 Organization, Standing, etc....................................... 7
4.2 Authorization; Enforceability..................................... 8
4.3 Warrants and Warrant Shares....................................... 8
4.4 Qualification..................................................... 8
4.5 Financial Statements.............................................. 8
4.6 Actions Pending................................................... 9
4.7 Outstanding Debt.................................................. 9
4.8 Title to Properties............................................... 9
4.9 Intellectual Properties........................................... 9
4.10 Taxes............................................................. 10
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4.11 Compliance with Laws, etc......................................... 10
4.12 Conflicting Agreements and Other Matters.......................... 10
4.13 Offering of Securities............................................ 11
4.14 Use of Proceeds................................................... 11
4.15 ERISA............................................................. 11
4.16 Governmental Consent.............................................. 13
4.17 Zoning and Environmental Compliance............................... 13
4.18 Investment Company Act and Holding Company........................ 13
4.19 Disclosure........................................................ 14
4.20 Solvency.......................................................... 14
4.21 Foreign Assets Control Regulations, etc........................... 14
4.22 Hotel Contracts................................................... 14
4.23 Joint Venture Agreements.......................................... 15
5. REPRESENTATIONS OF EACH PURCHASER....................................... 15
5.1 Nature of Purchase................................................ 15
5.2 Source of Funds................................................... 15
5.3 Release of Collateral............................................. 16
6. PREPAYMENTS............................................................. 17
6.1 Optional Prepayment............................................... 17
6.2 Notice of Optional Prepayment..................................... 17
6.3 Partial Payments Pro Rata......................................... 18
6.4 Retirement of Notes............................................... 18
6.5 Surrender of Notes on Prepayment.................................. 18
7. COVENANTS............................................................... 18
7.1 Books of Record and Account....................................... 18
7.2 Financial Statements, Notices, etc................................ 18
7.3 Inspection of Property............................................ 22
7.4 Covenant to Secure Notes Equally.................................. 22
7.5 Maintenance of Corporate Existence................................ 23
7.6 Maintenance of Properties......................................... 23
7.7 Insurance......................................................... 23
7.8 Taxes............................................................. 23
7.9 Compliance with Laws, etc......................................... 24
7.10 Environmental Compliance.......................................... 24
7.11 Pari Passu Ranking................................................ 24
7.12 Payment of Notes.................................................. 24
7.13 Security Documents; Further Assurances............................ 25
7.14 Foreign Subsidiaries' Security.................................... 25
7.15 Pledge of Shares of New Subsidiaries.............................. 26
7.16 Notification of Registration...................................... 26
7.17 Sub-licences or Assignments and Consents.......................... 26
7.18 Removal of Legends................................................ 26
8. NEGATIVE COVENANTS...................................................... 26
8.1 Liens.............................................................. 27
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8.2 Restricted Payments................................................ 29
8.3 Adjusted Consolidated Net Worth.................................... 30
8.4 Total Debt to Total Adjusted Capitalization........................ 30
8.5 Total Debt to Historical EBITDA.................................... 30
8.6 Historical EBITDA.................................................. 30
8.7 Merger, Consolidation, etc......................................... 31
8.8 Sale of Assets..................................................... 32
8.9 Cumulative Installed Rooms......................................... 33
8.10 Offering of Adult Titles........................................... 34
8.11 Amendments to the Technology License Agreement..................... 34
8.12 Transactions with Affiliates....................................... 34
8.13 Additional Pledged Securities; Restrictions
on PPV............................................................. 34
9. EVENTS OF DEFAULT AND ENFORCEMENT........................................ 36
9.1 Events of Default; Acceleration.................................... 36
9.2 Rescission of Acceleration......................................... 38
9.3 Notice of Acceleration or Rescission............................... 38
9.4 Other Remedies..................................................... 39
10. DEFINITIONS AND INTERPRETATION, ETC...................................... 39
10.1 Defined Terms...................................................... 39
10.2 Accounting Principles, Terms and Determinations.................... 47
11. MISCELLANEOUS............................................................ 47
11.1 Payments........................................................... 48
11.2 Expenses........................................................... 49
11.3 Consent to Amendments.............................................. 50
11.4 Solicitation of Holders of Notes................................... 50
11.5 Form, Registration, Transfer and Exchange of
Notes; Lost Notes.................................................. 50
11.6 Persons Deemed Owners.............................................. 51
11.7 Survival of Representations and Warranties......................... 51
11.8 Successors and Assigns............................................. 52
11.9 Disclosure to Other Persons........................................ 52
11.10 Notices............................................................ 52
11.11 Payments Due on Non-Business Days.................................. 53
11.12 Satisfaction Requirement........................................... 53
11.13 Entire Agreement................................................... 53
11.14 Governing Law...................................................... 53
11.15 Severability....................................................... 53
11.16 Descriptive Headings............................................... 53
11.17 Counterparts....................................................... 53
11.18 Severalty of Obligations........................................... 54
11.19 Consent to Jurisdiction; Service of Process........................ 54
11.20 Waiver of Jury Trial............................................... 54
</TABLE>
<PAGE>
PURCHASER SCHEDULE
SCHEDULE 1.2 - Pledged Security
SCHEDULE 3.11 - Description of Reorganization
SCHEDULE 4.1 - Subsidiaries
SCHEDULE 4.7 - Outstanding Debt
SCHEDULE 4.9 - Related Interests in Intellectual Property
SCHEDULE 4.12 - Restrictive Covenants
SCHEDULE 4.15 - ERISA
SCHEDULE 4.16 - Governmental Consents
SCHEDULE 8.1 - Liens
EXHIBIT A-1 - Form of Series A Note
EXHIBIT A-2 - Form of Series B Note
EXHIBIT B-1 - Form of Pledge Agreement
EXHIBIT B-2 - Form of Pledge Agreement (Japanese law)
EXHIBIT C - Form of Warrant
EXHIBIT D-1 - Form of Opinion of Counsel to the Company
EXHIBIT D-2 - Form of Opinion of Counsel to the Agent
EXHIBIT D-3 - Form of Local Counsel Opinion
EXHIBIT E - Form of Collateral Assignment Agreement
EXHIBIT F - Form of Appointment Agreement
EXHIBIT G - Form of Second Amendment to Shareholders' Agreement
EXHIBIT H - Gross Revenue Analysis
<PAGE>
MAGINET CORPORATION
405 TASMAN DRIVE
SUNNYVALE, CALIFORNIA 94089
Senior Secured Notes due 2000 with Warrants
August 15, 1995
To Each of the Purchasers Named in
the Purchaser Schedule Attached Hereto
Ladies and Gentlemen:
The undersigned, MagiNet Corporation, a company organized under the
laws of the State of California (the "Company"), hereby agrees with each of the
purchasers named in the Purchaser Schedule attached hereto (herein called the
"Initial Purchasers") and any subsequent purchaser which executes an instrument
of accession to this Note Agreement in the form of Annex I attached hereto
(herein called the "Subsequent Purchasers" and together with the Initial
Purchasers, the "Purchasers") as follows:
SECTION 1. AUTHORIZATION OF ISSUE OF SECURITIES.
1.1. Series A Notes. The Company has authorized the issue and sale
of its senior promissory notes (herein called the "Series A Notes") in the
aggregate principal amount of $24,900,000 to be dated the date of issue thereof,
to mature August 15, 2000, to bear interest on the unpaid balance thereof from
the date thereof until the principal thereof shall have become due and payable
at the rate of 10.5% per annum (subject to adjustment pursuant to Sections 8.6
and 8.9) and on overdue payments at the rate specified therein, each such
promissory note to be substantially in the form of Exhibit A-1 attached hereto.
The Series A Notes issued pursuant hereto will constitute direct, and, except as
provided herein, secured obligations of the Company and will rank at least pari
passu with all other outstanding obligations of the Company, present or future.
1.2. Series B Notes. On or before December 31, 1995, the Company may
authorize the issue and sale of senior promissory notes (herein
<PAGE>
2
called the "Series B Notes") to one or more Subsequent Purchasers reasonably
acceptable to the Initial Purchasers, in the aggregate principal amount of up to
$5,100,000, to be dated the date of issue thereof, to mature on August 15, 2000,
to bear interest on the unpaid balance thereof from the date thereof until the
principal thereof shall have become due and payable at a rate per of 10.5% annum
(subject to adjustment pursuant to Sections 8.6 and 8.9) and on overdue payments
at the rate specified therein, each such promissory note to be substantially in
the form of Exhibit A-2 attached hereto. Any Series B Notes issued pursuant
hereto will constitute direct, and, except as provided herein, secured
obligations of the Company and will rank at least pari passu with all other
outstanding obligations of the Company, present or future.
1.3. Pledge Agreement. The obligations of the Company hereunder and
under each of the Notes shall be secured by way of a pledge of the amount of
capital stock or similar equity interests specified in Schedule 1.2 opposite the
name of each of the companies listed on Schedule 1.2, together with all proceeds
thereof (collectively, the "Pledged Securities") in favor of The Chase Manhattan
Bank, N.A., as collateral agent (the "Agent") for the Purchasers, pursuant to
one or more pledge agreements in substantially the form of Exhibit B-1 attached
hereto, other than with respect to PPV Japan, Inc, the Pledged Securities of
which shall be pledged pursuant to an agreement of assignment of collateral in
substantially the form of Exhibit B-2 attached hereto (each a "Pledge
Agreement").
1.4. Warrants. The Company will authorize the issue of warrants in
substantially the form of Exhibit C hereto (the "Warrants") to subscribe at the
price per share (subject to adjustment as set forth in the Warrants) set forth
in the Warrants for up to 1,714,286 (subject to adjustment as set forth in
Section 4.3 and in the Warrants) shares of common stock of the Company, no par
value per share (the "Common Stock").
1.5. Reference to Notes. The term "Notes" as used herein shall
include each of the Series A Notes and Series B Notes (each a "Series") and any
Note delivered pursuant to any provision of this Agreement and each such senior
promissory note delivered in substitution or exchange for any other Note
pursuant to any such provision. The term "Warrants" as used herein shall
include each such common stock purchase warrant delivered pursuant to any
provision of this Agreement and each such warrant delivered in substitution or
exchange for any other Warrant pursuant to any such provision. The term
"Securities" shall include both the Notes and the Warrants.
SECTION 2. PURCHASE AND SALE OF SECURITIES.
2.1. Purchase and Sale of Securities. The Company hereby agrees to
sell to each Initial Purchaser, and, subject to the terms and conditions hereof,
each Initial Purchaser hereby agrees (x) to purchase from the Company the
aggregate principal amount of the Series A Notes set forth opposite such
NOTE AGREEMENT
<PAGE>
3
Initial Purchaser's name in the Purchaser Schedule attached hereto at the
purchase price of 100% of such aggregate principal amount and (y) to accept from
the Company the aggregate number of Warrants set forth opposite such Initial
Purchaser's name in the Purchaser Schedule attached hereto. The Company will
deliver to such Initial Purchaser, at the offices of White & Case, at 1155
Avenue of the Americas, New York, New York 10036, (i) one or more Series A Notes
registered in such Initial Purchaser's name (or in the name of such Initial
Purchaser's nominee), evidencing Series A Notes in the aggregate principal
amount of Series A Notes to be purchased by such Initial Purchaser and in the
denomination or denominations specified with respect to such Initial Purchaser
in the Purchaser Schedule against payment by such Initial Purchaser of the
purchase price thereof by transfer of immediately available funds for credit to
the Company's account #035004328-7 at Silicon Valley Bank, Santa Clara,
California, ABA No. 121-140-399, and (ii) one or more Warrants registered in
such Initial Purchaser's name, evidencing the aggregate number of Warrants to be
delivered to such Initial Purchaser, on the date of closing, which shall be
August 15, 1995 or any other date on or before August 31, 1995 upon which the
Company and the Initial Purchasers may mutually agree (herein called the "First
Closing Date").
If at the First Closing Date the Company fails to tender the
Securities to each Initial Purchaser as provided or any of the conditions
specified in Section 3 shall not have been fulfilled to the satisfaction of each
Initial Purchaser, such Initial Purchaser will, at its election, be relieved of
all further obligations under this Agreement, without thereby waiving any other
rights that it may have by reason of such failure or nonfulfillment.
2.2. Purchase and Sale of Series B Notes. The Company may from time
to time agree to sell to a Subsequent Purchaser reasonably acceptable to the
holders of the Series A Notes, and, subject to the terms and conditions hereof,
each such Subsequent Purchaser shall (x) execute and deliver an instrument of
accession in the form of Annex I hereto which shall provide the information for
the Purchaser Schedule, which shall be supplemented accordingly, (y) purchase
from the Company the aggregate principal amount of the Series B Notes set forth
opposite such Subsequent Purchaser's name in the Purchaser Schedule as so
supplemented at the purchase price of 100% of such aggregate principal amount
and (y) if applicable accept from the Company, the aggregate number of Warrants
offered to such Purchaser. The Company will deliver to such Subsequent
Purchaser at the offices of White & Case at 1155 Avenue of the Americas, New
York, New York 10036, (i) one or more Series B Notes registered in such
Subsequent Purchaser's name (or in the name of such Subsequent Purchaser's
nominee), evidencing Series B Notes in the aggregate principal amount of Series
B Notes to be purchased by such Subsequent Purchaser and in the denomination or
denominations specified with respect to such Subsequent Purchaser in the
Purchaser Schedule against payment by such Subsequent Purchaser of the purchase
price thereof by transfer of immediately available funds for credit to the bank
account of the Company
NOTE AGREEMENT
<PAGE>
4
with a bank in the United States, as specified by the Company and (ii) if
applicable, one or more Warrants registered in such Subsequent Purchaser's name,
evidencing the aggregate number of Warrants to be delivered to such Subsequent
Purchaser, on the second closing date, which shall be on such date on or before
December 31, 1995 as the Company and the Subsequent Purchasers may mutually
agree (herein called the "Second Closing Date"). The term "closing date" or
"date of closing" shall mean either the First Closing Date or the Second Closing
Date, as the case may be.
SECTION 3. CONDITIONS OF CLOSING. Each Initial Purchaser's obligation
to purchase and pay for the Series A Notes to be purchased by such Initial
Purchaser hereunder and each Initial Purchaser's obligation to accept the
Warrants to be issued to each Initial Purchaser hereunder is subject to the
satisfaction, on or before the First Closing Date, of the conditions set forth
in Sections 3.1 through 3.18, inclusive. Each Subsequent Purchaser's obligation
to purchase and pay for the Series B Notes which may be purchased by a
Subsequent Purchaser hereunder and each Subsequent Purchaser's obligation to
accept Warrants, if any, which may be issued to each Subsequent Purchaser
hereunder is subject to the satisfaction, on or before the Second Closing Date,
of the conditions set forth in Sections 3.19 through 3.21, inclusive.
3.1. Representations and Warranties. The representations and
warranties of the Company contained in this Agreement and the other Note
Documents and those otherwise made in writing by or on behalf of the Company in
connection with the transactions contemplated by this Agreement shall be true on
and as of the First Closing Date, except as affected by the consummation of such
transactions.
3.2. Performance; No Default. The Company shall have performed and
complied with all agreements and conditions contained in this Agreement and any
other Note Document required to be performed or complied with by it prior to or
at the closing and at the time of the closing there shall exist no Event of
Default or Default.
3.3. Compliance Certificate. The Company shall have delivered to such
Initial Purchaser an Officers' Certificate, dated the First Closing Date,
certifying that the conditions specified in Sections 3.1 and 3.2 have been
complied with or fulfilled.
3.4. Opinion of Initial Purchasers' Special Counsel. Such Initial
Purchaser shall have received from White & Case, who are acting as special
counsel for the Initial Purchasers in connection with this transaction, a
favorable opinion satisfactory to such Initial Purchaser as to such matters
incident to the matters herein contemplated as such Initial Purchaser may
reasonably request.
NOTE AGREEMENT
<PAGE>
5
3.5. Opinion of Company's Counsel. Such Initial Purchaser shall have
received from Wilson, Sonsini, Goodrich & Rosati, U.S. counsel for the Company,
a favorable opinion satisfactory to such Initial Purchaser and substantially in
the form of Exhibit D-1 attached hereto.
3.6. Opinions of Local Counsel. Such Initial Purchaser shall have
received from local counsel in the respective jurisdictions of organization for
each Subsidiary and Joint Venture Vehicle listed on Schedule 1.2, favorable
opinions satisfactory to such Initial Purchaser and substantially in the form of
Exhibit D-2 attached hereto.
3.7. Opinion of Agent's Counsel. Such Initial Purchaser shall have
received from White & Case, counsel for the Agent, a favorable opinion
satisfactory to such Initial Purchaser and substantially in the form of Exhibit
D-3 attached hereto.
3.8. Pledge Agreement. The Company shall have duly authorized,
executed and delivered a Pledge Agreement, and any other Pledge Agreements as
such Initial Purchaser reasonably deems advisable in connection with the Pledged
Securities and such Initial Purchaser shall have received a certified copy
thereof, and at the First Closing Date such Pledge Agreement(s) shall be in full
force and effect and shall constitute a valid, binding and enforceable
obligation in accordance with its terms, and the Company shall cause to be
delivered to the Agent all the certificated Pledged Securities, if any, referred
to in any such Pledge Agreement, together with executed and undated stock
powers, and such Initial Purchaser shall have received such confirmation from
the Company and the Agent with respect thereto as it may reasonably request. At
the First Closing Date, such Initial Purchaser shall receive copies of such
Pledge Agreement(s) in the form executed and delivered by the parties thereto.
3.9. Collateral Assignment Agreement. The Company shall have caused
PPV to have duly authorized, executed and delivered a collateral assignment
agreement with respect to the Technology License Agreement in substantially the
form of Exhibit E hereto (the "Collateral Assignment Agreement") in favor of the
Agent for the benefit of the Noteholders and such Initial Purchaser shall have
received a certified copy thereof, and at the First Closing Date such Collateral
Assignment Agreement shall be in full force and effect and shall constitute a
valid, binding and enforceable obligation in accordance with its terms. At the
First Closing Date, such Initial Purchaser shall receive copies of such
Collateral Assignment Agreement in the form executed and delivered by the
parties thereto. The Collateral Assignment Agreement shall allow Pacific Pay
Video Limited to sublicense or to assign rights under the Technology License
Agreement to Subsidiaries and Joint Venture Vehicles of the Company.
NOTE AGREEMENT
<PAGE>
6
3.10. Shareholders' Agreement. The second amendment to the
Shareholders' Agreement substantially in the form of Exhibit G hereto shall have
been duly authorized, executed and delivered by the parties thereto, and such
Initial Purchaser shall have received fully executed counterparts thereof, and
on the date of the First Closing Date, the Shareholders' Agreement, as amended,
shall be in full force and effect and such Initial Purchaser shall have received
such confirmation from the Company with respect thereto as such Initial
Purchaser may reasonably request.
3.11. Corporate Reorganization. The corporate reorganization
described in Schedule 3.11 shall have occurred and except as described in
Schedule 3.11, all of the assets of PPV shall have been duly and validly
transferred to the Company and such Initial Purchaser shall have received such
confirmation from the Company with respect thereto as such Initial Purchaser may
reasonably request.
3.12. Purchase Permitted By Applicable Laws. The purchase of and
payment for the Notes and acceptance of the Warrants by such Initial Purchaser
on the First Closing Date on the terms and conditions herein provided (including
the use of the proceeds of such Notes by the Company) shall not violate any
applicable law or governmental regulation (including, without limitation,
section 5 of the Securities Act or Regulation G, T, U or X of the Board of
Governors of the Federal Reserve System), shall not subject such Initial
Purchaser to any tax, penalty, liability or other undesirable condition under or
pursuant to any applicable law or governmental regulation, shall not require
reliance by such Initial Purchaser on provisions (such as Section 1405(a)(8) of
the New York Insurance Law) permitting limited investments by insurance
companies without restriction as to the character of the particular investment,
and such Initial Purchaser shall have received such certificates or other
evidence as it may request to establish compliance with this condition.
3.13. Payment of Closing Fees. The Company shall have paid the
reasonable fees, charges and disbursements of White & Case, special counsel to
the Initial Purchasers and Agent and of local counsel, if any, retained by the
Initial Purchasers, which are reflected in statements of such counsel rendered
to the Company prior to or on the First Closing Date.
3.14. Private Placement Number. White & Case shall have obtained for
the Notes a private placement number issued by Standard & Poor's CUSIP Service
Bureau (in cooperation with the Securities Valuation Office of the National
Association of Insurance Commissioners).
3.15. Proceedings. All corporate and other proceedings taken or to be
taken in connection with the transactions contemplated hereby and all documents
incident thereto shall be satisfactory in substance and form to such Initial
Purchaser, and such Initial Purchaser shall have received all such
NOTE AGREEMENT
<PAGE>
7
counterpart originals or certified or other copies of such documents as it may
reasonably request.
3.16. Appointment of Agent. The Company, the Agent and each of the
Initial Purchasers shall have executed and delivered the Appointment Agreement.
3.17. Additional Financing. The Company shall have provided evidence
in form and substance satisfactory to such Initial Purchaser that an investor
acceptable to such Initial Purchaser shall be committed to
make equity and/or debt investments in the Company on terms and conditions
satisfactory to such Initial Purchaser in an aggregate amount of at least
$5,100,000 prior to January 1, 1996.
3.18. Sale of Securities to other Initial Purchasers. The Company
shall have sold to the Initial Purchasers the Notes to be purchased by them at
the First Closing Date and shall have received payment in full therefor and the
Company shall have issued to the other Initial Purchasers the Warrants to be
issued to them at the First Closing Date.
3.19. Conditions at Second Closing Date. The Series A Notes shall be
outstanding and the conditions specified in Sections 3.1 through 3.15,
inclusive, shall have been satisfied as of the Second Closing Date with respect
to the Series B Notes (unless otherwise waived by the Subsequent Purchasers)
with all references in such Sections (and in the exhibits referenced therein) to
Series A Notes being read as Series B Notes, Initial Purchaser being read as
Subsequent Purchaser and to First Closing Date being read as the Second Closing
Date, mutatis mutandis.
3.20. Principal Amount of Series B Notes. The outstanding aggregate
principal amount of the Series B Notes shall be not greater than $5,100,000.
3.21. Accession to Appointment Agreement. Such Subsequent Purchasers
shall have acceded to the Appointment Agreement in accordance with the terms
thereof.
SECTION 4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The
Company represents and warrants as follows:
4.1. Organization, Standing, etc. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
California. Schedule 4.1 sets forth (i) the name of each Subsidiary and Joint
-
Venture Vehicle of the Company, (ii) its jurisdiction of incorporation or, if
--
not incorporated, operations and (iii) the percentage of its Voting Shares owned
---
by the Company and each other Subsidiary or Joint
NOTE AGREEMENT
<PAGE>
8
Venture Vehicle of the Company. All of the Voting Shares of each Subsidiary and
Joint Venture Vehicle shown in Schedule 4.1 as being owned by the Company and
its Subsidiaries have been validly issued, are fully paid and nonassessable and
are owned by the Company or another Subsidiary free and clear of any Lien
(except for Liens arising under the Security Documents or otherwise disclosed in
Schedule 4.1). Each Subsidiary and Joint Venture Vehicle is duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
organization and has all requisite corporate power and authority and all
material rights and permits to own and operate its properties and to carry on
its business as now conducted and as proposed to be conducted.
4.2. Authorization; Enforceability. The Company has all requisite
corporate power and authority and all material rights and permits to own and
operate its properties, to carry on its business as now conducted and as
proposed to be conducted, to enter into this Agreement, the other Note
Documents, to issue and sell the Securities and to carry out the terms of the
Note Documents. The execution and delivery of this Agreement and each of the
other Note Documents and the consummation of the transactions contemplated
hereby and thereby have been duly authorized by all necessary corporate action
on the part of the Company, and this Agreement and the other Note Documents
constitute, and the Securities when issued hereunder for value will each
constitute, a legal, valid and binding obligation of the Company, enforceable in
accordance with their respective terms.
4.3. Warrants and Warrant Shares. The Company has reserved and
unissued shares of its Common Stock at least equal to the shares of Common Stock
issuable upon exercise of the Warrants. The shares of Common Stock issuable
upon exercise of any Warrant have been duly authorized, and upon payment
therefor in accordance with the terms of such Warrant, shall be validly issued,
fully paid and nonassessable shares, with no liability on the part of the
exercising holder with respect to obligations of the Company. As of the First
Closing Date, on a fully-diluted basis the Common Stock into which the Warrants
are exercisable represents approximately 11.4% of the capital stock of the
Company; provided, that if the conditions specified in Section 1.b of the
Warrants are not satisfied on or before December 31, 1995, the stock into which
the Warrants are exercisable will represent approximately 23.2% of the capital
stock of the Company.
4.4. Qualification. Each of the Company, its Subsidiaries and its
Joint Venture Vehicles is duly qualified or authorized to do business and is in
good standing in every jurisdiction in which the properties owned, leased or
operated by the Company or such Subsidiary or Joint Venture Vehicle or the
nature of the business now conducted by the Company or such Subsidiary or Joint
Venture Vehicle makes such qualification necessary, except where the failure to
be so qualified would not have a Material Adverse Effect.
<PAGE>
9
4.5. Financial Statements. The Company has furnished each Purchaser
with the following financial statements, identified by a principal financial
officer of the Company: (i) the audited consolidated balance sheets of PPV and
-
its Subsidiaries at December 31, in each of the years 1992, 1993 and 1994, and
the related consolidated statements of income, stockholders' equity and cash
flows of PPV and its Subsidiaries for the fiscal years ended on such dates and
(ii) the unaudited consolidated balance sheets of PPV and its Subsidiaries at
--
June 30, 1995 and the related consolidated statements of income, stockholders'
equity and cash flows of PPV and its Subsidiaries for the 6 month period ended
on such date. Such financial statements (including any related schedules and/or
notes and subject, as to interim statements, to changes resulting from audits
and year-end adjustments and the absence of footnotes), have been prepared in
accordance with generally accepted accounting principles consistently followed
throughout the periods involved and show all liabilities, direct and contingent,
of PPV and its Subsidiaries required to be shown in accordance with such
principles. The consolidated financial statements fairly present the financial
condition of PPV and its Subsidiaries as at the dates thereof and for the
periods indicated. There has been no material adverse change in the business,
operations, affairs, condition (financial or other), properties or prospects of
the Company and its Subsidiaries taken as a whole since December 31, 1994.
4.6. Actions Pending. There is
(x) no action, suit, investigation or proceeding pending or, to the
knowledge of the Company, threatened against the Company or any of its
Subsidiaries or Joint Venture Vehicles or any properties or rights of the
Company or any of its Subsidiaries, and
(y) to the knowledge of the Company, no action, suit, investigation or
proceeding pending or threatened against On Command Video Corporation or
any of its properties,
by or before any court, arbitrator or administrative or governmental body which
(i) questions the validity of this Agreement or any other Note Document or any
-
action taken or to be taken pursuant to this Agreement or any other Note
Document or (ii) could reasonably be expected to result in any Material Adverse
--
Effect.
4.7. Outstanding Debt. Schedule 4.7 sets forth all outstanding Debt
of the Company, its Subsidiaries and its Joint Venture Vehicles (including all
Financing Leases and purchase money mortgages). There exists no default or
event of default under the provisions of any instrument evidencing any Debt of
the Company or its Subsidiaries or its Joint Venture Vehicles or of any
agreement relating thereto.
<PAGE>
10
4.8. Title to Properties. The Company and each of its Subsidiaries
and its Joint Venture Vehicles has good and marketable title to its real
properties (other than properties to which it has perpetual easements or which
it leases) and good title to all of its other properties, including the
properties reflected in the balance sheet as at December 31, 1994 referred to in
Section 4.5 (other than properties and assets disposed of in the ordinary course
of business). The Company and each of its Subsidiaries and its Joint Venture
Vehicles enjoys peaceful and undisturbed possession under all leases necessary
in any material respect for the conduct of its business, and all such leases are
valid and subsisting and are in full force and effect.
4.9. Intellectual Properties. Except as disclosed in Schedule 4.9,
the Company and each of its Subsidiaries and its Joint Venture Vehicles owns or
possesses rights to all patents, patent applications, copyrights, copyright
applications, trade secrets, trade names and trademarks, technologies, methods,
processes or other proprietary properties or information and all rights with
respect to the foregoing (collectively, "Intellectual Properties") necessary for
the conduct of their respective businesses as now conducted. Neither the Company
nor any Subsidiary nor any Joint Venture Vehicle has received a notification of
infringement of any Intellectual Property that, if adversely determined,
individually or in the aggregate, could reasonably be expected to have a
Material Adverse Effect. Except as disclosed in Schedule 4.9, no officer,
director, employee or shareholder of the Company or any Subsidiary or any Joint
Venture Vehicle (other than the Company or another Subsidiary) owns or has, nor
at the date of closing will own or have, any interest in any Intellectual
Property owned or used by the Company or any Subsidiary or any Joint Venture
Vehicle in connection with its businesses.
4.10. Taxes. The Company and each of its Subsidiaries and its Joint
Venture Vehicles has filed all federal, state, foreign and other income tax
returns which are required to be filed, and has paid all taxes as shown on such
returns and on all assessments received by it to the extent that such taxes have
become due, except such taxes as are being contested in good faith by
appropriate proceedings for which adequate reserves have been established in
accordance with generally accepted accounting principles. The consolidated
Federal income tax returns of the Company and its Subsidiaries (i) for all
-
calendar years through 1993, inclusive, have been filed with the Internal
Revenue Service, (ii) none have been audited by the Internal Revenue Service and
--
(iii) all returns remain open. The state income tax returns required to be
---
filed by the Company and its Subsidiaries (a) for all calendar years through
-
1993, inclusive, have been filed and (b) none have been audited and all are
-
open.
4.11. Compliance with Laws, Etc. Neither the Company nor any of its
Subsidiaries nor any of its Joint Venture Vehicles is in violation of (i) any
-
laws, ordinances, governmental rules or regulations to which it is subject or by
which it or any of its assets might be bound, (ii) any order, judgment or
--
<PAGE>
11
decree of any court, arbitrator or administrative or governmental body to which
it is subject or by which it or any of its assets might be bound, (iii) any term
---
of any contract, agreement or other instrument to which it is a party or by
which it or any of its assets might be bound, or (iv) any term of its charter or
--
by-laws, except which, either in any case specified in clauses (i), (ii), (iii)
and (iv) or in the aggregate, could not reasonably be expected to have a
Material Adverse Effect.
4.12. Conflicting Agreements and Other Matters. Neither the Company
nor any of its Subsidiaries nor any of its Joint Venture Vehicles is a party to
any contract or agreement or subject to any charter or other corporate
restriction which could reasonably be expected to result in a Material Adverse
Effect. Neither the execution and/or delivery of this Agreement or any of the
other Note Documents, nor the offering, issuance and sale of the Securities, nor
fulfillment of nor compliance with the terms and provisions hereof and of any
other Note Documents will conflict with, or result in a breach of the terms,
conditions or provisions of, or constitute a default under, or result in any
violation of, or result in the creation of any Lien (other than Liens in favor
of the Purchasers) upon any of the properties of the Company or any of its
Subsidiaries or any of its Joint Venture Vehicles pursuant to, the charter or
by-laws of the Company or such Subsidiary or such Joint Venture Vehicle, any
award of any arbitrator or any agreement (including any agreement with
stockholders), instrument, order, judgment, decree, statute, law, rule or
regulation to which the Company or any Subsidiary is or may be subject. The
Company is not a party to, or otherwise subject to any provision contained in,
any instrument evidencing Debt of the Company, any agreement relating thereto or
any other contract or agreement (including its charter) which limits the amount
of, or otherwise imposes restrictions on the incurring of, Debt of the Company
of the type to be evidenced by the Notes except as set forth in the agreements
listed in Schedule 4.12.
4.13. Offering of Securities. Neither the Company nor any agent
acting on its behalf has, directly or indirectly, offered the Notes or the
Warrants or any similar security of the Company for sale to, or solicited any
offers to buy either the Notes or the Warrants or any similar securities of the
Company from, or otherwise approached or negotiated with respect thereto with,
any Person other than the Purchasers and not more than 100 other institutional
investors, and neither the Company nor any agent acting on its behalf has taken
or will take any action which would subject the issuance or sale of either the
Notes or the Warrants to the provisions of section 5 of the Securities Act or to
the provisions of any securities or Blue Sky law of any applicable jurisdiction.
4.14. Use of Proceeds. The proceeds of the sale of the Notes will
be used for working capital and other general corporate purposes (including
without limitation the funding of the operations of Subsidiaries and Joint
Venture Vehicles and the acquisition of businesses or assets of businesses that
<PAGE>
12
are compatible with the Company). None of the transactions contemplated by this
Agreement will violate or result in a violation of section 7 of the Exchange Act
or any regulations issued pursuant thereto, including, without limitation,
Regulations G, T, U and X of the Board of Governors of the Federal Reserve
System. None of such proceeds will be used, directly or indirectly, for the
purpose, whether immediate, incidental or ultimate, of purchasing or carrying
any margin stock or for the purpose of maintaining, reducing or retiring any
Debt which was originally incurred to purchase or carry any stock that is
currently a margin stock or for any other purpose which might constitute this
transaction a "purpose credit" within the meaning of such Regulation G.
4.15. ERISA.
(a) The present value of the benefit liabilities (within the meaning
of section 4001(a)(16) of ERISA) under each Plan does not exceed the current
value (within the meaning of section 3(26) of ERISA) of the assets of such Plan
allocable to such benefit liabilities, determined on the basis of assumptions
and methods (including, without limitation, those used in valuing Plan assets)
each of which is reasonable and in accordance with actuarial standards and
applicable law.
(b) None of the Company, any of its Subsidiaries or any ERISA
Affiliate has breached the fiduciary rules of ERISA or engaged in any prohibited
transaction, and no such breach or prohibited transaction has occurred, that
could result in any direct or indirect liability (including as a result of an
indemnification obligation) of the Company, any of its Subsidiaries or any ERISA
Affiliate in connection with a suit for damages or pursuant to section 409(i) or
502(1) of ERISA or section 4975 of the Code.
(c) No accumulated funding deficiency (as defined in section 302 of
ERISA or section 412 of the Code), whether or not waived, has been incurred or
exists with respect to any Plan. Full payment has been made within the time
required under the Code or the terms of any Plan of all amounts which the
Company or any Subsidiary or ERISA Affiliate is required under applicable law to
have paid as contributions to each Plan.
(d) Other than for premiums payable in the normal course that are not
past due, none of the Company, any Subsidiary or any ERISA Affiliate has
incurred (either directly or indirectly, including as a result of an
indemnification obligation) any material liability under or pursuant to Title I
or IV of ERISA or the penalty or excise tax provisions of the Code relating to
employee benefit plans and no event, transaction or condition has occurred or
exists or, to the Company's best knowledge, is expected to occur or exist with
respect to any Plan which would result in any such liability to the Company, any
Subsidiary or any ERISA Affiliate. There has been no reportable event (within
the meaning of section 4043(c) of ERISA) or any other event or condition with
respect to any Plan which presents a risk of termination of, or the appointment
<PAGE>
13
of a trustee to administer, any such Plan by the PBGC. No Plan is a
Multiemployer Plan or a "multiple employer" plan.
(e) Except liability for continuation coverage provided pursuant to
section 4980B of the Code, no postretirement benefits are provided under any
welfare benefit plan (as defined in Section 3(l) of ERISA) of the Company, any
Subsidiary or the ERISA Affiliates.
(f) The execution and delivery of this Agreement and of each of the
Note Documents and the issuance and sale of the Securities thereunder will be
exempt from, or will not involve any transaction which is subject to, the
prohibitions of section 406 of ERISA and section 4975 of the Code and will not
involve any transaction in connection with which a penalty could be imposed
under section 502(i) of ERISA or a tax could be imposed pursuant to section 4975
of the Code. The representation by the Company in the immediately preceding
sentence is made in reliance upon and subject to the accuracy of each
Purchaser's representation in Section 5.2 of this Agreement.
(g) Neither the Company, nor any Subsidiary of the Company, nor any
ERISA Affiliate is either a "party in interest" (as defined in Title I, Section
3(14) of ERISA), nor a "disqualified person" (as defined in section 4975(e)(2)
of the Code) nor are the Securities "employer securities" (as defined in Title
I, Section 407(d)(i) of ERISA) with respect to any employee benefit plan other
than those identified in Schedule 4.15 attached hereto.
(h) Each Foreign Pension Plan has been maintained in substantial
compliance with its terms and with the requirements of any and all applicable
laws, statutes, rules, regulations and orders and has been maintained, where
required, in good standing with applicable regulatory authorities. Neither the
Company nor any of its Subsidiaries nor any of its Joint Venture Vehicles has
incurred any obligation in connection with the termination of or withdrawal from
any Foreign Pension Plan. The present value of the accrued benefit liabilities
(whether or not vested) under each Foreign Pension Plan, determined as of the
end of the Company's most recently ended fiscal year on the basis of actuarial
assumptions, each of which is reasonable, did not exceed the current value of
the assets of such Foreign Pension Plan allocable to such benefit liabilities.
4.16. Governmental Consent. Neither the nature of the Company and
its businesses or properties, nor any relationship between the Company and any
other Person, nor any circumstance in connection either with the offering,
issuance, sale or delivery of the Securities or with performance under the Note
Documents is such as to require any authorization, consent, approval, exemption
or other action by or notice to or filing with any court or administrative or
governmental body in connection with the execution and delivery of this
Agreement or any other Note Document, the offering, issuance, sale or delivery
of the Securities or performance under, fulfillment of or
NOTE AGREEMENT
<PAGE>
14
compliance with the terms and provisions hereof, of the Securities or of any
other Note Document except for such actions, notices or filings as have been
made prior to the date hereof or shall be timely made after the date hereof and
listed on Schedule 4.16.
4.17. Zoning and Environmental Compliance. The Company, each of its
Subsidiaries and its Joint Venture Vehicles and all of their respective
properties and facilities have complied at all times and in all respects with
all Environmental Laws, except where failure to comply could not reasonably be
expected to result in a Material Adverse Effect. Neither the Company nor any of
its Subsidiaries nor any of its Joint Venture Vehicles is aware of any claim or
demand against it or any of its Subsidiaries or any of its Joint Venture
Vehicles seeking damages, responses, costs, clean-up or any other form of relief
in equity or at law arising out of or relating to the treatment, disposal,
release, threatened release or presence of Hazardous Materials, which claim or
demand, individually or in the aggregate, might reasonably be expected to have a
Material Adverse Effect. Neither the Company nor any of its Subsidiaries nor
any of its Joint Venture Vehicles has acquired, incurred or assumed, directly or
indirectly, any contingent liability in connection with the release of any
Hazardous Material into the environment, which liability might result in a
Material Adverse Effect.
4.18. Investment Company Act and Holding Company Status. Neither the
Company nor any Subsidiary is an investment company or a person directly or
indirectly controlled by or acting on behalf of an investment company within the
meaning of the United States Investment Company Act of 1940, as amended. Neither
the Company nor any Subsidiary is a "holding company" or "subsidiary company" of
a "holding company", or an "affiliate" of a "holding company" or of a
"subsidiary company" of a "holding company", or a "public utility", within the
meaning of the United States Public Utility Holding Company Act of 1935, as
amended.
4.19. Disclosure. Neither this Agreement, any other Note Document,
the Private Placement Memorandum, nor any other document, certificate or
statement furnished to the Purchasers by or on behalf of the Company or any
Subsidiary in connection herewith contains any untrue statement of a material
fact or omits to state a material fact necessary in order to make the statements
contained herein and therein not misleading (it being understood that with
respect to pro forma calculations and estimates regarding future developments
contained in the Private Placement Memorandum, such pro forma calculations and
estimates are based on assumptions the Company in good faith believes are
reasonable and there are no facts presently known to the Company which would
cause the Company to change such projections and estimates in any material
respect). There is no fact known to the Company or any of its Subsidiaries
which materially adversely affects or in the future may (so far as the Company
can now foresee) materially adversely affect the business, operations, affairs,
condition (financial or other), properties or
NOTE AGREEMENT
<PAGE>
15
prospects of the Company and its Subsidiaries taken as a whole, or the ability
of the Company to perform its obligations under this Agreement or any other Note
Document and which has not been set forth in this Agreement, any other Note
Document, the Private Placement Memorandum or in the other documents,
certificates and statements furnished to the Purchasers by or on behalf of the
Company prior to the date hereof in connection with the transactions
contemplated hereby.
4.20. Solvency. The Company is, and upon giving effect to the
issuance of the Securities will be, a "solvent institution", as said term is
used in Section 1405(c) of the New York Insurance Law, whose "obligations are
not in default as to principal or interest", as said terms are used in said
Section 1405(c).
4.21. Foreign Assets Control Regulations, Etc. None of the
transactions contemplated by this Agreement (including the use of proceeds of
the sale from the Securities) or any other Note Document will result in a
violation of any of the foreign assets control regulations of the United States
Treasury Department (31 CFR, Subtitle B, Chapter V, as amended), or any enabling
legislation or Presidential Executive Order in connection therewith.
4.22. Hotel Contracts. Each Hotel Contract of each Subsidiary and
Joint Venture Vehicle of the Company constitutes a legal, valid and binding
obligation of such Subsidiary and such Joint Venture Vehicle, as the case may
be, and is in full force and effect.
4.23. Joint Venture Agreements. (a) Each Joint Venture Agreement of
the Company and each of its Subsidiaries constitutes a legal, valid and binding
obligation of the Company or such Subsidiary and is in full force and effect.
(b) The Joint Venture Agreement between PPV and JAFTA Japan Co., Inc.
dated July 15, 1992 has been superseded in its entirety by the Amended and
Restated Joint Venture Agreement between PPV, JAFTA Japan Co., Inc. and Izumi
Kikaku Co. Ltd. dated November 11, 1993 and is no longer in full force and
effect.
SECTION 5. REPRESENTATIONS OF EACH PURCHASER. On the First Closing
Date, each Initial Purchaser represents, and on the Second Closing Date, each
Subsequent Purchaser represents as follows:
5.1. Nature of Purchase. Such Purchaser is acquiring the Securities
for its own account and not with a view to or for sale in connection with any
distribution thereof within the meaning of the Securities Act, provided that the
--------
disposition of such Purchaser's property shall at all times be and remain within
its control.
NOTE AGREEMENT
<PAGE>
16
5.2. Source of Funds. Each Purchaser represents that at least one of
the following statements concerning each source of funds to be used by it to pay
the purchase price of the Securities (a "Source") is accurate on and as of the
date of closing:
(a) the Source is an insurance company pooled separate account that is
maintained solely in connection with the Purchaser's fixed contractual
obligations under which the amounts payable, or credited, to an employee
benefit plan and to any participant or beneficiary of such plan (including
any annuitant) are not affected in any manner by the investment performance
of the separate account; or
(b) the Source is either (i) an insurance company pooled separate
account, within the meaning of Prohibited Transaction Class Exemption
("PTCE") 90-1 (issued January 29, 1990), or (ii) a bank collective
investment fund, within the meaning of the PTCE 91-38 (issued July 12,
1991) and, except as the Purchaser has disclosed to the Company in writing
pursuant to this clause (b), no employee benefit plan or group of plans
maintained by the same employer or employee organization beneficially owns
more than 10% of all assets allocated to such pooled separate account or
collective investment fund; or
(c) the Source is an "investment fund" managed by a "qualified
professional asset manager" or "QPAM" (as defined in Part V of PTCE 84-14,
issued March 13, 1984), no employee benefit plan's assets that are included
in such investment fund, when combined with the assets of all other
employee benefit plans established or maintained by the same employer or by
an affiliate (within the meaning of Section V(c)(1) of PTCE 84-14) of such
employer or by the same employee organization and managed by such QPAM,
exceed 20% of the total client assets managed by such QPAM, the conditions
of Part I(c) and (g) of PTCE 84-14 are satisfied, and (i) the identity of
such QPAM and (ii) the names of all employee benefit plans whose assets are
included in such investment fund have been disclosed to the Company in
writing pursuant to this clause (c); or
(d) the Source is a governmental plan; or
(e) the Source is one or more employee benefit plans, or a separate
account or trust fund comprised of one or more employee benefit plans, each
of which has been identified to the Company in writing pursuant to this
clause (e); or
(f) the Source is an "insurance company general account," as such term
is defined in the Department of Labor Prohibited Transaction Class
Exemption 95-60 (issued July 12, 1995) ("PTCE 95-60") and as of the date of
this Agreement there is no "employee benefit
NOTE AGREEMENT
<PAGE>
17
plan" with respect to which the aggregate amount of such general account's
reserves and liabilities for the contracts held by or on behalf of such
"employee benefit plan" and all other "employee benefit plans" maintained
by the same employer (and affiliates thereof as defined in Section V(a)(1)
of PTCE 95-60) exceeds 10% of the total reserves and liabilities of such
general account (as determined under PTCE 95-60) (exclusive of separate
account liabilities) plus surplus as set forth in the National Association
of Insurance Commissioners Annual Statement filed with the state of
domicile of the Purchaser; or
(g) the Source is not an "employee benefit plan" as defined in Title
I, Section 3(3) of ERISA or a "plan" as defined in Section 4975(c) of the
Code (collectively a "plan").
As used in this Section 5.2, the terms "employee benefit plan", "governmental
plan" and "separate account" shall have the respective meanings assigned to such
terms in Section 3 of ERISA.
5.3. Release of Collateral. Each Purchaser agrees that it shall
instruct the Agent to release any and all security interests in the Collateral
in the event that each of the following conditions shall have been, and at the
relevant date of determination, continue to be satisfied:
(i) the ratio of Total Debt to Historical EBITDA of the Company is
less than 3.5:1;
(ii) Cumulative Installed Rooms is greater than or equal to 66.67% of
Projected Cumulative Installed Rooms; and
(iii) any such Collateral securing indebtedness for borrowed money of
the Company or its Subsidiaries in favor of any Person (other than the
Noteholders) shall have been released.
For purposes of determining whether the requirements of clauses (i) and (ii)
have been met, such determination shall be made on a quarterly basis as of each
of March 31, June 30, September 30 and December 31 of each year, beginning on
December 31, 1996.
SECTION 6. PREPAYMENTS. The Notes shall be subject to prepayment
only with respect to the optional prepayments permitted by Section 6.1.
6.1. Optional Prepayment. The Notes shall not be subject to
prepayment prior to the third anniversary of the date of closing and thereafter
shall be subject to prepayment, in whole at any time or from time to time in
part (in multiples of $100,000), at the option of the Company, (x) from the
third anniversary of the date of closing to but not including the fourth
anniversary of
<PAGE>
18
the date of closing at 101% of the principal amount so prepaid plus interest
thereon to the prepayment date and (y) from and after the fourth anniversary of
the date of closing at 100% of the principal amount so prepaid plus interest
thereon to the prepayment date. If the final maturity of the Notes is
accelerated pursuant to Section 9.1 hereof, the Company shall also pay a premium
(i) from the date of closing to but not including the first anniversary of the
date of closing at 104% of the principal amount of the Notes outstanding plus
interest accrued thereon, (ii) from the first anniversary of the date of closing
to but not including the second anniversary of the date of closing at 103% of
the principal amount of the Notes outstanding plus interest accrued thereon,
(iii) from the second anniversary of the date of closing to but not including
the third anniversary of the date of closing at 102% of the principal amount of
the Notes outstanding plus interest accrued thereon, (iv) from the third
anniversary of the date of closing to but not including the fourth anniversary
of the date of closing at 101% of the principal amount of the Notes outstanding
plus interest accrued thereon and (iv) from and after the fourth anniversary of
the date of closing at 100% of the principal amount of the Notes outstanding
plus interest accrued thereon.
6.2. Notice of Optional Prepayment. The Company shall give the
holder of each Note irrevocable written notice of any prepayment pursuant to
Section 6.1 not less than 30 days nor more than 60 days prior to the prepayment
date, (i) specifying such prepayment date, (ii) specifying the aggregate
- --
principal amount of all outstanding Notes held by such holder that is to be
prepaid on such date and (iii) stating that such prepayment is to be made
---
pursuant to Section 6.1. Notice of prepayment having been given as aforesaid,
the principal amount of the Notes specified in such notice, together with
interest thereon to the prepayment date and together with the premium, if any,
with respect thereto, shall become due and payable on such prepayment date.
6.3. Partial Payments Pro Rata. Upon any partial prepayment of the
Notes pursuant to Section 6.1, the principal amount so prepaid shall be
allocated to all Notes at the time outstanding (regardless of Series) and in
proportion, as nearly as practicable, to the respective outstanding principal
amounts thereof, with adjustments to the extent practicable, to equalize for any
prior prepayments not in such proportion.
6.4. Retirement of Notes. The Company shall not, and shall not
permit any of its Subsidiaries or Affiliates to, prepay or otherwise retire in
whole or in part prior to their stated final maturity, or purchase or otherwise
acquire (other than by prepayment pursuant to Section 6.1 or upon acceleration
of such final maturity pursuant to Section 9.1), directly or indirectly, Notes
held by any holder. Any Notes so prepaid or otherwise retired or purchased or
otherwise acquired by the Company or any of its Subsidiaries or Affiliates shall
not be deemed to be outstanding for any purpose under this Agreement.
<PAGE>
19
6.5. Surrender of Notes on Prepayment. Subject to Section 11.1, upon
any partial prepayment of a Note, at the option of the holder thereof, such Note
may be (i) surrendered to the Company pursuant to Section 11.5 in exchange for a
-
new Note in a principal amount equal to the principal amount remaining unpaid on
the surrendered Note or (ii) made available to the Company for notation thereon
--
of the portion of the principal so prepaid. Any Note paid or prepaid in full
shall be surrendered to the Company, if so requested by the Company, and shall
be canceled and shall not be reissued, and no Note shall be issued in lieu of
the prepaid principal amount of any Note.
SECTION 7. COVENANTS. The Company covenants that from and after the
date of this Agreement through the closing and thereafter for the benefit of the
holders of the Notes so long as any Note remains outstanding:
7.1. Books of Record and Account. The Company will, and will cause
each of its Subsidiaries and Joint Venture Vehicles to, keep true and proper
books of record and account which are sufficient to allow the Company to prepare
financial statements which fairly present the results of the operations and
financial position of the Company on a consolidated basis, and will reflect in
its financial statements adequate accruals and appropriations to reserves, all
in accordance with generally accepted accounting principles consistently applied
and with the applicable provisions of any regulatory authorities having
jurisdiction over the Company and its Subsidiaries and Joint Venture Vehicles.
7.2. Financial Statements, Notices, Etc. The Company covenants that
it will deliver to each holder of Notes in duplicate:
(i) as soon as practicable and in any event within 20 days after the
end of each month, a consolidated balance sheet of the Company and its
Subsidiaries as at the end of such month, a consolidated statement of
income of the Company and its Subsidiaries for such month, a report on the
backlogs for such month and a hotel by hotel gross revenue analysis of the
Company and its Subsidiaries for such month, all in form consistent with
the Company's historical monthly statements as shown in Exhibit H hereto
and in reasonable detail and reasonably satisfactory to the Required
Holder(s) and the financial statements shall be certified by an authorized
financial officer of the Company as fairly presenting the results of
operations and financial position of the Company on a consolidated basis,
subject to changes resulting from quarterly and year-end adjustments and
the absence of footnotes;
(ii) as soon as practicable and in any event within 45 days after the
end of each quarterly period (other than the last quarterly period) in each
fiscal year a consolidated balance sheet of the Company
<PAGE>
20
and its Subsidiaries as at the end of such quarterly period and the related
consolidated statements of income, retained earnings and cash flows of the
Company and its Subsidiaries for such quarterly period and, in the case of
the second and third quarterly periods, for the period from the beginning
of the current fiscal year to the end of such quarterly period, setting
forth in each case in comparative form figures for the corresponding period
in the preceding fiscal year, all in reasonable detail and reasonably
satisfactory in form to the Required Holder(s) and certified by an
authorized financial officer of the Company as fairly presenting the
results of operations and financial position of the company on a
consolidated basis, subject to changes resulting from year-end adjustments
and the absence of footnotes;
(iii) as soon as practicable and in any event within 90 days after
the end of each fiscal year, (A) consolidated statements of income and cash
flows and a consolidated statement of retained earnings of the Company and
its Subsidiaries for such year, and a consolidated balance sheet of the
Company and its Subsidiaries as at the end of such year, setting forth for
each consolidated report in comparative form corresponding figures from the
preceding fiscal year, accompanied by the report of independent public
accountants of recognized national standing selected by the Company in such
accountants' standard form whose report shall be without limitation as to
the scope of the audit and shall have been prepared in accordance with
generally accepted accounting principles) and (B) consolidating statement
of income and cash flows of the Company and its Subsidiaries and its Joint
Venture Vehicles for such year and consolidating balance sheets of the
Company and its Subsidiaries and its Joint Venture Vehicles as at the end
of such fiscal year, setting forth in comparative form figures for the
corresponding period in the preceding fiscal year and certified by an
authorized financial officer of the Company as fairly presenting the
results of operations and financial position of the Company and each
Subsidiary and each Joint Venture Vehicle;
(iv) together with each delivery of financial statements required by
clauses (ii) and (iii) above, an Officers' Certificate (A) stating that the
-
signer has reviewed the terms hereof and of the Notes and has made, or
caused to be made under his or her supervision, a review of the
transactions and condition of the Company and its Subsidiaries and its
Joint Venture Vehicles during the accounting period covered by such
financial statements, (B) stating that such review has not disclosed the
-
existence during or at the end of such accounting period, and that the
signer does not have knowledge of the existence as at the date of such
Officers' Certificate, of any condition or event which constitutes a
Default or Event of Default, or, if any such condition or event existed or
exists, specifying the nature and period of existence thereof and what
action the Company has taken or is taking or proposes to take with
<PAGE>
21
respect thereto, (C) demonstrating compliance by the Company and its
-
Subsidiaries and its Joint Venture Vehicles with the provisions of Sections
8.1(j), 8.2(a), 8.3, 8.4, 8.5, 8.6, 8.8 and 8.9 and (D) stating Historical
-
EBITDA and the number of Cumulative Installed Rooms as of the date of such
financial statements;
(v) together with each delivery of financial statements required by
clause (iii) above, a certificate of the independent accountants giving the
report thereon (A) stating that their audit examination has included a
-
review of the financial covenants of this Agreement and that such review is
sufficient to enable them to make the statement referred to in subclause
(C) of this clause (v), (B) stating whether, in the course of their audit
-
examination, they obtained knowledge (and whether, as of the date of such
written statement, they have knowledge) of the existence of any condition
or event which constitutes a Default or Event of Default or any failure of
the Company to keep, perform, observe or fulfill any of its covenants or
agreements set forth in this Agreement and, if so, specifying the nature
and period of existence thereof and (C) stating that they have examined the
-
Officers' Certificate delivered in connection with each fiscal year end
pursuant to clause (iv) of this Section 7.2 and that the matters set forth
in such Officers' Certificate pursuant to subclause (B) of such clause (iv)
relating to financial covenants only have been properly stated in
accordance with the terms of this Agreement;
(vi) promptly upon their becoming available, (x) copies of each
financial statement, proxy statement, notice or report sent by the Company
or any of its Subsidiaries to its stockholders generally and copies of each
report (whether regular, periodic or otherwise) and any registration
statement (without exhibits), prospectus or written communication (other
than transmittal letters) in respect thereof filed by the Company or any of
its Subsidiaries with, or received by the Company or any of its
Subsidiaries in connection therewith from, any securities exchange or the
SEC or any governmental body or agency succeeding to the functions of the
SEC) and (y) copies of any press releases relating to the Company or any
Subsidiary thereof;
(vii) promptly upon receipt thereof, a copy of each other report
submitted to the Board of Directors of the Company or any Subsidiary or any
Joint Venture Vehicles by independent accountants in connection with any
annual, interim or special audit made by them of the books of the Company
or any of its Subsidiaries or any of is Joint Venture Vehicles, together
with the Company's and each such Subsidiary's responses to such reports;
(viii) promptly upon a Responsible Officer obtaining knowledge of any
condition or event which constitutes a Default or Event of De-
<PAGE>
22
fault or Event of Default or that the holder of any Note has given any
notice or taken any other action with respect to a claimed default
hereunder or that any Person has given any notice to the Company or any
Subsidiary or taken any other action with respect to a claimed default or
event of default, an Officers' Certificate describing the same and the
period of existence thereof and specifying what action the Company has
taken or is taking or proposes to take with respect thereto;
(ix) immediately upon becoming aware of the occurrence of (A) any
-
"reportable event" as defined in section 4043(c) of ERISA and the
regulations issued thereunder, (B) any "prohibited transaction" as defined
-
in section 4975 of the Code or as described in section 406 of ERISA in
connection with any Plan or any trust created thereunder or (C) any other
-
event or condition with respect to any Plan which could constitute grounds
for, or result in, the (1) termination of, or the appointment of a trustee
-
to administer, any Plan, (2) imposition of a Lien on any property of the
-
Company, any Subsidiary or ERISA Affiliate or (3) the incurrence of any
-
liability by the Company, any of its Subsidiaries or any ERISA Affiliate
pursuant to Title I or IV of ERISA or the penalty or excise tax provisions
of the Code relating to employee benefit plans, an Officers' Certificate
signed by the chief financial officer of the Company setting forth the
details respecting such event or condition, the action, if any, that the
Company or any Subsidiary or ERISA Affiliate proposes to take with respect
thereto (including a copy of any notice, report or application filed with,
given to or received from the PBGC, the Internal Revenue Service or the
Department of Labor with respect to such event or condition), and any
action, when known, taken or threatened by the PBGC, the Internal Revenue
Service or the Department of Labor with respect to such event or condition;
(x) promptly upon assuming an obligation to contribute to a
"Multiemployer Plan" (within the meaning of section 4001(a)(3) of ERISA),
written notice thereof and of the identity of such plan;
(xi) promptly upon receipt thereof by a Responsible Officer of the
Company or any of its Subsidiaries or any of its Joint Venture Vehicles, a
copy of (A) any written inquiry, notice, claim or complaint to the effect
-
that the Company or any of its Subsidiaries or Joint Venture Vehicles is or
may be liable to any Person as a result of the release by the Company, any
of its Subsidiaries, any of its Joint Venture Vehicles or any other Person
of any Hazardous Material into the environment and (B) any written inquiry
-
regarding or notice or complaint alleging any violation of or liability
under any Environmental Law or any health and safety legislation by the
Company or any of its Subsidiaries or any of its Joint Venture Vehicles,
which release, violation or liability could
<PAGE>
23
reasonably be expected to have, individually or in the aggregate, a
Material Adverse Effect.
(xii) prompt written notice of any action, suit or administrative
proceeding to which the Company or any of its Subsidiaries or any of its
Joint Venture Vehicles is a party which, if adversely determined, would
materially impair the right of the Company or any of its Subsidiaries or
any of is Joint Venture Vehicles to carry on its business substantially as
now conducted, or could reasonably be expected to have a Material Adverse
Effect;
(xiii) promptly upon receipt or transmittal thereof, copies of all
communications received by the Company from, or sent by the Company to, the
Agent pursuant to the terms of the Security Documents; and
(xiv) with reasonable promptness, such other data and information as
such holder of a Note may reasonably request from time to time.
7.3. Inspection of Property. The Company covenants that it will
permit any Person designated by the holder of any Note in writing, at such
holder's expense (except that if a Default or Event of Default shall have
occurred and be continuing at the time of such inspection or examination, the
Company shall reimburse such holder for all such reasonable expenses), to visit
and inspect any of the properties of the Company and its Subsidiaries, to
examine the books of account, records, reports and other papers of the Company
and its Subsidiaries and make copies thereof or extracts therefrom and to
discuss the affairs, finances and accounts of any of such corporations with the
principal officers of such corporations and their independent public
accountants, all at such reasonable times and with reasonable notice and as
often as such holder may reasonably request.
7.4. Covenant to Secure Notes Equally. The Company covenants that,
if it or any Subsidiary or any Joint Venture Vehicle shall create or assume any
Lien upon any of its property, whether now owned or hereafter acquired, other
than any Lien permitted by the provisions of Section 8.1 (unless prior written
consent to the creation or assumption thereof shall have been obtained pursuant
to Section 11.3), it will make or cause to be made effective provision whereby
the Notes will be secured by such Lien equally and ratably with any and all
other Debt thereby secured (and upon the disposition thereof will be entitled,
equally and ratably with such other Debt, to receive the proceeds of any
property or assets subject to such Lien) and, in any case, the Notes shall have
the benefit of an equitable Lien on such property to the full extent that, and
with such priority as, the holders of the Notes may be entitled under applicable
law. Compliance with this Section 7.4 shall not cure any Default or Event of
Default arising under Section 8.1.
<PAGE>
24
7.5. Maintenance of Corporate Existence. The Company will, and will
cause its Subsidiaries and Joint Venture Vehicles to, do all things necessary to
preserve and keep in full force and effect their respective existences,
franchises and material rights except as specifically permitted hereunder;
provided, however, that a Subsidiary may be liquidated or merged with or into
another Subsidiary if the Board of Directors of the Company determines in good
faith that such liquidation or merger is in the best business interest of the
Company and such liquidation or merger is permitted under Sections 8.7(b) and
8.8.
7.6. Maintenance of Properties. The Company will maintain or cause
to be maintained in good repair, working order and condition all properties used
or useful in the business of the Company and its Subsidiaries and Joint Venture
Vehicles and from time to time will make or cause to be made all necessary
renewals, replacements, additions, betterments and improvements thereto.
7.7. Insurance. The Company will, and will cause its Subsidiaries
and its Joint Venture Vehicles to, maintain with financially sound and reputable
insurers having a rating by A.M. Best Company of "A-XII" or better or an
equivalent rating in the local jurisdiction of any Subsidiary or any Joint
Venture Vehicle organized under the laws of a country other than the United
States, at the time of issuance or renewal of such policy, insurance with
respect to its properties and business against such casualties and
contingencies, of such types (including, without limitation, property damage,
public liability, business interruption, larceny, embezzlement, or other
criminal misappropriation insurance) and in such amounts as is customary in the
case of corporations of established reputation engaged in the same or similar
business and similarly situated.
7.8. Taxes. The Company will, and will cause its Subsidiaries to,
pay all taxes, assessments and other governmental charges and levies imposed
upon it or any of its properties or in respect of any of its franchises,
business, income or profits when the same become due and payable as shown on the
returns therefor as prepared in good faith by the Company or such Subsidiary or
Joint Venture Vehicle and all claims (including, without limitation, claims or
demands of materialmen, mechanics, carriers, warehousemen, landlords and other
like Persons) for sums which have become due and payable and which by law have
or might become a Lien upon any of its properties, provided that no such charge
--------
or claim need be paid if being contested in good faith by appropriate
proceedings promptly initiated and diligently conducted and if such reserves or
other appropriate provision, if any, as shall be required by generally accepted
accounting principles shall have been made therefor and if the Company's or any
such Subsidiary's or Joint Venture Vehicle's title to and its right to use its
property are not materially adversely affected thereby. The Company will not
consent to or permit the filing of or be a party to any consolidated income tax
return on behalf of itself or any of its Subsidiaries or
<PAGE>
25
any of its Joint Venture Vehidles with any Person (other than a consolidated
return of the Company and its Subsidiaries) except if the Company is acquired in
compliance with Section 8.7.
7.9. Compliance with Laws, etc. The Company will, and will cause its
Subsidiaries and Joint Venture Vehicles to, comply with the requirements of all
applicable laws, rules, regulations and orders of any governmental authority,
and maintain all licenses, permits, franchises and other governmental
authorizations necessary to the ownership of its properties or the conduct of
its business, the noncompliance with which, or the failure of which to maintain,
could reasonably be expected to have a Material Adverse Effect.
7.10. Environmental Compliance. The Company will, and will cause its
Subsidiaries and Joint Venture Vehicles to, keep any properties it owns or
operates free of contamination from Hazardous Materials and free from other
potentially harmful physical or chemical conditions, except where such Hazardous
Materials are utilized in compliance with applicable law. The Company will, and
will cause its Subsidiaries and Joint Venture Vehicles to, use and operate all
of its facilities and properties in compliance with all Environmental Laws
(including keeping all necessary permits, approvals, certificates and licenses
in effect and remaining in compliance therewith) and handle all Hazardous
Materials in compliance with all applicable Environmental Laws, in each case,
the noncompliance with which could reasonably be expected, individually or in
the aggregate, to have a Material Adverse Effect. Upon providing the holders of
the Notes with copies of all materials described in clause (xi) of Section 7.2,
as promptly as reasonably practicable the Company will, and will cause its
Subsidiaries and Joint Venture Vehicles to, cure any violation (including the
taking of all necessary and appropriate remedial action) or have dismissed with
prejudice any actions or proceedings referred to therein, except where the
failure to do so would not have, individually or in the aggregate, a Material
Adverse Effect.
7.11. Pari Passu Ranking. The Company undertakes that its obligations
under this Note Agreement and the Notes will rank at least pari passu (in right
of payment) with all of its other present and future Debt.
7.12. Payment of Notes. The Company will punctually pay or cause to
be paid the principal, premium, if any, and interest due and payable in respect
of the Notes in accordance with the terms thereof.
7.13. Security Documents; Further Assurances. The Company agrees
that it will not amend, terminate, modify, supplement or grant any waiver with
respect to any Security Document without the written consent to each such
amendment, termination, modification, supplement or waiver of the Required
Holder(s). The Company agrees to perform its obligations under the Security
Documents in accordance with the respective terms thereof. The Company agrees
that it will not increase the fees of the Agent without the prior
<PAGE>
26
written consent of the Required Holder(s). At the Company's expense, the Company
agrees that it shall, or shall cause an agent on its behalf to, file any
continuation statements which are required to be filed and take such other
action as is necessary in any jurisdiction (including, for the avoidance of
doubt, continuation statements under the Uniform Commercial Code of the State of
California) in order to preserve and protect the security interests created
pursuant to the Security Documents and to maintain the validity, effectiveness
and enforceability of the Security Documents. The Company will, and will cause
each of its Subsidiaries and its Joint Venture Vehicles to, at the expense of
the Company and its Subsidiaries and its Joint Venture Vehicles, (i) make,
-
execute, endorse, acknowledge, file and/or deliver to the Agent from time to
time such conveyances, transfer endorsements, powers of attorney, certificates,
and other assurances or instruments as the Agent or the Required Holder(s) may
reasonably require, (ii) maintain each of the Security Documents in full force
--
and effect at all times (including the priority thereof), (iii) preserve and
---
protect the Collateral and protect and enforce its rights and title and the
rights and title of the Noteholders and the Agent to the Collateral, (iv) notify
--
the Noteholders and the Agent of any consent, filing, recording or registration
requirements in the respective jurisdictions of organization for each Subsidiary
and Joint Venture Vehicle whose securities have been pledged pursuant to the
Pledge Agreements and which are required to maintain the validity, effectiveness
and enforceability of the Security Documents and (v) take such further steps
-
relating to the Collateral covered by any Security Document as the Agent or the
Required Holder(s) may reasonably require.
7.14. Foreign Subsidiaries' Security. If following a change in the
relevant sections of the Code or the regulations, rules, rulings, notices or
other official pronouncements issued or promulgated thereunder, counsel for the
Company acceptable to the Required Holder(s) does not within 30 days after a
request from the Required Holder(s) deliver evidence reasonably satisfactory to
the Required Holder(s) that, with respect to any Foreign Subsidiary or any
Foreign Joint Venture Vehicle of the Company which has not already had all of
its stock held by the Company pledged pursuant to a Pledge Agreement, a pledge
of 66% or more of the total combined voting power of all classes of capital
stock of such Foreign Subsidiary or Foreign Joint Venture Vehicle entitled to
vote would cause the undistributed earnings of such Foreign Subsidiary or such
Foreign Joint Venture Vehicle as determined for Federal income tax purposes to
be treated as a deemed dividend to the Company as a result of the pledge of the
capital stock of such Foreign Subsidiary or such Foreign Joint Venture Vehicle
by the Company, then in the case of a failure to deliver the evidence described
above (such event in such circumstances being referred as a "Change in Tax Law
Event"), then that portion of such Foreign Subsidiary's or such Foreign Joint
Venture Vehicle's outstanding capital stock or similar equity interest held by
the Company not theretofore pledged pursuant to a Pledge Agreement shall be
pledged by the Company to the Agent pursuant to a Pledge Agreement (or another
pledge agreement in substantially similar
<PAGE>
27
form, if needed). All documents delivered pursuant to this Section 7.14 shall be
in form and substance reasonably satisfactory to the Required Holder(s).
7.15. Pledge of Shares of New Subsidiaries. If the Company organizes
or acquires any new Subsidiaries or Joint Venture Vehicles, the Company will
pledge all classes of capital stock held by it of such Subsidiaries or Joint
Venture Vehicles to secure the obligations of the Company under the Notes and
this Agreement pursuant to a pledge agreement in form and substance satisfactory
to the Required Holders; provided, that until the occurrence of a Change in Tax
Law Event, the Company shall not be obligated to pledge in excess of 66% of the
total combined voting power of any such Subsidiary or Joint Venture Vehicles,
and provided, further, that the capital shares of a newly acquired Subsidiary or
Joint Venture Vehicle, other than any Subsidiary or Joint Venture Vehicle
organized under the laws of South Africa, may be subject to existing Liens at
the time of acquisition as may be permitted pursuant to the terms of this
Agreement.
7.16. Notification of Registration. The Company agrees to notify the
Agent and the Noteholders in the event that it registers as a foreign
corporation in Australia.
7.17. Sub-licenses or Assignments and Consents. The Company agrees
(x) to cause PPV to sub-license or assign the Technology License Agreement to
each of the Company's Subsidiaries and Joint Venture Vehicles and (y) to obtain
the consent of the Singapore Board of Film Censors in connection with the
transfer and pledge of the shares of PPV Singapore PTE Ltd, in each case, by
December 31, 1995.
7.18. Removal of Legends. The Company agrees that if either (i) it
"shows profit" or (ii) it lists its securities on an approved exchange, in each
case, as such terms are defined and interpreted by the Department of
Corporations of the State of California pursuant to Section 260.141.12 of the
Rules of the Commissioner of Corporations, the Company promptly shall notify the
Securityholders of such event, and the Company shall, at its expense, file an
application with the Commissioner requesting removal of the legend condition and
upon approval of such application execute and deliver new Securities in exchange
for the existing Securities held by such Securityholders, which new Securities
shall not contain the legend regarding the restrictions on transfer imposed by
the California Department of Corporations.
SECTION 8. NEGATIVE COVENANTS. The Company covenants that from and
after the date of this Agreement through the closing and thereafter for the
benefit of the holders of the Notes so long as any Note remains outstanding:
8.1. Liens. Unless the obligations of the Company under the Note
Agreement and the Notes are secured equally and ratably with such Liens
<PAGE>
28
in form and substance satisfactory to the holders of the Notes, so long as any
of the Notes are outstanding, the Company will not, and will not permit any
Subsidiary or Joint Venture Vehicle to, create, incur, assume or suffer to exist
any Lien upon or with respect to any of its properties, whether now owned or
hereafter acquired, including without limitation, the Technology License
Agreement, except:
(a) Liens existing as of the date of issuance of the Notes and
reflected in Schedule 8.1; provided that such Liens shall not at any time
hereafter encumber any assets or secure Debt other than that which by the
terms applicable thereto, at the date hereof, such Liens encumber, secure
or are intended to secure or encumber;
(b) any attachment or judgment Lien, unless the judgment it secures
shall not, within 60 days after the entry thereof, have been bonded,
discharged or execution thereof stayed pending appeal, or shall not have
been discharged within 60 days after the expiration of any such stay and
for which adequate reserves have been established in accordance with
generally accepted accounting principles;
(c) Liens incidental to the conduct of business or the ownership of
properties and assets (including Liens in connection with worker's
compensation, unemployment insurance and other like laws, warehousemen's
and attorney's liens and statutory landlords' liens) and Liens to secure
the performance of bids, tenders or trade contracts, or to secure statutory
obligations, surety or appeal bonds or other Liens of like general nature
incurred in the ordinary course of business and not in connection with the
borrowing of money; provided that, aggregate obligations secured thereby in
--------
excess of $500,000 shall not be more than 30 days overdue unless such
obligations are being contested in good faith by appropriate actions or
proceedings and appropriate book reserves with respect thereto have been
established in accordance with generally accepted accounting principles;
(d) Liens on real or personal property acquired (whether directly or
through the acquisition of stock of a corporation owning such property) or
constructed after the date of closing ("After-Acquired Property"), or Liens
on improvements to property after the date of closing, which Liens are
given to secure the payment of the purchase price or cost incurred in
connection with such acquisition or construction of After-Acquired Property
or such improvements including, without limitation, (x) a security interest
granted to or title retention reserved by the seller of the After-Acquired
Property to secure the purchase price owing to the seller or (y) a security
interest the proceeds of which were used to pay for the purchase,
construction or improvement of such property; provided that (i) such Liens
-------- -
shall only be permitted (pursuant to this clause (d)) to the extent to
which they
<PAGE>
29
shall attach to the assets acquired, constructed or improved, (ii) the
--
Liens shall have been created or incurred not later than 270 days after the
date of acquisition or the date of completion of the construction or
improvements, as the case may be, and (iii) the amount secured by such
---
Liens does not exceed the purchase price of the property so acquired or the
cost of the construction or improvements;
(e) any Lien existing on any property of any corporation at the time
such corporation is merged or consolidated with or into the Company or
becomes a Subsidiary or Joint Venture Vehicle of the Company, provided that
--------
(i) no such Lien shall extend to or cover any property other than property
-
initially subject thereto and improvements thereto, (ii) the incurrence of
--
the Debt secured by such Lien does not violate any other provisions herein,
(iii) such Lien and the Debt it secures are not incurred in connection with
---
or in contemplation of such merger, consolidation or sale and (iv) such
--
Liens shall be permitted by this clause (e) only for the period ending 360
days after such event;
(f) any Lien arising under the Security Documents;
(g) Liens for taxes, assessments or other governmental charges or
levies not yet due or payable or which are being contested in good faith by
appropriate proceedings, provided that appropriate book reserves with
--------
respect thereto have been established in accordance with generally accepted
accounting principles;
(h) the extension, renewal or replacement of any Lien permitted by
paragraphs (a) through (e) in respect of the same property theretofore
subject thereto, without increase of the principal amount of the Debt
secured thereby, provided that no such extension, renewal or replacement of
--------
any Lien permitted by paragraph (e) shall extend the time period set forth
in clause (iv) therein;
(i) sub-licenses or assignments of the rights of PPV under the
Technology License Agreement to any Subsidiary or Joint Venture Vehicle;
and
(j) notwithstanding the restrictions provided herein, the Company
and any one or more Subsidiaries may create, issue, incur or assume Liens
otherwise prohibited by this Section 8.1, provided that neither
(A) the aggregate amount of all Debt or other obligations secured by
such Liens not otherwise permitted by this Section 8.1 nor
(B) the total book value of the assets subject to such Liens
NOTE AGREEMENT
<PAGE>
30
shall exceed the greater of (i) 15% of Total Consolidated Assets and (ii)
- --
(x) at any time on or before June 30, 1996, $12,500,000, and (y) at any
time thereafter, $20,000,000.
A Lien equally and ratably securing the obligations of the Company under
the Note Agreement and the other Note Documents shall not be considered
acceptable to the Required Holder(s) in accordance with this Section 8.1 unless
either (x) the Company shall provide the holders of Notes with opinions of
counsel (reasonably satisfactory to the Required Holder(s)) in all relevant
jurisdictions, which opinions shall be in form and substance satisfactory to the
Required Holder(s), as to such matters as the Required Holder(s) shall
reasonably request, it being understood, that the opinions relating to the
enforceability of any such Lien for the benefit of the holders of Notes shall
not be subject to any exception relating to insolvency or bankruptcy which would
not have been necessary to take had the obligations of the Company been
similarly secured by such a Lien on the date on which the Notes were issued or
(y) the holders of Notes are made parties to, or beneficiaries under, an
intercreditor agreement with the new secured lenders pursuant to which the
obligations of the Company under this Agreement and the other Note Documents are
effectively secured by the security received by the new lenders in form and
substance reasonably satisfactory to Required Holder(s).
The Company shall not impose any Lien on any of the Collateral (other than
as allowed pursuant to clause (f) of this Section 8.1) unless the holders of
Notes are made parties to, or beneficiaries under, an intercreditor agreement
with the Persons benefiting from such Lien (in form and substance reasonably
satisfactory to Required Holder(s)), pursuant to which the obligations of the
Company under this Agreement and the Notes shall in effect be secured equally
and ratably with the Lien benefiting such other Persons.
8.2. Restricted Payments. The Company will not, and will not permit
any Subsidiary or Joint Venture Vehicle to, make any Restricted Payment, except
that, so long as no Default or Event of Default then exists or would result
therefrom,
(a) the Company may redeem or purchase shares of its capital stock
(or options to purchase its capital stock) held by former employees of the
Company or any of its Subsidiaries following the termination of their
employment, provided that the aggregate amount of all such redemptions or
--------
purchases does not exceed 5% of the total outstanding capital stock of the
Company in any fiscal year; and
(b) the Company or any Subsidiary shall be permitted to purchase
shares of the capital stock of any other Subsidiary or joint venture
partner, provided that the transaction is pursuant to the reasonable
requirements or objectives of the Company's or such Subsidiary's business
and is upon fair and reasonable terms on an arm's length basis.
NOTE AGREEMENT
<PAGE>
31
8.3. Adjusted Consolidated Net Worth. The Company will not permit
Adjusted Consolidated Net Worth at any time to be less than the sum of (x)
$10,000,000 and (y) 50% of the aggregate net proceeds, on a cumulative basis, of
any equity offerings concluded by the Company or by any Subsidiary of the
Company at any time after December 31, 1995.
8.4. Total Debt to Total Adjusted Capitalization. The Company will
not permit Total Debt at any time to exceed 80% of Total Adjusted
Capitalization.
8.5. Total Debt to Historical EBITDA. The Company will not permit
the ratio of Total Debt to Historical EBITDA (x) at December 31, 1996, to exceed
5:1, (y) at March 31, June 30, September 30 and December 31, 1997, to exceed 4:1
and (z) at the end of any calendar quarter following December 31, 1997 to and
until the maturity of the Notes, to exceed 3.5:1.
8.6. Historical EBITDA. (a) The Company will not permit Historical
EBITDA as of the last day of each period set forth below to be less than 50% of
the Projected EBITDA set forth opposite such period below:
<TABLE>
<CAPTION>
Period Projected EBITDA
------ ----------------
($000)
<S> <C>
September 30,1996 7,166
December 31, 1996 12,171
March 31, 1997 17,849
June 30, 1997 23,686
September 30,1997 29,357
December 31, 1997 34,948
March 31, 1998 40,676
June 30, 1998 46,252
September 30, 1998 51,664
December 31, 1998 56,889
March 31, 1999 60,665
June 30, 1999 64,193
September 30, 1999 67,474
December 31, 1999 70,444
March 31, 2000 73,013
June 30, 2000 75,399
</TABLE>
<PAGE>
32
(b) If at the time of any determination Historical EBITDA is less than 80%
of Projected EBITDA relevant to the time of determination, then until Historical
EBITDA is determined to be equal to or greater than 80% of Projected EBITDA
relevant to the time of determination, the interest rate on the Notes shall
increase to 11.5%, it being understood that such increase in the interest rate
shall not cure any default arising under clause (a) of this Section 8.6 as a
consequence of Historical EBITDA being less than an amount equal to 50% of
Projected EBITDA.
(c) For purposes of determining whether the Company is in compliance with
its obligations under this Section 8.6, for the corresponding period set forth
above, Historical EBITDA shall be determined (x) for the period ending on
September 30, 1996, on an adjusted basis including only the three quarters ended
March 31, June 30 and September 30, 1996 and (y) beginning with the period
ending on December 31, 1996, on a quarterly basis each of March 31, June 30,
September 30 and December 31 of each year with respect to the quarter then ended
and the immediately preceding three consecutive fiscal quarters.
8.7. Merger, Consolidation, etc. (a) The Company covenants that it
will not merge or consolidate with any other Person, or sell, lease or otherwise
dispose of all or substantially all its assets to any other Person, unless (A)
-
no Default or Event of Default has occurred and is continuing or would exist
immediately after such merger or consolidation or sale of assets and (B) in the
-
case of a merger or consolidation, the Company is the continuing or surviving
corporation or, if the Company is not the continuing or surviving corporation or
in the case of a transfer of assets, (i) the surviving corporation or transferee
-
is a corporation organized and existing under the laws of the United States of
America or a state thereof or the District of Columbia, (ii) such corporation
--
shall have executed and delivered to each holder of any Securities its
assumption in writing (in form and substance reasonably satisfactory to the
Required Securities Holder(s)) of the due and punctual payment of the principal,
premium, if any, and interest payable with respect to the Notes and the
performance and observance of every other covenant and condition of this
Agreement and the other Note Documents, (iii) such corporation shall have caused
---
to be delivered to each holder of any Securities an opinion of independent
counsel, in form and substance reasonably satisfactory to the Required
Securities Holder(s), to the effect that all agreements or instruments effecting
such assumption have been duly authorized, executed and delivered by such
surviving, continuing or resulting corporation or such transferee and constitute
a legal, valid and binding obligation against such corporation enforceable in
accordance with their terms and (iv) immediately after giving effect to such
--
transaction (and such assumption) such corporation
<PAGE>
33
could incur at least $1 of additional Total Debt without a Default or an Event
of Default occurring hereunder.
(b) Except as allowed pursuant to Section 8.8, the Company will not permit
any Subsidiary or any Joint Venture Vehicle to, directly or indirectly,
consolidate with or merge into any other Person or permit any other Person to
consolidate with or merge into it, except that any Subsidiary or any Joint
Venture Vehicle may consolidate with or merge into the Company or a Subsidiary
if the Company or the Subsidiary or the Joint Venture Vehicle of which the
Company owns the higher percentage interest, as the case may be, shall be the
surviving corporation and if, immediately after giving effect to such
transaction, no Default or Event of Default shall have occurred and be
continuing.
8.8. Sale of Assets. The Company will not and will not permit any
Subsidiary or Joint Venture Vehicle to (whether by a single transaction or a
number of related or unrelated transactions and whether at one time or over a
period of time) sell, transfer, lease out, lend or otherwise dispose of (whether
outright, by a sale-and-repurchase or sale-and-leaseback arrangement, or
otherwise and whether to another member of the Group or any other Person) (each
a "Disposal") all or any part of its assets (other than a sale of substantially
all of the assets of the Company permitted pursuant to Section 8.7) if the net
book value of such assets, when aggregated with all other assets (other than
inventory sold in the normal course of business) disposed of by any member of
the Group or Joint Venture Vehicle (A) within the same fiscal year, would exceed
-
10% of the value of the Total Consolidated Assets of the Group (as reported in
the Company's most recent published quarterly consolidated financial statements)
or (B) since the Notes have been outstanding, would exceed 25% of Total
-
Consolidated Assets of the Group (as reported in the Company's most recent
published quarterly consolidated accounts), unless (i) both immediately before
-
and after giving effect thereto, no Default or Event of Default has occurred and
is then continuing and (ii) such Disposal is made for cash and within 180 days
--
of such a Disposal such cash proceeds are used either (x) to purchase another
-
asset or other assets of a similar value in one or more of the lines of business
of the Company (as determined by the Board of Directors) or (y) to cause the
-
Company to repay an amount of indebtedness of the Company (other than
indebtedness subordinated to the Notes) equal to the amount of such cash
proceeds in excess of the foregoing 10% or 25% of the Total Consolidated Assets
of the Group. The following Disposals shall not be taken into account under
this Section:
(i) Disposals in the ordinary course of business;
(ii) Disposals of individual assets having a book value of less than
$1,000,000;
<PAGE>
34
(iii) a Disposal of assets by one Subsidiary or Joint Venture Vehicle
of the Company to another Subsidiary of the Company or to the Company;
(iv) the exchange of assets for other assets of a similar nature and
value;
(v) Disposals consisting of the assignment, licensing or sub-
licensing of intellectual property rights by the Company, any Subsidiary or
Joint Venture Vehicle to any Subsidiary or Joint Venture Vehicle; and
(vi) any Disposal which the Required Holder(s) shall have agreed in
writing shall not be taken into account.
A merger or consolidation of a Subsidiary into any Person (other than a
Subsidiary) shall be treated for purposes of this Section 8.8 as a Disposal of
all the assets of such Subsidiary. A merger or consolidation of a Subsidiary
into another Subsidiary, where the percentage shareholder interest of the
Company in the surviving or resulting Subsidiary is less than the percentage
interest of the Company in either of the merging or consolidating Subsidiaries,
shall be treated for purposes of this Section 8.8 as a disposition of assets
equal to the excess, if any, of (A) the sum of the separate percentage interests
of the Company's ownership of each of the merging or consolidating Subsidiaries
multiplied by the respective total assets of each Subsidiary over (B) the
percentage interest of the Company's ownership of the surviving or resulting
Subsidiary multiplied by the total assets of the surviving or resulting
Subsidiary.
8.9. Cumulative Installed Rooms. (a) The Company will not permit
Cumulative Installed Rooms as of the last day of each period set forth below to
be less than 50% of Projected Cumulative Installed Rooms set forth opposite
such period below:
Period Cumulative Installed Rooms
------ --------------------------
September 30, 1995 37,970
December 31, 1995 51,284
March 31, 1996 67,284
June 30, 1996 84,284
September 30, 1996 102,284
December 31, 1996 121,284
March 31, 1997 138,284
June 30, 1997 154,284
September 30, 1997 169,284
December 31, 1997 183,284
March 31, 1998 197,284
June 30, 1998 210,284
September 30, 1998 222,284
December 31, 1998 234,284
March 31, 1999 245,284
June 30, 1999 255,284
September 30, 1999 264,284
December 31, 1999 272,284
March 31, 2000 280,284
June 30, 2000 288,284
<PAGE>
35
(b) If at the time of any determination Cumulative Installed Rooms is less
than 80% of Projected Cumulative Installed Rooms relevant to the time of
determination, then until Cumulative Installed Rooms is determined to be equal
to or greater than 80% of Projected Cumulative Installed Rooms relevant to the
time of determination, the interest rate on the Notes shall increase to 11.5%,
it being understood that such increase in the interest rate shall not cure any
default arising under clause (a) of this Section 8.9 as a consequence of
Cumulative Installed Rooms being less than an amount equal to 50% of Projected
Cumulative Installed Rooms.
(c) For purposes of determining whether the Company is in compliance with
its obligations under this Section 8.9, for the corresponding period set forth
above Cumulative Installed Rooms shall be determined on a quarterly basis for
the period ended March 31, June 30, September 30 and December 31 of each year.
8.10. Offering of Adult Titles. The Company will not, at any time,
have Adult Titles represent more than 30% of all video entertainment titles
offered by the Group and its Joint Venture Vehicles; provided, that the Company
will not, and will not permit any member of the Group or any Joint Venture
Vehicle, at any time, to offer films which are illegal to exhibit in the United
States. The Company covenants that it will, and will cause each of its
Subsidiaries and Joint Venture Vehicles to, include Lock-out Functions in each
video system it installs.
<PAGE>
36
8.11. Amendments to the Technology License Agreement. So long as the
Collateral Assignment Agreement remains in full force and effect, the Company
will not amend, modify or supplement in any material respect or terminate the
Technology License Agreement without the prior written consent of the Required
Holder(s); provided, however, if Company delivers a written notice to the
--------
Noteholders which states that (i) the Company desires to amend, modify or
supplement the Technology License Agreement pursuant to this Section 8.11 and
(ii) the Noteholders must respond to such notice within four Business Days from
the date of receipt or will be deemed to have consented to the request, and the
Required Holder(s) fail to respond to such notice within four Business Days,
such failure to respond shall be deemed to be a consent to any such amendment,
modification or supplement.
8.12. Transactions with Affiliates. The Company will not, and will
not permit any Subsidiary or Joint Venture Vehicle to, directly or indirectly,
enter into any transaction (including, without limitation, the purchase, sale or
exchange of assets or the rendering of services) with any Affiliate (other than
a Wholly Owned Subsidiary), except in the ordinary course of and pursuant to the
reasonable requirements of the Company's or such Subsidiary's business and upon
fair and reasonable terms that are no less favorable to the Company or such
Subsidiary, as the case may be, than those which would be obtained in an arm's
length transaction at the time with a Person not an Affiliate.
8.13. Additional Pledged Securities; Restrictions on PPV.
(a) Until the following conditions in this Section 8.13(a) have been
satisfied, the covenants in Section 8.13(b) shall be binding upon the Company:
(i) the Company shall have provided evidence satisfactory to the
Noteholders that the capital stock or similar equity interests of each of
Pacific Pay Video (Thailand) Limited and Pacific Pay Video (Taiwan) Inc.
have been transferred from PPV to the Company and that the Company is the
registered holder thereof;
(ii) the Company shall have duly authorized, executed and delivered
one or more Pledge Agreements pursuant to which the Company shall have
pledged the capital stock or similar equity interests of each of Pacific
Pay Video (Thailand) Limited and Pacific Pay Video (Taiwan) Inc., together
with all proceeds thereof to secure the obligations of the Company
hereunder and under the Notes;
(iii) each Noteholder shall have received a certified copy of such
Pledge Agreement(s) and such Pledge Agreement(s) shall be in full force and
effect and shall constitute valid, binding and enforceable obligations in
accordance with their terms and each Noteholder shall have received an
opinion (in form and substance satisfactory to Required
<PAGE>
37
Holder(s)) from independent counsel reasonably acceptable to Required
Holder(s) to such effect; and
(iv) the Company shall cause to be delivered to the Agent all the
certificated Pledged Securities, if any, referred to in any such Pledge
Agreement, together with executed and undated stock powers.
(b) Until the conditions in Section 8.13(a) have been satisfied in full,
the Company will not permit PPV to
(i) transact any business other than as incidental to the holding of
the Technology License Agreement and the holding of the capital stock or
similar equity interests of each of Pacific Pay Video (Thailand) Limited
and Pacific Pay Video (Taiwan) Inc.;
(ii) incur any Debt in an aggregate amount in excess of $100,000
other than Debt due to the Company or to a wholly-owned Subsidiary of the
Company;
(iii) create, incur, assume or suffer to exist any Lien (including
Liens otherwise permitted by Section 8.1) upon or with respect to any of
the capital stock or similar equity interests of either of Pacific Pay
Video (Thailand) Limited or Pacific Pay Video (Taiwan) Inc.;
(iv) transfer any of the capital stock or similar equity interests of
either of Pacific Pay Video (Thailand) Limited or Pacific Pay Video
(Taiwan) Inc. except to the Company in accordance with Section 8.13(a);
(v) liquidate, wind-up or otherwise terminate its corporate
existence; or
(v) merge or consolidate with any Person (including any merger or
consolidation which would otherwise be permitted in accordance with Section
8.7).
SECTION 9. EVENTS OF DEFAULT AND ENFORCEMENT.
9.1. Events of Default; Acceleration. If any of the following events
shall occur and be continuing for any reason whatsoever (and whether such
occurrence shall be voluntary or involuntary or come about or be effected by
operation of law or otherwise):
(i) the Company defaults in the payment of any principal of or
premium payable with respect to any Note when the same shall
<PAGE>
38
become due, either by the terms thereof or otherwise as herein provided; or
(ii) the Company defaults in the payment of any interest on any Note
for more than ten days after the date due; or
(iii) the Company or any Subsidiary or Joint Venture Vehicle shall
fail to make any payment when due on any indebtedness for borrowed money,
aggregating $5,000,000 (or the equivalent thereof in any other currency) or
more in aggregate principal amount; or any event shall occur (other than
the mere passage of time) or any condition shall exist in respect of any
such indebtedness for borrowed money, or under any agreement securing or
relating to such indebtedness for borrowed money, the effect of which is to
require (or permit any holder of such indebtedness or a trustee to require)
such indebtedness, or a portion thereof, to be paid prior to its stated
maturity or prior to its regularly scheduled date of payment; or
(iv) any representation, warranty or other statement made by the
Company herein or by or on behalf of the Company in any instrument
furnished in compliance with or in reference to this Agreement shall be
false or misleading in any material respect or shall omit or fail to state
information, which omission or failure makes such representation, warranty
or other statement false or misleading in any material respect; or
(v) the Company fails to perform or observe any agreement contained
in Section 8.1, 8.3, 8.4, 8.5, 8.6, 8.9, 8.10 or 8.11 and such failure
shall not be remedied within 15 days after any Responsible Officer obtains
actual knowledge thereof; or
(vi) the Company fails to perform or observe any agreement contained
in Section 8.2, 8.7 or 8.8; or
(vii) the Company fails to perform or observe any other agreement,
term or condition contained herein or in any of the other Note Documents
and such failure shall not be remedied within 60 days after any Responsible
Officer obtains actual knowledge thereof; or
(viii) the Company or any of its Subsidiaries shall (A) generally not
-
be paying its debts as they become due, (B) file, or consent by answer or
-
otherwise to the filing against it of, a petition for relief or
reorganization or arrangement or any other petition in bankruptcy, for
liquidation or to take advantage of any bankruptcy or insolvency law of any
jurisdiction, (C) make an assignment for the benefit of its creditors, (D)
- -
consent to the appointment of a custodian, receiver, trustee or other
officer with similar powers with respect to it
<PAGE>
39
or with respect to any substantial part of its property, (E) be adjudicated
-
insolvent or (F) take corporate action for the purpose of any of the
-
foregoing, unless the Required Holders have consented to such event in
writing prior to the occurrence thereof; or
(ix) if a court or governmental authority of competent jurisdiction
shall enter an order appointing, without consent by the Company or any of
its Subsidiaries, a custodian, receiver, trustee or other officer with
similar powers with respect to it or with respect to a substantial part of
its property, assets or revenues, or if an order for relief shall be
entered in any case or proceeding for liquidation or reorganization or
otherwise to take advantage of any bankruptcy or insolvency law of any
jurisdiction, or ordering the dissolution, winding-up or liquidation of the
Company or any of its Subsidiaries, or if any petition for any such relief
shall be filed against the Company or any of its Subsidiaries and such
petition shall not be dismissed within 30 days, unless the Required Holders
have consented to such event in writing prior to the occurrence thereof; or
(x) a final judgment or judgments for the payment of money in an
aggregate amount in excess of $5,000,000 (excluding portions covered by
insurance, provided that the insurer has admitted in writing its
responsibility for any such liability) is or are outstanding against one or
more of the Company and its Subsidiaries and/or, within 60 days after entry
thereof, any one of such judgments is not discharged, bonded or execution
thereof stayed pending appeal, or within 60 days after the expiration of
any such stay, such judgment is not discharged; or
(xi) any Security Document or any provision thereof shall cease to
be in full force and effect, or shall cease to give the Agent the Liens,
rights, powers and privileges purported to be created thereby, or the
Company or any Subsidiary or any Joint Venture Vehicle shall default in the
due performance or observance of any term, covenant or agreement on its
part to be performed or observed pursuant to the Security Documents and
such default shall not be remedied within 15 days after a Responsible
Officer obtains actual knowledge thereof;
then (A) if such event is an Event of Default specified in clause (i) or (ii) of
-
this Section 9.1, the holder of any Note may at its option, by notice in writing
to the Company, declare such Note to be, and such Note shall thereupon be and
become, immediately due and payable at par together with interest accrued
thereon and premium, if any, payable with respect thereto pursuant to Section
6.1, without presentment, demand, protest or other notice of any kind, all of
which are hereby waived by the Company, (B) if such event is an Event of Default
-
specified in clause (viii) or (ix) of this Section 9.1 with respect to the
Company, all of the Notes at the time outstanding shall automatically become
immediately due and payable at par together with interest accrued thereon, and
<PAGE>
40
premium, if any, payable with respect thereto pursuant to Section 6.1, without
presentment, demand, protest or notice of any kind, all of which are hereby
waived by the Company, and (C) if such event is not an Event of Default
-
specified in clause (viii) or (ix) of this Section 9.1 with respect to the
Company, the Required Holder(s) of the Notes then outstanding may at its or
their option, by notice in writing to the Company, declare all of the Notes to
be, and all of the Notes shall thereupon be and become, immediately due and
payable at par together with interest accrued thereon and together with any
premium payable pursuant to Section 6.1 with respect to each Note, without
presentment, demand, protest or other notice of any kind, all of which are
hereby waived by the Company.
9.2. Rescission of Acceleration. At any time after any or all of the
Notes shall have been declared immediately due and payable pursuant to Section
9.1, the Required Holder(s) may, by notice in writing to the Company, rescind
and annul such declaration and its consequences if (i) the Company shall have
-
paid all overdue interest on the Notes, the principal of and premium, if any,
payable with respect to any Notes which have become due otherwise than by reason
of such declaration, and interest on such overdue interest to the extent
permitted by law and overdue principal in an amount at the rate specified in the
Notes, (ii) the Company shall not have paid any amounts which have become due
--
solely by reason of such declaration, (iii) all Events of Default and Defaults,
---
other than non-payment of amounts which have become due solely by reason of such
declaration, shall have been cured or waived pursuant to Section 11.3 and (iv)
--
no judgment or decree shall have been entered for the payment of any amounts due
pursuant to the Notes or this Agreement. No such rescission or annulment shall
extend to or affect any subsequent Event of Default or Default or impair any
right arising therefrom.
9.3. Notice of Acceleration or Rescission. Whenever any Note shall
be declared immediately due and payable pursuant to Section 9.1 or any such
declaration shall be rescinded and annulled pursuant to Section 9.2, the Company
shall forthwith give written notice thereof to the holder of each Note at the
time outstanding.
9.4. Other Remedies. If any Event of Default shall occur and be
continuing, the holder of any Note may proceed to protect and enforce its rights
under this Agreement and such Note by exercising such remedies as are available
to such holder in respect thereof under applicable law, either by suit in equity
or by action at law, or both, whether for specific performance of any covenant
or other agreement contained in this Agreement or any other Note Document or in
aid of the exercise of any power granted in this Agreement or the other Note
Documents; provided, that in the case of the Security Documents, no holder of
--------
any Note may proceed to protect or enforce its rights under this Agreement and
such Note by exercising remedies as are available to such holder in respect
thereof under applicable law through the Agent without the consent of the
Required Holder(s). No course of dealing and no delay on
<PAGE>
41
the part of any holder of any Note in exercising any right, power or remedy
shall operate as a waiver thereof or otherwise prejudice such holder's rights,
powers or remedies. No remedy conferred in this Agreement or any Security
Document upon the holder of any Securities or on the Agent, as the case may be,
is intended to be exclusive of any other remedy, and each and every such remedy
shall be cumulative and shall be in addition to every other remedy conferred
herein or now or hereafter existing at law or in equity or by statute or
otherwise.
10. DEFINITIONS AND INTERPRETATION, ETC. For the purpose of this
Agreement, the terms defined in the introductory sentence and in Sections 1 and
2 shall have the respective meanings specified therein, and the following terms
shall have the meanings specified with respect thereto below:
10.1. Defined Terms.
"Adult Titles" shall mean any motion pictures not rated by the Motion
Picture Association of America in the United States (or an equivalent rating
accorded by a similar body in any other jurisdiction).
"Adjusted Consolidated Net Worth" shall mean the sum of (i) minority
interests, plus (ii) the par value (or value stated on the books of the Company)
of the capital stock (but excluding treasury stock and capital stock subscribed
and unissued) of the Company and its Subsidiaries, plus (iii) the amount of the
additional paid-in capital, retained earnings and any cumulative translation
adjustment of the Company and its Subsidiaries, in each case determined as of
such date in accordance with generally accepted accounting principles with
respect to the Company and its Subsidiaries on a consolidated basis.
"Affiliate" shall mean, at any time, (a) with respect to any Person,
any other Person that at such time directly or indirectly through one or more
intermediaries Controls, or is Controlled by, or is under common Control with,
such first Person, and (b) any Person (other than a Noteholder) beneficially
owning or holding, directly or indirectly, 5% or more of any class of voting or
equity interests of the Company or any Subsidiary or any corporation of which
the Company and its Subsidiaries beneficially own or hold, in the aggregate,
directly or indirectly, 5% or more of any class of voting or equity interests.
As used in this definition, "Control" means the possession, directly or
indirectly, of the power to direct or cause the direction of the management and
policies of a Person, whether through the ownership of voting securities, by
contract or otherwise. Unless the context otherwise clearly requires, any
reference to an "Affiliate" is a reference to an Affiliate of the Company.
<PAGE>
42
"Appointment Agreement" shall mean the agreement substantially in the
form of Exhibit F hereto pursuant to which the Agent is appointed to act as
security trustee for the benefit of the Noteholders.
"Business Day" shall mean any day other than a Saturday, a Sunday or a
day on which commercial banks in New York or California are required or
authorized to be closed.
"Change in Tax Law Event" shall have the meaning provided in Section
7.14.
"Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time, and the regulations promulgated and rulings issued thereunder.
Section references to the Code are to the Code, as in effect at the date of this
Agreement and any subsequent provisions of the Code, amendatory thereof,
supplemental thereto or substituted therefor.
"Collateral" shall mean the Pledged Securities and the interests of
PPV under the Technology License Agreement assigned in favor of the Agent on
behalf of the Noteholders pursuant to the Collateral Assignment Agreement.
"Collateral Assignment Agreement" shall have the meaning provided in
Section 3.9.
"Competitor" means any entity which derives or plans to derive a
material portion of its revenues, directly or indirectly, from the provision to
the hotel industry of television entertainment, information or transaction
processing services.
"Confidential Information" shall mean information delivered to the
Purchasers by or on behalf of the Company or any Subsidiary in connection with
the transactions contemplated by or otherwise pursuant to this Agreement that is
proprietary in nature and that was clearly marked or labeled or otherwise
adequately identified when received by such Purchasers as being confidential
information of the Company or such Subsidiary, provided, that such term does not
--------
include information that (a) was publicly known or otherwise known to such
Purchasers prior to the time of such disclosure, (b) subsequently becomes
publicly known through no act or omission by such Purchasers or any person
acting on its behalf, (c) otherwise becomes known to such Purchasers other than
through disclosure by the Company or any Subsidiary or (d) constitutes financial
statements delivered to such Purchasers under Section 7.2 that are otherwise
publicly available.
"Cumulative Installed Rooms" shall mean the aggregate number of rooms
the Company, its Subsidiaries and Joint Venture Vehicles have under contract to
provide an in-room, on-demand, pay-per-view entertainment and
NOTE AGREEMENT
<PAGE>
43
information system in hotels and in which rooms such a system has been
installed, is fully operational and is capable of generating income; provided,
--------
however, that "Cumulative Installed Rooms" shall not include rooms installed
- -------
with systems acquired as a result of a merger or consolidation with, or
acquisition of, any single competitor of the Company if the number of rooms
installed with systems so acquired in any such transaction exceeds 10,000.
"Current Debt" shall mean, with respect to any Person, all liabilities
for borrowed money and all liabilities secured by any Lien existing on property
owned by such Person (whether or not those liabilities have been assumed) which,
in either case, are payable on demand or within one year from the date of the
creation thereof, plus the aggregate amount of Guarantees by such Person of all
such liabilities of other Persons except (i) any liabilities which are renewable
-
or extendible at the option of the debtor to a date more than one year from the
date of creation thereof and (ii) any liabilities which, although payable within
--
one year, constitute principal payments on indebtedness expected to mature more
than one year from the date of its creation.
"Debt" shall mean Current Debt and Funded Debt.
"Dollar or $" shall each mean the lawful currency of the United States
of America.
"Environmental Laws" shall mean any and all statutes, laws,
regulations, ordinances, rules, judgments, orders, decrees, permits,
concessions, grants, franchises, licenses, agreements or governmental
restrictions relating to pollution and the protection of the environment or the
release of any materials into the environment, including but not limited to
those related to hazardous substances or wastes, air emissions and discharges to
waste or public systems.
"ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended from time to time, and the regulations promulgated and rulings
issued thereunder. Section references to ERISA are to ERISA, as in effect at the
date of this Agreement and any subsequent provisions of ERISA, amendatory
thereof, supplemental thereto or substituted therefor.
"ERISA Affiliate" shall mean each person (as defined in Section 3(9)
of ERISA) which together with the Company or a Subsidiary of the Company would
be deemed to be a "single employer" (i) within the meaning of Section
414(b),(c), (m) or (o) of the Code or (ii) as a result of the Company or a
Subsidiary of the Company being or having been a general partner of such person.
"Event of Default" shall mean any of the events specified in Section
9, provided that there has been satisfied any requirement therein in connection
with such event for the giving of notice, or the lapse of time, or the
NOTE AGREEMENT
<PAGE>
44
happening of any further condition, event or act, and "Default" shall mean any
of such events, whether or not any such requirement has been satisfied.
"Exchange Act" shall mean the United States Securities Exchange Act of
1934, as amended.
"Financial Institution" shall mean an institutional investor (other
than an individual) which is an "accredited investor" as defined in Regulation D
of the Securities Act.
"Financing Lease" shall mean any lease which is shown or is required
to be shown in accordance with generally accepted accounting principles as a
liability on the balance sheet of the lessee thereunder.
"First Closing Date" shall have the meaning specified in Section 2.1.
"Foreign Pension Plan" shall mean any plan, fund (including without
limitation, any superannuation fund) or other similar program established or
maintained outside the United States of America by the Company or any one or
more of its Subsidiaries or its Joint Venture Vehicles primarily for the benefit
of employees of the Company or such Subsidiaries or such Joint Venture Vehicles
residing outside the United States of America, which plan, fund or other similar
program provides, or results in, retirement income, a deferral of income in
contemplation of retirement or payments to be made upon termination of
employment, and which plan is not subject to ERISA or the Code.
"Foreign Joint Venture Vehicle" shall mean any Joint Venture Vehicle
that is incorporated or organized outside of the United States or any State or
territory thereof.
"Foreign Subsidiary" shall mean any Subsidiary that is incorporated or
organized outside of the United States or any State or territory thereof.
"Funded Debt" shall mean (without duplication), with respect to any
Person, (i) all liabilities for borrowed money other than Current Debt, (ii) all
- --
liabilities secured by any Lien existing on property owned by such Person
(whether or not those liabilities have been assumed) other than Current Debt,
(iii) the aggregate amount of Guarantees by such Person other than Guarantees of
- ----
Current Debt of other Persons and (iv) accrued royalty payments for programming,
--
which are outstanding one year from their creation.
"Group" shall be the Company and each of its Subsidiaries.
NOTE AGREEMENT
<PAGE>
45
"Guarantee" shall mean, with respect to any Person, any direct or
indirect liability, contingent or otherwise, of such Person with respect to any
indebtedness, lease (other than Operating Leases), dividend or other obligation
of another, including, without limitation, any such obligation directly or
indirectly guaranteed, endorsed (otherwise than for collection or deposit in the
ordinary course of business) or discounted or sold with recourse by such Person,
or in respect of which such Person is otherwise directly or indirectly liable,
including, without limitation, any such obligation in effect guaranteed by such
Person through any agreement (contingent or otherwise) to purchase, repurchase
or otherwise acquire such obligation or any security therefor, or to provide
funds for the payment or discharge of such obligation (whether in the form of
loans, advances, stock purchases, capital contributions or otherwise), or to
maintain the solvency or any balance sheet or other financial condition of the
obligor of such obligation, in any such case if the purpose or intent of such
agreement is to provide assurance that such obligation will be paid or
discharged, or that any agreements relating thereto will be complied with, or
that the holders of such obligation will be protected against loss in respect
thereof. The amount of any Guarantee shall be equal to the outstanding
principal amount of the obligation guaranteed or such lesser amount to which the
maximum exposure of the guarantor shall have been specifically limited.
"Hazardous Material" shall mean (i) any "hazardous substance", as
-
defined by the United States Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended, (ii) any "hazardous waste", as defined by
--
the United States Resource Conservation and Recovery Act of 1976, as amended,
(iii) any petroleum product, or (iv) any pollutant or contaminant or hazardous,
- ---- --
dangerous or toxic chemical, material or substance the handling, release or
presence of which is regulated pursuant to or otherwise governed by any
Environmental Law.
"Historical EBITDA" shall mean as of the date of determination the sum
of all earnings before interest, taxes, depreciation and amortization of the
Company on a consolidated basis during the immediately preceding four
consecutive fiscal quarters, as set forth in the books and financial records of
the Company.
"Hotel Contracts" shall mean contracts to provide services to hotels.
"Joint Venture Agreements" shall mean the Amended and Restated Joint
Venture Agreement between PPV, JAFTA Japan Co., Inc. and Izumi Kikaku Co. Ltd.
dated November 11, 1993, the Joint Venture Agreement between PPV and Nag Yong
Lee dated March 1, 1995, Shareholders Agreement between PPV and Mr. Arun
Churdboonchart and AC Telecom Ltd, dated as of May 6, 1995, and the Pacific Pay
Video (Taiwan), Inc Shareholder Agreement dated as of August 1, 1994.
NOTE AGREEMENT
<PAGE>
46
"Joint Venture Vehicle" shall mean any corporation, partnership,
association, joint venture or other entity (other than a Subsidiary) at least
40% of the total combined voting power of all classes of Voting Shares or equity
capital of which shall, at the time as of which any determination is being made,
be owned by the Company either directly or through Subsidiaries.
"Lien" shall mean any interest in property securing an obligation owed
to, or a claim by, a person other than the owner of the property, whether such
interest is based on the common law, statute or contract, and including but not
limited to the security interest lien arising from a mortgage, encumbrance,
pledge, conditional sale or trust receipt or a lease, consignment or bailment
for security purposes. The term "Lien" shall not include reservations,
exceptions, encroachments, easements, rights-of-way, covenants, conditions,
restrictions, leases and other minor title exceptions and encumbrances affecting
property, provided that they do not constitute security for monetary
--------
obligations. For the purposes of this Agreement, the Company, a Subsidiary or a
Joint Venture Vehicle shall be deemed to be the owner of any property which it
has acquired or holds subject to a conditional sale agreement or other
arrangement pursuant to which title to the property has been retained by or
vested in some other Person for security purposes, and such retention or vesting
shall be deemed to create a Lien on such property.
"Lock-out Function" shall mean the function of video program
entertainment systems installed in a hotel room, which enables the user to
prevent or limit access to Adult Titles in such room.
"Material Adverse Effect" shall mean, with respect to an action or
event or group of actions or events, (i) a material adverse effect on the
business, operations, affairs, condition (financial or other), properties or
prospects of the Company or on the consolidated business, operations, affairs,
condition (financial or other), properties or prospects of the Company and its
Subsidiaries and Joint Venture Vehicles, taken as a whole or (2) a material
adverse effect on the ability of the Company to perform and comply with its
obligations under this Agreement, the Notes or any other Note Document.
"Multiemployer Plan" shall mean any Plan which is a "multiemployer
plan" (as such term is defined in section 4001(a)(3) of ERISA).
"Note Documents" shall mean (i) the Note Agreement; (ii) any Security
Document; (iii) the Notes; (iv) the Warrants; (v) the Shareholders Agreement and
(vi) any other agreement, instrument, certificate or document executed and
delivered in connection with any Note Document.
"Noteholder" shall mean, at any time, a registered holder of Notes.
NOTE AGREEMENT
<PAGE>
47
"Officers' Certificate" shall mean a certificate signed in the name of
the Company by at least two Responsible Officers of the Company.
"Operating Lease" shall mean any lease of property under which the
Company or a Subsidiary is liable as lessee, or is liable by Guarantee of the
obligations of another Person as lessee, other than a Financing Lease.
"PBGC" shall mean the Pension Benefit Guaranty Corporation or any
governmental authority succeeding to any of its functions.
"Person" shall mean and include an individual, a partnership, a joint
venture, a corporation, a trust, an unincorporated organization or a government
or any department or agency thereof.
"Plan" shall mean any multiemployer or single-employer plan as defined
in Section 4001 of ERISA, which is maintained or contributed to by (or to which
there is an obligation to contribute of) the Company or a Subsidiary of the
Company or an ERISA Affiliate, and each such plan for the five year period
immediately following the latest date on which the Company, or a Subsidiary of
the Company or an ERISA Affiliate maintained, contributed to or had an
obligation to contribute to such plan.
"Pledged Securities" shall have the meaning specified in Section 1.2.
"PPV" shall mean Pacific Pay Video Limited.
"Private Placement Memorandum" shall mean the confidential private
placement memorandum of the Company prepared by the Company dated February 1995,
together with any supplemental information provided in writing to the Purchasers
subsequently, including, without limitation, the Long-Range Plan, dated as of
July 21, 1995.
"Projected EBITDA" shall mean, at any time during a period set forth
in Section 8.6, that amount set forth opposite such period in Section 8.6.
"Projected Cumulative Installed Rooms" shall mean, at any time during
a period set forth in Section 8.9, that amount set forth opposite such period in
Section 8.9.
"Required Holder(s)" shall mean the holder or holders of at least 70%
of the aggregate principal amount of the Notes from time to time outstanding.
"Required Securities Holder(s)" shall mean both (i) Required Holder(s)
and (ii) the holder or holders of Warrants exercisable into shares of
NOTE AGREEMENT
<PAGE>
48
Common Stock which in the aggregate amount to at least 70% of the aggregate
number of shares of Common Stock into which all the Warrants are exercisable.
"Responsible Officer" shall mean the president, the treasurer, the
chief executive officer, the chief operating officer, the chief financial
officer or the chief accounting officer of the Company.
"Restricted Payment" shall mean (i) dividends or other distributions
-
in respect of capital stock of the Company (except distributions in such stock)
and (ii) the redemption or acquisition of such stock or of warrants, rights or
--
other options to purchase such stock (except when solely in exchange for such
stock) or the redemption or acquisition by a Subsidiary of the Company of shares
not directly or indirectly held by the Company unless made, contemporaneously,
from the net proceeds of a sale of such stock; in either case, valued at the
fair market value of the property being dividended, distributed or otherwise
transferred as a distribution.
"Second Closing Date" shall have the meaning specified in Section 2.2.
"securities" and "security" shall have the meaning specified for the
term "security" in section 2(1) of the Securities Act.
"Securities Act" shall mean the United States Securities Act of 1933,
as amended.
"Security Documents" shall mean the Pledge Agreement(s), the
Collateral Assignment Agreement, the Appointment Agreement, any other documents
executed in connection therewith and any other security documents entered into
after the closing date.
"Shareholders' Agreement" shall mean the Shareholders' Agreement dated
as of September 29, 1994, as amended by the First Amendment dated May 16, 1995,
by and between PPV and the existing rights holders listed therein.
"Subsidiary" shall mean any corporation, partnership, association,
joint venture or other entity at least 50% of the total combined voting power of
all classes of Voting Shares or equity capital of which shall, at the time as of
which any determination is being made, be owned by the Company either directly
or through Subsidiaries, or in respect of which the Company has the power to
control the financial and operating policies.
"Technology License Agreement" shall mean the Technology License
Agreement dated April 15, 1992 between PPV and On Command Video Corporation, as
amended from time to time.
<PAGE>
48
"Total Adjusted Capitalization" shall mean the sum of Total Debt and
Adjusted Consolidated Net Worth.
"Total Consolidated Assets" shall mean the total assets of the
Company and its Subsidiaries, on a consolidated basis, determined in accordance
with generally accepted accounting principles.
"Total Debt" shall mean (without duplication), as of any date of
determination, the total of all Debt of the Company, its Subsidiaries and Joint
Venture Vehicles.
"Transferee" shall mean any direct or indirect transferee of all or
any part of any Note purchased by the Purchaser under this Agreement.
"United States" or "U.S." shall mean the United States of America.
"Voting Shares" shall mean, with respect to any incorporated company,
any shares of such company whose holders are entitled under ordinary
circumstances to vote for the election of directors of such company
(irrespective of whether at the time stock of any other class or classes shall
have or might have voting power by reason of the happening of any contingency)
and with respect to any company which is not incorporated, any interest in such
company which entitles the holder thereof to participate either in the
management or the profits of such company.
"Wholly Owned Subsidiary" shall mean, as applied to any Subsidiary, a
Subsidiary all the outstanding shares (other than directors' qualifying shares,
if required by law) of every class of stock of which are at the time owned by
the Company or by one or more Wholly Owned Subsidiaries or by the Company and
one or more Wholly Owned Subsidiaries.
10.2. Accounting Principles, Terms and Determinations. All
references in this Agreement to generally accepted accounting principles shall,
unless otherwise specified, be deemed to refer to generally accepted accounting
principles as practiced in the relevant jurisdiction, in effect at the time of
application thereof.
SECTION 11. MISCELLANEOUS.
11.1. Payments. The Company agrees that, so long as any Purchaser
shall hold any Note, it will make payments of principal of, interest on and any
premium payable with respect to such Note, by wire transfer of immediately
available funds for credit (not later than 12:00 noon, New York City time, on
the date due) to such Purchaser's account or accounts as specified in the
Purchaser Schedule attached hereto, or such other account or accounts in
<PAGE>
50
the United States as such Purchaser may designate in writing without presentment
of or notation on the Notes, notwithstanding any contrary provision herein or in
any Note with respect to the place of payment. Each holder of a Note by its
purchase thereof agrees that, before disposing of such Note, such holder will
make a notation thereon (or on a schedule attached thereto) of all principal
payments previously made thereon and of the date to which interest thereon has
been paid. The Company agrees to afford the benefits of this Section 11.1 to any
Transferee which shall have agreed to be bound by the provisions of this Section
11.1.
11.2. Expenses. The Company agrees, whether or not the transactions
contemplated hereby shall be consummated, to pay, and save each Purchaser and
any Transferee harmless against liability for the payment of, all out-of-pocket
expenses arising in connection with such transactions, including (i) all
-
reasonable document production and duplication charges, (ii) the reasonable
--
fees, charges and disbursements of any special counsel engaged by such Purchaser
or such Transferee in connection with the Note Documents and the transactions
contemplated thereby, (iii) the reasonable costs and expenses associated with
---
obtaining private placement numbers for the Notes, (iv) the reasonable out-of-
--
pocket costs and expenses each Purchaser incurred in connection with the
purchase of the Securities, (v) the cost and expenses (including fees) of the
-
Agent under any Security Document, including without limitation the costs and
expenses described in each of the Pledge Agreements, (vi) the reasonable costs
--
and expenses of delivering to each Purchaser, insured to its satisfaction, the
Securities purchased by such Purchaser hereunder, (vii) the reasonable cost of
---
delivering to the Company (insured to the satisfaction of the holder of such
Note) any Note surrendered to the Company pursuant to this Agreement and the
cost of delivering to any Purchaser or Transferee any Note issued in
substitution or replacement therefor, (viii) the costs and expenses, including
----
attorneys' fees (including the allocated costs and expenses of in-house
counsel), incurred by such Purchaser or such Transferee relating to (A) the
-
exchange of Notes, (B) the consideration by such Purchaser or Transferee of any
-
proposed amendments, waivers or consents (regardless of whether or not consented
to or actually executed) pursuant to the provisions of this Agreement or the
Notes, (C) the enforcement of (or determining whether or how to enforce) any
-
rights under this Agreement or any other Note Document or the collection of any
amounts due such Purchaser or Transferee under the Note Documents including,
without limitation, costs and expenses incurred in any bankruptcy case,
insolvency, restructuring or workout, (D) the preparation for, negotiations
-
regarding, consultations concerning or the defense of legal proceedings
involving any claim or claims made or threatened against such Purchaser or
Transferee arising out of the Note Documents or (E) responding to any subpoena
-
or other legal process or informal investigative demand issued in connection
with this Agreement or the transactions contemplated hereby or by reason of such
Purchaser's or such Transferee's having acquired any Security. Notwithstanding
the foregoing, the Company shall not be obligated to reimburse any Purchaser or
Transferee for any
<PAGE>
51
expenses, costs, outlays or fees incurred in connection with any action or
proceeding to enforce any of the provisions of the Note Documents which a court
of competent jurisdiction determines was not undertaken in good faith.
The Company also agrees to pay the costs and expenses or other taxes,
fees and charges incurred with respect to the recording, registering or filing
of any instrument to secure the Notes pursuant to Section 7.4 and compliance
with all statutes and regulations as may be necessary or desirable in order to
establish, protect, perfect and preserve any Lien created or maintained pursuant
to Section 7.4. The Company also will pay, and will save each Purchaser
harmless from all claims in respect of the fees, if any, of brokers and finders
(other than those retained by such Purchaser) and any and all liabilities with
respect to any taxes (including interest and penalties) which may be payable in
respect of the execution and delivery of this Agreement or any other Note
Documents, any instrument required to secure the Notes pursuant to Section 7.4,
the issue of the Notes hereunder and any amendment or waiver under or in respect
of this Agreement, the Notes or any other Note Document.
In furtherance of the foregoing, on the date of closing, the Company
will pay or cause to be paid the reasonable fees and disbursements of your
special counsel provided that such fees and disbursements are reflected in a
statement of such special counsel submitted to the Company at least three days
prior to the date of closing and, in addition, the Company will also pay or
cause to be paid, promptly upon receipt of supplemental statements therefor,
additional fees, if any, and disbursements of such special counsel in connection
with the transactions hereby contemplated.
The obligations of the Company under this Section 11.2 shall survive
the transfer of any Note or portion thereof or interest therein by any Purchaser
or any Transferee, the payment of any Note, the acceptance of any Warrant or the
termination of this Agreement or any other Note Document.
11.3. Consent to Amendments. This Agreement may be amended and the
Company may take any action herein prohibited, or omit to perform any act herein
required to be performed by it, if the Company shall obtain the written consent
to such amendment, action or omission to act, of the Required Holder(s) except
that, without the written consent of the holder or holders of all Notes at the
time outstanding, no amendment to this Agreement shall change the maturity of
any Note, or change the principal of, or the rate or time of payment of interest
on or any premium payable with respect to any Note, or affect the time, amount
or allocation of any prepayments, or change the proportion of the principal
amount of the Notes required with respect to any consent, amendment, waiver or
declaration. Each holder of any Note at the time or thereafter outstanding and
the Company shall be bound by any consent authorized by this Section 11.3,
whether or not such Note shall have been marked to indicate such consent, but
any Notes issued thereafter may bear a notation referring to any such consent.
No course of dealing between the
<PAGE>
52
Company and the holder of any Note nor any delay in exercising any rights
hereunder or under any Note shall operate as a waiver of any rights of any
holder of such Note. As used herein and in the Notes, the term "this Agreement"
and references thereto shall mean this Agreement as it may from time to time be
amended or supplemented.
11.4. Solicitation of Holders of Notes. Neither the Company nor any
Affiliate will solicit, request or negotiate for or with respect to any proposed
waiver or amendment of any of the provisions of this Agreement or the Notes
unless each holder of the Notes (irrespective of the amount of Notes then owned
by it) shall be informed thereof by the Company and shall be afforded the
opportunity of considering the same and shall be supplied by the Company with
sufficient information to enable it to make an informed decision with respect
thereto. Executed or true and correct copies of any waiver sent or effected
pursuant to the provisions of Section 11.3 shall be delivered by the Company to
each holder of outstanding Notes forthwith following the date on which the same
shall have been executed and delivered by the holder or holders of the requisite
percentage of outstanding Notes. Neither the Company nor any Affiliate will,
directly or indirectly, pay or cause to be paid any remuneration, whether by way
of supplemental or additional interest, fee or otherwise, to any holder of a
Note for any consent by such Person to any waiver or amendment of any of the
terms and provisions of this Agreement or the Notes unless such remuneration is
concurrently paid, on the same terms, ratably to the holders of all of the Notes
then outstanding.
11.5. Form, Registration, Transfer and Exchange of Notes; Lost Notes.
The Notes are issuable as registered notes without coupons in denominations of
at least $100,000, except as may be necessary to reflect any principal amount
not evenly divisible by $100,000. The Company shall keep at its principal
office a register in which the Company shall provide for the registration of
Notes and of transfers of Notes. Any holder of any of the Notes may sell,
assign or otherwise transfer any of such Notes to (x) any Financial Institution
or (y) subject to the immediately succeeding sentence, any other Person other
than a Person which is at the time of such sale, assignment or transfer a
Competitor. Unless such Noteholder is transferring such Notes to a Financial
Institution, the transferring Noteholder shall notify the Company in writing as
to the identity of such proposed transferee, and such Noteholder shall not
transfer such Note to such Person if the Company, within 5 Business Days of
receipt of such notice, notifies such Noteholder (with supporting details) that
the proposed transferee is a Competitor and that the Company objects to such
transfer, it being understood that if the Noteholder does not receive such a
notice from the Company within such 5 Business Days, the proposed transferee
shall not be considered a Competitor for purposes hereof and the transfer shall
not be prohibited hereby. Any Transferee shall have acceded to the Appointment
Agreement in accordance with the terms thereof by executing an Instrument of
Accession in the form of Annex I to the Appointment Agreement. Upon surrender
for registration of transfer of any Note at the principal office
<PAGE>
53
of the Company, the Company shall, at its expense, execute and deliver one or
more new Notes of like tenor and of a like aggregate principal amount,
registered in the name of such transferee or transferees. At the option of the
holder of any Note, such Note may be exchanged for other Notes of like tenor and
of any authorized denominations, of a like aggregate principal amount, upon
surrender of the Note to be exchanged at the principal office of the Company.
Whenever any Notes are so surrendered for exchange, the Company shall, at its
expense, execute and deliver the Notes which the holder making the exchange is
entitled to receive. Every Note surrendered for registration of transfer or
exchange shall be duly endorsed, or be accompanied by a written instrument of
transfer duly executed, by the holder of such Note or such holder's attorney
duly authorized in writing. Any Note or Notes issued in exchange for any Note or
upon transfer thereof shall carry the rights to unpaid interest and interest to
accrue which were carried by the Note so exchanged or transferred, so that
neither gain nor loss of interest shall result from any such transfer or
exchange. Upon receipt of written notice from the holder of any Note of the
loss, theft, destruction or mutilation of such Note and, in the case of any such
loss, theft or destruction, upon receipt of such holder's unsecured indemnity
agreement, or in the case of any such mutilation upon surrender and cancellation
of such Note, the Company will make and deliver a new Note, of like tenor, in
lieu of the lost, stolen, destroyed or mutilated Note.
11.6. Persons Deemed Owners. Prior to due presentment for
registration of transfer, the Company may treat the Person in whose name any
Note is registered as the owner and holder of such Note for the purpose of
receiving payment of principal of, interest on and any premium payable with
respect to such Note and for all other purposes whatsoever, whether or not such
Note shall be overdue, and the Company shall not be affected by notice to the
contrary. Subject to the preceding sentence, any holder of any of the Notes may
grant participations in such Note to (x) any Financial Institution or (y)
subject to the immediately succeeding sentence, any other Person other than a
Person which is at the time of the granting of such participation a Competitor.
Unless such Noteholder is granting a participation in the Notes to a Financial
Institution, the granting Noteholder shall notify the Company in writing as to
the identity of such proposed grantee, and such Noteholder shall not grant such
participation to such Person if the Company, within 5 Business Days of receipt
of such notice, notifies such Noteholder (with supporting details) that the
proposed grantee is a Competitor and that the Company objects to such transfer,
it being understood that if the transferring Noteholder does not receive such a
notice from the Company within such 5 Business Days, the proposed grantee shall
not be considered a Competitor for purposes hereof and the granting of the
participation shall not be prohibited hereby.
11.7. Survival of Representations and Warranties. All
representations and warranties contained herein or made by or on behalf of the
Company in connection herewith shall survive the execution and delivery of this
Agreement and the Securities, the transfer by the Purchaser of any Note,
<PAGE>
54
together with the Warrants or portion thereof or interest therein and the
payment of any Note, and may be relied upon by any Transferee, regardless of any
investigation made at any time by or on behalf of the Purchaser or any
Transferee. All statements contained in any certificate or other instrument
delivered by or on behalf of the Company pursuant hereto or in connection with
the transactions contemplated hereby shall be deemed representations and
warranties of the Company hereunder.
11.8. Successors and Assigns. All covenants and other agreements in
this Agreement contained by or on behalf of any of the parties hereto shall bind
and inure to the benefit of the respective successors and assigns of the parties
hereto (including, without limitation, any Transferee) whether so expressed or
not.
11.9. Disclosure to Other Persons. Each holder of Notes agrees to
use its best efforts to hold in confidence all Confidential Information;
provided that nothing herein shall prevent the holder of any Note from
- --------
delivering copies of any financial statements and other documents (whether or
not constituting Confidential Information) delivered to such holder, and
disclosing any other information (whether or not constituting Confidential
Information) disclosed to such holder, by or on behalf of the Company or any
Subsidiary or Joint Venture Vehicle thereof in connection with or pursuant to
this Agreement to (i) such holder's directors, officers, employees, agents and
-
professional consultants, (ii) any other holder of any Note, (iii) any Person to
-- ---
which such holder offers to sell such Note or any part thereof (if such Person
has agreed in writing prior to its receipt of such Confidential Information to
be bound by the provisions of this Section 11.9), (iv) any Person to which such
--
holder sells or offers to sell a participation in all or any part of such Note
(if such Person has agreed in writing prior to its receipt of such Confidential
Information to be bound by the provisions of this Section 11.9), (v) any Person
-
from which such holder offers to purchase any security of the Company, (vi) any
--
federal or state regulatory authority having jurisdiction over such holder,
(vii) the National Association of Insurance Commissioners or any similar
---
organization, (viii) any Person holding any debt instrument issued by the
----
Company, (ix) any Person responsible for rating the Notes or any other debt
--
instrument issued by the Company or (x) any other Person to which such delivery
-
or disclosure may be necessary or appropriate (A) in compliance with any law,
-
rule, regulation or order applicable to such holder, (B) in response to any
-
subpoena or other legal process or informal investigative demand or (C) in
-
connection with any litigation to which such holder is a party. Each holder of
a Note, by its acceptance of such Note, will be deemed to have agreed to be
bound by and to be entitled to the benefits of this Section 11.9 as though it
were a party to this Agreement.
11.10. Notices. All written communications provided for hereunder
shall be delivered by hand, by internationally recognized overnight delivery
service (with charges prepaid) or by telecopy (if immediately followed
<PAGE>
55
by a duplicate delivery by hand or prepaid internationally recognized overnight
delivery service) and (i) if to the Purchaser, addressed to the Purchaser at the
-
address specified for such communications in the Purchaser Schedule attached
hereto, or at such other address as the Purchaser shall have specified to the
Company in writing, (ii) if to any other holder of any Note, addressed to such
--
other holder at such address as such other holder shall have specified to the
Company in writing or, if any such other holder shall not have so specified an
address to the Company, then addressed to such other holder in care of the last
holder of such Note which shall have so specified an address to the Company and
(iii) if to the Company, addressed to it at its address shown at the beginning
---
of this Agreement, Attention: Chief Financial Officer, or at such other address
as the Company shall have specified to the holder of each Note in writing. Any
notice so addressed shall be deemed given (A) when delivered if by hand, (B)
- -
when telecopied (if followed with a delivery the following day by hand or
overnight delivery service) or (C) one Business Day after delivery prepaid to
-
any internationally recognized overnight delivery service.
11.11. Payments Due on Non-Business Days. Anything in this Agreement
or the Notes to the contrary notwithstanding, any payment of principal of or
interest on any Note, or any premium payable with respect thereto, that is due
on a date other than a Business Day shall be made on the next succeeding
Business Day. If the date for any payment is extended to the next succeeding
Business Day by reason of the preceding sentence, the period of such extension
shall be included in the computation of the interest payable on such Business
Day.
11.12. Satisfaction Requirement. If any agreement, certificate or
other writing, or any action taken or to be taken, is by the terms of this
Agreement required to be satisfactory to any Purchaser or to the Required
Holder(s), the determination of such satisfaction shall be made by such
Purchaser or the Required Holder(s), as the case may be, in the sole and
exclusive judgment of the Person or Persons making such determination.
11.13. Entire Agreement. Subject to the last sentence of Section
11.3, this Agreement and the Notes embody the entire agreement and understanding
between the Purchasers and the Company and supersede all prior agreements and
understandings relating to the subject matter hereof.
11.14. Governing Law. This Agreement shall be construed and enforced
in accordance with, and the rights of the parties shall be governed by, the law
of the State of New York.
11.15. Severability. Any provision of this Agreement which is
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
<PAGE>
56
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
11.16. Descriptive Headings. The descriptive headings of the several
Sections of this Agreement are inserted for convenience only and do not
constitute a part of this Agreement.
11.17. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original but all of which together shall
constitute one instrument.
11.18. Severalty of Obligations. The sales of Notes to the
Purchasers are to be several sales, and the obligations of the Purchasers under
this Agreement are several obligations. Except as provided in Section 3.18, no
failure by any Purchaser to perform its obligations under this Agreement shall
relieve any other Purchaser or the Company of any of its obligations hereunder,
and no Purchaser shall be responsible for the obligations of, or any action
taken or omitted by, any other Purchaser hereunder.
11.19. Consent to Jurisdiction; Service of Process. For the purposes
of assuring that the holders of the Notes may enforce their rights under this
Agreement, the Company for itself and its successors and assigns, hereby
irrevocably (i) agrees that any legal or equitable action, suit or proceeding
-
against the Company arising out of or relating to this Agreement or the Notes or
any transaction contemplated hereby or the subject matter of any of the
foregoing may be instituted in any state or Federal court in the State of New
York, (ii) waives any objection which it may now or hereafter have to the venue
--
of any action, suit or proceeding in the State of New York or any claim of forum
-----
non conveniens in the State of New York, and (iii) irrevocably submits itself to
- -------------- ---
the non-exclusive jurisdiction of any state or Federal court of competent
jurisdiction in the State of New York for purposes of any such action, suit or
proceeding. Without limiting the foregoing, the Company hereby appoints, in the
case of any such action or proceeding brought in the courts of or in the state
of New York, CT Corporation System, with offices on the date hereof at 1633
Broadway, New York, New York 10019, to receive, for it and on its behalf,
service of process in the State of New York with respect thereto, provided the
Company may appoint any other person, reasonably acceptable to the Required
Holder(s), with offices in the State of New York to replace such agent for
service of process upon delivery to the Noteholders of a reasonably acceptable
agreement of such new agent agreeing so to act. The Company agrees that service
of process by means of notice (as provided in Section 11.10) of any such action,
suit or proceeding with respect to any matter as to which it has submitted to
jurisdiction as set forth in this Section 11.19 shall be taken and held to be
valid personal service upon it.
<PAGE>
57
11.20. WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO IRREVOCABLY
AND UNCONDITIONALLY WAIVES THE RIGHT TO TRIAL BY JURY IN ANY LEGAL OR EQUITABLE
ACTION, SUIT OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE
NOTES OR ANY TRANSACTION CONTEMPLATED HEREBY OR THEREBY OR THE SUBJECT MATTER OF
ANY OF THE FOREGOING.
<PAGE>
58
If you are in agreement with the foregoing, please sign the form of
acceptance on the enclosed counterpart of this letter and return the same to the
Company, whereupon this letter shall become a binding agreement among the
Company and the Purchasers.
Very truly yours,
MAGINET CORPORATION
By: /s/ James A. Barth
-------------------------------
Name: James A. Barth
Title: Chief Financial Officer
The foregoing Agreement is
hereby accepted as of the
date first above written.
NEW YORK LIFE INSURANCE COMPANY
By: /s/ Himi Kittner
------------------------------
Name: Himi Kittner
Title: Vice President
THE MUTUAL LIFE INSURANCE COMPANY
OF NEW YORK
By: /s/ Peter W. Oliver
-----------------------------
Name: Peter W. Oliver
Title: Managing Director
WASLIC COMPANY II
By: /s/ Daniel F. Lindley
-----------------------------
Name: Daniel F. Lindley
Title: President & Secretary
NAMTOR BVC LP
By: /s/ Noel Rotham
-----------------------------
Name: Noel Rotham
Title: Partner
<PAGE>
Purchaser Schedule
------------------
PURCHASER SCHEDULE
(SERIES A NOTES)
<TABLE>
<CAPTION>
Note Denominations
Principal and Registered
Purchaser Amount Numbers
- -------------------------------------------- -------------- ------------------
<S> <C> <C>
NEW YORK LIFE INSURANCE COMPANY $13,000,000 $13,000,000 (R-1)
All payments of either principal or interest
on account of the above Note numbered R-1
(and any replacement or substitute Notes
therefor) shall be made by wire transfer of
immediately available funds to:
Morgan Guaranty Trust Company of New York
New York, New York
ABA No. 021-000-238
For credit to the account of:
New York Life Insurance Company
General Account No. 810-00-000
Each such wire transfer shall set forth
payment with respect to MagiNet Corporation
10.5% Senior Series A Secured Notes Due
2000 referencing "PPN 55917 @ AA2" and the
due date and application (as among
principal, premium or interest) of the
payment being made and a notice setting
forth the above details shall be
contemporaneously delivered to:
New York Life Insurance Company
51 Madison Avenue
New York, NY 10010
Attention: Treasury Department
Securities Income Section
Room 209
Fax: 001-212-447-4160
</TABLE>
64-1 .
<TABLE>
<CAPTION>
Note Denominations
Principal and Registered
Purchaser Amount Numbers
- --------------------------------------------- ------------- ------------------
<S> <C> <C>
Address for all other communications and
notices:
New York Life Insurance Company
51 Madison Avenue
New York, NY 10010
Attention: Investment Department
Private Finance Group
Room 206
Fax No. 001-212-447-4122
With a copy (excluding financial statements)
to:
New York Life Insurance Company
51 Madison Avenue
New York, NY 10010
Attention: Investment Section
Office of the General Counsel
Room 10SB
Fax: 001-212-576-8340
White & Case
7-11 Moorgate
London EC2R 6HH
England
Attn: Senior Partner
Tel: 171-726-6361
Fax: 171-726-4314
</TABLE>
Name of Nominee in which Notes are to be issued: None.
Taxpayer I.D. Number: 13-5582869
[WARRANTS]
<TABLE>
<CAPTION>
Number of Number of
Shares Represented Shares Represented
by Warrants (original) by Warrants (if adjusted)
- ------------------------------------------------- ---------------------------
<S> <C> <C>
New York Life
Insurance Company 742,857 1,733,333
</TABLE>
64-2 .
PURCHASER SCHEDULE
(SERIES A NOTES)
<TABLE>
<CAPTION>
Note Denominations
Principal and Registered
Purchaser Amount Numbers
- --------------------------------------------- -------------- -----------------
<S> <C> <C>
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK $10,000,000 $10,000,000 (R-2)
All payments on account of the above Note
numbered R-2 (and any replacement or
substitute Notes therefor) shall be made by
wire transfer of immediately available
funds for credit to:
Security Remittance Account NO. 321-023803
Chemical Bank
New York, New York
for credit of The Mutual Life Insurance
Company of New York
ABA No. 021000128
Each such wire transfer shall set forth
payment with respect to MagiNet Corporation
10.5% Senior Series A Secured Notes due
2000 referencing "PPN 55917 @ AA2" and the
due date and application (as among
principal, premium or interest) of the
payment being made and a notice setting
forth the above details shall be
contemporaneously delivered to:
</TABLE>
64-3 .
<TABLE>
<CAPTION>
Note Denominations
Principal and Registered
Purchaser Amount Numbers
- --------------------------------------------- -------------- -----------------
<S> <C> <C>
Glenpointe Marketing & Operations Center -
MONY
Glenpointe Center West
500 Frank W. Burr Boulevard
Teaneck, NJ 07666-6888
U.S.A.
Telecopy: 201-907-6797
Attention: Securities Custody
Address for all other communications and
notices:
The Mutual Life Insurance Company of New York
1740 Broadway
New York, New York 10019
U.S.A.
Attention: MONY Capital Management Unit
Name of Nominee in which Notes are to be issued: None
Taxpayer I.D. Number: 12-1632487
with a copy (excluding financial statements) to:
White & Case
7-11 Moorgate
London EC2R
England
Attn: Senior Partner
Tel: 171-726-6361
Fax: 171-726-4314
</TABLE>
[WARRANTS]
<TABLE>
<CAPTION>
Number of Number of
Shares Represented Shares Represented
by Warrants (original) by Warrants (if adjusted)
- ----------------------------------------------------- --------------------------
<S> <C> <C>
The Mutual Insurance Company
of New York 571,429 1,333,333
</TABLE>
64-4 .
PURCHASER SCHEDULE
(SERIES A NOTES)
<TABLE>
<CAPTION>
Note Denominations
Principal and Registered
Purchaser Amount Numbers
- --------------------------------------------- -------------- -----------------
<S> <C> <C>
WASLIC COMPANY II $1,500,000 $1,500,000 (R-3)
All payments on account of the above Note
numbered R-3 (and any replacement or
substitute Notes therefor) shall be made by
wire transfer of immediately available funds
for credit to:
Morgan Guaranty Trust Company of New York
New York, New York
ABA No. 021-000-238
For credit to the account of:
Trust and Investment Journal
A/C# 999-99-951
Attn: Tony Capizzi
Ref: MagiNet Corporation
Each such wire transfer shall set forth
payment with respect to MagiNet Corporation
10.5% Senior Series A Secured Notes due 2000
referencing "PPN 55917 @ AA2" and the due
date and application (as among principal,
premium or interest) of the payment being
made and a notice setting forth the above
details shall be contemporaneously delivered
to:
J.P. Morgan Delaware
902 N. Market Street
9th Floor
Wilmington, Delaware 19801
Facsimile: 302-651-9637
with a copy to:
Ft. Washington Investment Advisors
400 Broadway
Cincinnati, OH 45202
Facsimile: 513-629-1695
Address for all other communications and
notices as above.
</TABLE>
64-5 .
Name of Nominee in which Notes are to be issued: None
Taxpayer I.D. Number: 52-1549279
with a copy (excluding financial statements) to:
White & Case
7-11 Moorgate
London EC2R
England
Attn: Senior Partner
Tel: 171-726-6361
Fax: 171-726-4314
[WARRANTS]
<TABLE>
<CAPTION>
Number of Number of
Shares Represented Shares Represented
by Warrants (original) by Warrants (if adjusted)
--------------------------- ---------------------------
<S> <C> <C>
Waslic Company II 85,714 200,000
</TABLE>
64-6 .
PURCHASER SCHEDULE
(SERIES A NOTES)
<TABLE>
<CAPTION>
Note Denominations
Principal and Registered
Purchaser Amount Numbers
- -------------------------------------------- ---------------- ------------------
<S> <C> <C>
NAMTOR BVC LP $400,000 $400,000 (R-4)
All payments on account of the above Note
numbered R-4 (and any replacement or
substitute Notes therefor) shall be made by
wire transfer of immediately available funds
for credit to:
Bankers Trust Company NYC/PCG
280 Park Avenue
New York, NY 10017
ABA: 021001033
For credit to the account of:
Account no: 99-401-380
For further credit to:
account no: 277574
account name: NAMTOR BVC/Pac Pay
Each such wire transfer shall set forth
payment with respect to MagiNet Corporation
10.5% Senior Series A Secured Notes due 2000
referencing "PPN 55917 @ AA2: and the due
date and application (as among principal,
premium or interest) of the payment being
made and a notice setting forth the above
details shall be contemporaneously delivered
to:
Namtor Inc.
311 South Wacker Drive
Chicago, Illinois 60606
Attn: Mr. Edward P. Langefeld
Address for all other communications and
notices as above.
</TABLE>
64-7 .
Name of Nominee in which Notes are to be issued: None
Taxpayer I.D. Number: 36-3568488
with a copy (excluding financial statements) to:
White & Case
7-11 Moorgate
London EC2R
England
Attn: Senior Partner
Tel: 171-726-6361
Fax: 171-726-4314
[WARRANTS]
<TABLE>
<CAPTION>
Number of Number of
Shares Represented Shares Represented
by Warrants (original) by Warrants (if adjusted)
--------------------------- ---------------------------
<S> <C> <C>
Namtor BVC LP 22,857 53,333
</TABLE>
64-8
<PAGE>
NOTE AGREEMENT
SCHEDULE 1.2
Schedule 1.2
PLEDGED SECURITY
----------------
<TABLE>
<CAPTION>
Name of Subsidiary Jurisdiction of Number of Shares
or Joint Venture Incorporation Pledged as Security
---------------- --------------- -------------------
<S> <C> <C>
Pay Per View Japan, Inc. Japan 264
Pacific Pay Video (HK) Limited Hong Kong 6,600
PPV Singapore Pte Ltd Singapore 66,000
Pacific Pay Video (Thailand) Co., Thailand
Limited+ 0
Pacific Pay Video (Taiwan) Inc.+ Taiwan 0
Pacific Pay Video Pty. Limited Australia 66
Pacific Pay Video New Zealand New Zealand
Limited 66
Pacific Pay Video (Korea) Ltd. Korea 176,000
Pacific Pay Video International, United States
Inc. (California) 1,000
Pacific Pay Video Limited United States
(California) 100
</TABLE>
- -----------------------
+ Subsidiaries of Pacific Pay Video Limited
<PAGE>
Schedule 3.11
DESCRIPTION OF REORGANIZATION
See the attached.
<PAGE>
Pacific Pay Video Limited
-------------------------
Outline for Establishing Holding Company Structure
--------------------------------------------------
Objectives
- ----------
1.) Establish a holding company to facilitate a more appropriate corporate
structure for operating, marketing and managing the Company's products and
services internationally.
2.) Minimize any impact on current financing efforts, taxes, or ability to use
pooling of interest accounting in future acquisitions.
Basis Structure and Implementation
- ----------------------------------
1.) Incorporate two new California corporations: Newholdings (parent) and
NewSub (100% owned subsidiary of NewHoldings).
2.) Merge NewSub into PPV in reverse triangular merger such that all current
PPV shareholders thereafter hold exactly the same interest in NewHoldings
as they did in PPV and NewHoldings holds 100% of the stock of PPV.
3.) All contracts would remain in PPV, except to the extent that contracts need
to be assigned to NewHoldings for it to carry out its administrative and
other responsibilities, and except for contracts related to equity or debt
or similar instruments which would be assumed by NewHoldings (e.g.,
shareholders agreements; SVB arrangements).
4.) The stock in PPV's current in-country subsidiaries would be distributed to
NewHoldings and thereafter such subsidiaries would be operated as
NewHoldings subsidiaries.
5.) NewHoldings may be requested to guarantee certain contracts or that such
contracts be assigned from PPV to NewHoldings, particularly those involving
payment obligations.
6.) All stock plans, options, and warrants would be assumed by NewHoldings.
Stock plans would be available to employees of all NewHoldings
subsidiaries.
Approval
- --------
1.) Only board approval is required to establish the holding company structure
and to distribute shares of existing PPV subsidiaries to NewHoldings.
2.) No dissenters' rights are triggered by the merger.
3.) No federal or state securities law registration should be required.
<PAGE>
Effect on Financing
- -------------------
1.) NY Life understands that the debt financing will be made to the
NewHoldings, New structure should not affect the ability of NY Life to be
secured since collateral is stock of all subsidiaries. NY Life will take
shares of PPV as collateral in addition to the shares of other
subsidiaries.
2.) NewHoldings will allocate cash to PPV and other subsidiaries as needed to
operate each company
Reorganization
- --------------
1.) PPV would continue to hold all existing license rights including the OCV
license. PPV would contract with other subsidiaries of NewHoldings (e.g.,
country operating subsidiaries) for services or technology connected with
the sale and installation of OCV systems.
2.) Employees would be reallocated as appropriate to their function.
Administration would be in the parent along with possibly marketing and/or
sales. Current country operating subsidiaries would not change, except the
equity in such subsidiaries would be held by the parent holding company and
not PPV.
Tax and Accounting
- ------------------
1.) The establishment of the holding company through the reverse triangular
merger will be tax free to each shareholder and each shareholder will carry
over the tax basis in his PPV shares to his NewHoldings shares.
2.) The distribution of the stock of the PPV subsidiaries to NewHoldings will
not result in recognition of gain or loss on a consolidated basis.
3.) Because there is no change in the equity interests of any security holder
in the overall organization, neither the establishment of the holding
company nor the distribution of the stock of the PPV subsidiaries to
NewHoldings should preclude a later pooling of interests acquisition.
4.) Tax counsel and the Company's accountants will provide written opinions to
verify the above conclusions before proceeding with the reorganization.
Contracts
- ---------
1.) Because the reorganization is structured as a reverse triangular merger and
because there is no change of control of the overall entity, contracts with
PPV should be unaffected by the reorganization. To the extent it is
desirable to move a contract to NewHoldings such contract will need to
either permit such assignment to a commonly controlled (i.e., affiliate)
corporation or a consent to such transfer will need to be obtained.
<PAGE>
2.) Section 10.3 of the Shareholders Agreement entered into as part of the
September 1994 financing provides that the shares of NewHoldings issued in
the reorganization will be automatically subject to the terms of that
agreement.
Timetable
- ---------
1.) Assuming June 15 board approval of the reorganization, the merger would
occur during the week of June 19, after tax, accounting, and contract
issues are finalized.
2.) The intent is to complete the reorganization prior to any funding from NY
life.
<PAGE>
Schedule 4.1
SUBSIDIARIES
------------
<TABLE>
<CAPTION>
Name of Subsidiary Jurisdiction of Percent of Voting Shares
or Joint Venture Incorporation Owned by the Company
<S> <C> <C>
Pay Per View Japan, Inc. Japan 90
Pacific PayVideo (HK) Limited Hong Kong 100
PPV Singapore Pte Ltd Singapore 100
Pacific Pay Video (Thailand) Co., Thailand
Limited + 49
Pacific Pay Video (Taiwan) Inc.t Taiwan 55
Pacific Pay Video Pty, Limited Australia 100
Pacific Pay Video New Zealand New Zealand
Limited 100
Pacific Pay Video (Korea) Ltd. Korea 85
Pacific Pay Video International, United States
Inc. (California) 100
Pacific Pay Video Limited United States
(California) 100
</TABLE>
+ Subsidiaries of Pacific Pay Video Limited
<PAGE>
Schedule 4.7
OUTSTANDING DEBT
----------------
Pacific Pay Video limited has indebtedness to Silicon Valley Bank in the
amount of six million dollars ($6,000,000), which will be repaid in full at
closing.
Pay Per View Japan, Inc. has indebtedness to Jafta Japan Co. in the amount
of approximately three hundred thousand dollars ($300,000) pursuant to the
Amended and Restated Joint Venture Agreement by and between Pacific Pay Video
Limited, Jafta Japan Co. and Izumi Kikaku Co. Ltd., dated November 11, 1993.
<PAGE>
Schedule 4.9
RELATED INTERESTS IN INTELLECTUAL PROPERTY
------------------------------------------
None.
<PAGE>
Schedule 4.12
RESTRICTIVE COVENANTS
---------------------
That certain Loan and Security Agreement by and between the Company and
Silicon Valley Bank contains restrictions regarding the incurrence of debt.
However, the Loan and Security Agreement will be terminated upon the closing.
<PAGE>
Schedule 4.15
ERISA
-----
None.
<PAGE>
Schedule 4.16
Post-Closing
Governmental Consents Or Filings
A. Korean.
------
1. Approval, notification or confirmation for the change of the foreign
investment or remittance of foreign currency out of Korea as required by
the Foreign Exchange Management Law of Korea and the regulations thereunder
and the Foreign Capital inducement Law of Korea,
B. Japan.
-----
1. Approval of the Fair Trade Commission under the Japanese Anti-monopoly Law
if any of the assignees is engaged in a "financial business" as defined in
the Japanese Antimonopoly Law, and such Assignee becomes the owner of more
than five percent (ten percent in the case of such assignee being an
insurance company) of the total outstanding shares of stock of the Japanese
subsidiary via enforcement of the Security interest, and such assignee
holds such shares beyond one year.
C. Singapore:
---------
1. Stamping of the instruments of transfer for the Pledged Securities in
PPV-Singapore and the Pledge Agreement.
2. Evidence of the holding by either PPV-Singapore or each of The Marina
Mandarin Hotel, The Orchard Hotel Singapore, the Shangri-La Hotel
(Singapore) and the Hotel Inter-Continental Singapore of the requisite
license under the Singapore Broadcasting Authority Act in connection with
PPV-Singapore's business of in-room shopping and guest services to such
hotels.
3. Approval of the Board of Film Censors Singapore to a change in share
ownership for licenses in connection with the Pledge Agreement.
D. New Zealand:
-----------
None
<PAGE>
E. Australia:
---------
1. Stamping of share transfer forms and Pledge Agreement relating to the
pledging of the PPV-Australia Pledged Securities, enforcement of the Pledge
Agreement, or sale to a third party upon enforcement.
2. Stamping of any pledge agreement or the Pledge Agreement, and the filing of
an Australian Securities Commission filing if MagiNet Corporation is at the
relevant time registered as a foreign corporation in Australia, it
Additional Securities are acquired and pledged to the Agent.
F. Hong Kong:
---------
1. Stamping of the share transfer forms relating to (a) the transfer from PPVL
to MagiNet Corporation, (b) the pledge of the PPV-Hong Kong Pledged
Securities, or (c) the transfer of the shares upon enforcement of the
Pledge Agreement.
G. Other:
-----
1. Filing of Form D pursuant to Regulation D promulgated under the Securities
Act of 1933, as amended, with Federal and any appropriate state
authorities.
<PAGE>
Schedule 8.1
LIENS
-----
To secure its obligations to Comsat Video Enterprises, Inc. under the
Programming Services Agreement the Company granted to Comsat Video Enterprises,
Inc. a security interest in the Company's territorial rights to the continent of
africa under the Technology license Agreement. The Programming Services
Agreement has been terminated by the Company; the only remaining obligation is
an obligation to pay approximately $700,000 or programing services previously
rendered. This amount will be paid immediately after closing.
Silicon Valley Bank has a security interest in substantially all of the
assets of the Company (other than the capital stock of the subsidiaries of the
Company). This security interest will be released substantially
contemporaneously with the closing.
<PAGE>
EXHIBIT A-1
-----------
[FORM OF SERIES A NOTE]
MAGINET CORPORATION
SENIOR SERIES A SECURED NOTE DUE AUGUST 15, 2000
(IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS NOTE, OR ANY INTEREST
THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR WRITTEN
CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA, EXCEPT
AS PERMITTED IN THE COMMISSIONER'S RULES.)
No. R-__ __________ __, 19__
$________ New York, New York
PPN 55917@ AA2
FOR VALUE RECEIVED, the undersigned, MAGINET CORPORATION (herein
called the "Company"), a corporation organized under the laws of the State of
California, hereby promises to pay to _______________________________, or
registered assigns, the principal sum of ____________, _________________________
DOLLARS on August 15, 2000, with interest (computed on the basis of a 360-day
year of twelve 30-day months) (i) on the unpaid balance thereof at the rate of
10.5% per annum from the date hereof, payable semiannually on the 15th day of
August and February in each year, commencing with the February 15th next
succeeding the date hereof, until the principal hereof shall have become due and
payable, and (ii) on any overdue payment (including any overdue prepayment) of
principal, any overdue payment of interest and any overdue payment of any
premium payable on demand at a rate per annum from time to time equal to the
greater of (A) 2% plus the interest rate applicable to this Note on the date
such payment became due and (B) 2.0% over the rate of interest publicly
announced by Morgan Guaranty Trust Company of New York from time to time in New
York City as its Prime Rate.
In accordance with the terms of Section 8.6 of the Agreement referred
to below, if at the time of any determination Historical EBITDA is less than 80%
of Projected EBITDA, then until Historical EBITDA is determined to be equal to
or greater than 80% of Projected EBITDA, the interest rate on this Note shall
increase to 11.5%. In accordance with the terms of Section 8.9 of the
Agreement, if at the time of any determination Cumulative Installed Rooms is
less than 80% of Projected Cumulative Installed Rooms, then until Cumulative
Installed Rooms is determined to be equal to or greater than 80% of Cumulative
Installed Rooms, the interest rate on this Note shall increase to 11.5%. (All
capitalized terms in the preceding sentence have the meaning given to them in
the Agreement referred to below.)
<PAGE>
Payments of principal of, interest on and premium, if any, payable
with respect to this Note are to be made at the main office of Morgan Guaranty
Trust Company of New York in The City of New York or at such other place as the
holder hereof shall designate to the Company in writing, in lawful money of the
United States of America.
This Note is one of the Senior Series A Secured Notes due 2000 (herein
called the "Notes") issued pursuant to a Note Agreement, dated August 15, 1995
(herein called the "Agreement"), among the Company and the original purchasers
of the Notes named in the Purchaser Schedule attached thereto and is entitled to
the benefits thereof.
This Note is a registered Note and, as provided in the Agreement, upon
surrender of this Note for registration of transfer, duly endorsed, or
accompanied by a written instrument of transfer duly executed, by the registered
holder hereof or such holder's attorney duly authorized in writing, a new Note
for a like principal amount will be issued to, and registered in the name of,
the transferee. Prior to due presentment for registration of transfer, the
Company may treat the person in whose name this Note is registered as the owner
hereof for the purpose of receiving payment and for all other purposes, and the
Company shall not be affected by any notice to the contrary.
This Note is subject to optional prepayment, in whole or from time to
time in part, on the terms specified in the Agreement.
This Note is secured by the pledge and assignment of certain
Collateral (as defined in the Agreement).
In case an Event of Default, as defined in the Agreement, shall occur
and be continuing, the principal of this Note may be declared or otherwise
become due and payable in the manner and with the effect provided in the
Agreement.
This Note is intended to be performed in the State of New York and
shall be construed and enforced in accordance with the internal law of such
State.
MAGINET CORPORATION
By:
-------------------------
Name:
Title:
<PAGE>
EXHIBIT A-2
-----------
[FORM OF SERIES B NOTE]
MAGINET CORPORATION
SENIOR SERIES B SECURED NOTE DUE AUGUST 15, 2000
(IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS NOTE, OR ANY INTEREST
THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR WRITTEN
CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA, EXCEPT
AS PERMITTED IN THE COMMISSIONER'S RULES.)
No. R-__ __________ __, 19__
$________ New York, New York
PPN ________
FOR VALUE RECEIVED, the undersigned, MAGINET CORPORATION (herein
called the "Company"), a corporation organized under the laws of the State of
California, hereby promises to pay to _______________________________, or
registered assigns, the principal sum of ____________, _________________________
DOLLARS on August 15, 2000 with interest (computed on the basis of a 360-day
year of twelve 30-day months) (i) on the unpaid balance thereof at the rate of
10.5% per annum from the date hereof, payable semiannually on the 15th day of
August and February in each year, commencing with the ________ __ next
succeeding the date hereof, until the principal hereof shall have become due and
payable, and (ii) on any overdue payment (including any overdue prepayment) of
principal, any overdue payment of interest and any overdue payment of any
premium payable on demand at a rate per annum from time to time equal to the
greater of (A) 2% plus the interest rate applicable to this Note on the date
such payment became due and (B) 2.0% over the rate of interest publicly
announced by Morgan Guaranty Trust Company of New York from time to time in New
York City as its Prime Rate.
In accordance with the terms of Section 8.6 of the Agreement referred
to below, if at the time of any determination Historical EBITDA is less than 80%
of Projected EBITDA, then until Historical EBITDA is determined to be equal to
or greater than 80% of Projected EBITDA, the interest rate on this Note shall
increase to 11.5%. In accordance with the terms of Section 8.9 of the
Agreement, if at the time of any determination Cumulative Installed Rooms is
less than 80% of Projected Cumulative Installed Rooms, then until Cumulative
Installed Rooms is determined to be equal to or greater than 80% of Cumulative
Installed Rooms, the interest rate on this Note shall increase to 11.5%. (All
capitalized terms in the preceding sentence have the meaning given to them in
the Agreement referred to below.)
<PAGE>
Payments of principal of, interest on and premium, if any, payable
with respect to this Note are to be made at the main office of Morgan Guaranty
Trust Company of New York in The City of New York or at such other place as the
holder hereof shall designate to the Company in writing, in lawful money of the
United States of America.
This Note is one of the Senior Series B Secured Notes due 2000 (herein
called the "Notes") issued pursuant to a Note Agreement, dated August 15, 1995
(herein called the "Agreement"), among the Company and the original purchasers
of the Notes named in the Purchaser Schedule attached thereto and is entitled to
the benefits thereof.
This Note is a registered Note and, as provided in the Agreement, upon
surrender of this Note for registration of transfer, duly endorsed, or
accompanied by a written instrument of transfer duly executed, by the registered
holder hereof or such holder's attorney duly authorized in writing, a new Note
for a like principal amount will be issued to, and registered in the name of,
the transferee. Prior to due presentment for registration of transfer, the
Company may treat the person in whose name this Note is registered as the owner
hereof for the purpose of receiving payment and for all other purposes, and the
Company shall not be affected by any notice to the contrary.
This Note is subject to optional prepayment, in whole or from time to
time in part, on the terms specified in the Agreement.
This Note is secured by the pledge and assignment of certain
Collateral (as defined in the Agreement).
In case an Event of Default, as defined in the Agreement, shall occur
and be continuing, the principal of this Note may be declared or otherwise
become due and payable in the manner and with the effect provided in the
Agreement.
This Note is intended to be performed in the State of New York and
shall be construed and enforced in accordance with the internal law of such
State.
MAGINET CORPORATION
By:
-------------------------
Name:
Title:
<PAGE>
The Pledge Agreement also appears as Exhibit 10.16 to this Registration
Statement.
EXHIBIT B-1
PLEDGE AGREEMENT
between
MAGINET CORPORATION,
as Pledgor
and
THE CHASE MANHATTAN BANK, N.A.,
as Pledgee
Dated as of August 15, 1995
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Section Page
- ------- -----
<S> <C> <C>
SECTION 2. DEFINITIONS AND PRINCIPLES OF CONSTRUCTION..................2
SECTION 3. PLEDGE OF SECURITIES........................................3
SECTION 4. APPOINTMENT OF AGENTS; ENDORSEMENTS.........................6
SECTION 5. VOTING AND OTHER RIGHTS WHILE NO EVENT OF DEFAULT...........6
SECTION 6. DIVIDENDS AND OTHER DISTRIBUTIONS ..........................7
SECTION 7. REMEDIES IN CASE OF EVENT OF DEFAULT........................7
SECTION 8. APPLICATION OF PROCEEDS....................................10
SECTION 9. PURCHASERS OF PLEDGE COLLATERAL............................11
SECTION 10. FURTHER ASSURANCES.........................................11
SECTION 12. TRANSFER BY THE PLEDGOR....................................12
SECTION 13. REPRESENTATIONS, WARRANTIES AND
COVENANTS OF THE PLEDGOR...................................13
SECTION 14. PLEDGOR'S OBLIGATIONS ABSOLUTE.............................13
SECTION 15. REGISTRATION...............................................13
SECTION 16. INDEMNITY..................................................14
SECTION 17. TERMINATION; RELEASE.......................................15
SECTION 18. NOTICES....................................................15
SECTION 19. MISCELLANEOUS..............................................16
</TABLE>
*This Table of Contents is provided for convenience only and is not a part
of the attached Pledge Agreement.
<PAGE>
EXECUTION COPY
PLEDGE AGREEMENT
----------------
PLEDGE AGREEMENT, dated as of August 15, 1995, between MAGINET CORPORATION,
a corporation organized under the laws of the State of California, as pledgor
(the "Pledgor"), and The Chase Manhattan Bank, N.A., a national banking
--------
association, as collateral agent ("the Pledgee")for the benefit of the
-------
Noteholders pursuant to the Appointment Agreement. Capitalized terms used herein
shall have the meanings provided in Section 2.
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Pledgor and the Purchasers have entered into the Note
Agreement providing for the issuance and sale of the Notes and the issuance of
the Warrants as contemplated therein;
WHEREAS, The Chase Manhattan Bank, N.A., the Pledgor and the
Purchasers have entered into the Appointment Agreement providing for the
appointment of The Chase Manhattan Bank, N.A. to act as collateral agent for the
benefit of the Noteholders under the Security Documents (including this
Agreement);
WHEREAS, it is a condition precedent under the Note Agreement to each
Purchaser's obligation, to purchase and pay for the Notes and to accept the
Warrants to be issued under the Note Agreement that the Pledgor shall have
executed and delivered to the Pledgee this Agreement;
WHEREAS, the Pledgor desires to execute this Agreement to satisfy the
conditions described in the preceding paragraphs and to induce the Purchasers to
enter into the Note Agreement and to purchase and pay for the Notes and to
accept the Warrants (and to induce any future Noteholders so to do);
NOW, THEREFORE, in consideration of the benefits accruing to the
Pledgor, the receipt and sufficiency of which are hereby acknowledged, the
Pledgor hereby makes the following representations and warranties to the Pledgee
and hereby covenants and agrees with the Pledgee as follows:
SECTION 1. SECURITY. (a) This Agreement is for the benefit of the
--------
Pledgee as collateral agent for he Noteholders pursuant to the Appointment
Agreement (and,
1
<PAGE>
to the extent provided in Section 16 of this Agreement, for the benefit of the
Pledgee in its individual capacity) to secure: (i) the payment due of the
principal of and interest in respect of the Notes and payment of all other
obligations and liabilities (including without limitation indemnities, premium,
if any, fees and interest thereon) of the Pledgor, now existing or hereafter
incurred under, arising out of or in connection with the Note Agreement, each
Note or any other Note Document (other than the Warrants); and (ii) the due
performance and compliance with the terms of the Note Documents by the Pledgor
(all such principal, interest, obligations and liabilities, collectively, the
"Secured Obligations").
- ---------------------
SECTION 2. DEFINITIONS AND PRINCIPLES OF CONSTRUCTION. For all
------------------------------------------
purposes of this Agreement: (i) capitalized terms not otherwise defined herein
shall have the meanings set forth in the Note Agreement; (ii) the principles of
construction set forth in the Note Agreement shall apply; and (iii) as used
herein, references to "this Agreement", "hereunder" and words of like meaning
shall refer to this pledge agreement.
As used in this Agreement:
"Agreement" and "this Agreement" shall mean this pledge agreement,
--------- --------------
dated as of August 15, 1995, as the same may be modified, amended or
supplemented from time to time.
"Foreign Joint Venture Vehicle" shall mean a Joint Venture Vehicle
-----------------------------
that is incorporated or organized outside of the United States or any State or
territory thereof.
"Legal Mortgage Subsidiaries" shall mean each of Pacific Pay Video
---------------------------
(HK) Limited, PPV Singapore Pte Ltd, Pacific Pay Video Pty. Limited, Pacific Pay
Video New Zealand Limited and any other Subsidiary or Joint Venture Vehicle
incorporated or established under the laws of a jurisdiction which utilizes the
common law concepts of legal and equitable mortgages over shares of capital
stock or similar equity interests.
"Liquidating Dividend" shall have the meaning set forth in Section 6.
--------------------
"Maximum Foreign Pledge" shall mean, in respect of any Foreign
----------------------
Subsidiary or Foreign Joint Venture Vehicle: (i) prior to the occurrence of a
Change in Tax Law Event, the number of Securities representing 66% (or such
other threshold amount as may become relevant after the date hereof in
determining whether a pledge under a pledge agreement would result in the
undistributed earnings of such Foreign Subsidiary or Foreign Joint Venture
Vehicle, as relevant, as determined for Federal income tax purposes being
treated as a deemed dividend to the Pledgor) of the total combined voting power
of all classes of Securities of such Foreign Subsidiary or Foreign Joint Venture
Vehicle entitled to vote; and (ii) on and following the occurrence of a Change
in Tax Law Event, the number of Securities representing the maximum total
combined voting power of all classes of Securities of such Foreign Subsidiary or
Foreign Joint Venture Vehicle entitled to vote that may be pledged without
creating a deemed dividend to the Pledgor.
2
<PAGE>
"Pledge Documents" shall mean: (i) this Agreement (and any other
----------------
pledge agreement in form and substance satisfactory to the Pledgee entered into
as contemplated by this Agreement); (ii) the Note Agreement; and (iii) any other
Note Document to which the Pledgee is or will be a party.
"Secured Obligations" shall have the meaning set forth in Section 1.
-------------------
"Securities" shall mean, with respect to each Subsidiary or Joint
----------
Venture Vehicle, as relevant, all the issued and outstanding shares of capital
stock or similar equity interests of such Subsidiary or Joint Venture Vehicle
(and any options, warrants or other rights to purchase such capital stock or
similar equity interests at any time prior to the date on which the Secured
Obligations are discharged in full) owned by the Pledgor, including without
limitation all such shares of capital stock, similar equity interests, options,
warrants or other rights owned by the Pledgor on the date hereof and all such
capital stock, options, warrants or other rights acquired by the Pledgor in the
future. The Pledgor hereby represents and warrants that on the date hereof (i)
the information set forth in Annex A concerning the Securities and Pledged
Securities of each of its Subsidiaries and Joint Venture Vehicles set forth in
Annex A is true and correct and (ii) there are no options, warrants, or other
rights to purchase any such Securities outstanding.
All Securities described as "Pledged Securities" in Annex A and all
other Securities from time to time pledged, mortgaged or charged hereunder or
under another Pledge Document are hereinafter referred to as the "Pledged
-------
Securities," and the Pledged Securities, together the time held by the Pledgee
- ----------
hereunder, is hereinafter referred to as the "Pledge Collateral".
-----------------
SECTION 3. PLEDGE OF SECURITIES
---------------------
3.1 Pledge. To secure the Secured Obligations and for the
------
purposes set forth in Section 1, the Pledgor: (i) hereby grants to the Pledgee a
continuing security interest of first priority in all of the Pledge Collateral;
(ii) hereby pledges and deposits as security with the Pledgee (except as
otherwise permitted in this Section 3) the Pledged Securities owned by the
Pledgor on the date hereof and delivers to the Pledgee certificates therefor (to
the extent such Pledged Securities are certificated) accompanied by stock powers
for all such Pledged Securities duly executed in blank by the Pledgor (or such
other instruments of transfer as are acceptable to the Pledgee); and (iii)
hereby assigns, transfers, hypothecates, mortgages, charges and sets over to the
Pledgee (including by way of legal mortgage to the extent such Pledged
Securities are issued by a Legal Mortgage Subsidiary) all of the Pledgor's
right, title and interest in and to such Pledged Securities (and in and to the
certificates or instruments (if any) evidencing such Pledged Securities), to be
held by the Pledgee upon the terms and conditions set forth in this Agreement
and the other Pledge Documents.
3.2 Subsequently Acquired Securities. If the Pledgor shall acquire
--------------------------------
(by purchase, stock dividend or otherwise), at any time or from time to time
after the date hereof, any additional Securities:
3
<PAGE>
(i) issued by a Subsidiary or Joint Venture Vehicle, as relevant,
other than a Foreign Subsidiary or Foreign Joint Venture Vehicle, then the
Pledgor will forthwith pledge and deposit such Securities as security with the
Pledgee; or
(ii) issued by a Foreign Subsidiary or Foreign Joint Venture Vehicle,
as relevant, and, as a result of such acquisition, the Pledged Securities in
respect of such Foreign Subsidiary or Foreign Joint Venture Vehicle are less
than such Foreign Subsidiary's or Foreign Joint Venture Vehicle's then existing
Maximum Foreign Pledge, then the Pledgor will forthwith pledge, mortgage or
charge hereunder (or under another pledge agreement in form and substance
satisfactory to the Pledgee, if necessary under any applicable law or if
otherwise desirable to carry into effect the purposes of this Agreement) and
deposit (subject to the proviso below) as security with the Pledgee such
additional Securities as are necessary so that the Pledged Securities in respect
of such Foreign Subsidiary or Foreign Joint Venture Vehicle, as relevant, are
equal to such Foreign Subsidiary's or Foreign Joint Venture Vehicle's then
existing Maximum Foreign Pledge; provided, however, that the Pledgor shall not
-----------------
be required pursuant to this Section
3.2(ii) to deposit as security with the Pledgee Securities issued by a Foreign
Subsidiary or Foreign Joint Venture Vehicle, as relevant, organized and
established after the date hereof (other than a Subsidiary or Joint Venture
Vehicle organized under the laws of South Africa, the Securities of which shall
be pledged to and deposited with the Pledgee under this Agreement (or under
another pledge agreement in form and substance satisfactory to the Pledgee if
necessary or otherwise desirable to carry into effect the purposes of this
Agreement) so as to create a first priority Lien in favor of the Pledgee on such
Securities) so long as such Securities are subject to Liens permitted under
Section 8.1(e) of the Note Agreement and the Lien created by this Agreement (or
any other pledge agreement entered into as contemplated by this Agreement),
which Lien under this Agreement may be junior to the Lien permitted by Section
8.1(e) of the Note Agreement,, and such Securities when pledged, mortgaged or
charged hereunder shall thereafter constitute Pledged Securities, and the
Pledgor will promptly deliver to the Pledgee a certificate executed by a
Responsible Officer describing such Pledged Securities and certifying that the
same have been duly pledged, mortgaged or charged with the Pledgee hereunder-
(or under such other pledge agreement, as the case may be); provided, further,
-----------------
that the Pledgor will deposit such Securities with the Pledgee free and clear of
any Lien other than the Lien created by this Agreement (or any other pledge
agreement entered into as contemplated by this Agreement), which Lien shall then
be a first priority Lien, promptly upon such Securities' no longer being subject
to Liens permitted under Section 8.1(e) of the Note Agreement (whether because
of release or otherwise);
and in each case (except as provided in the first proviso to Section 3.2(ii) and
as provided in Section 3.5) deliver to the Pledgee certificates therefor
accompanied by stock powers duly executed in blank by the Pledgor (or such other
instruments of transfer as are acceptable to the Pledgee), Thereafter such
Securities will constitute Pledged Securities, and the Pledgor will promptly
deliver to the Pledgee a certificate executed by a Responsible Officer
describing such Pledged Securities and certifying that the same have been duly
pledged, mortgaged or charged with the Pledgee hereunder (or under such other
pledge agreement, as the case may be).
3.3 Uncertificated Securities. Notwithstanding anything to the
contrary contained in Sections 3.1 and 3.2, if any Pledged Securities (whether
now owned or hereafter
4
<PAGE>
acquired) are evidenced by an uncertificated security, the Pledgor shall
promptly: (i) notify the Pledgee of such uncertificated security; (ii) take all
actions required to perfect the security interest of the Pledgee therein under
applicable law; and (iii) notify the Pledgee of such actions taken. The Pledgor
further agrees: (i) to take such actions as the Pledgee deems necessary or
reasonably desirable to effect the foregoing and to permit the Pledgee to
exercise any of its rights and remedies hereunder; and (ii) to provide an
opinion of counsel satisfactory to the Pledgee with respect to any such pledge
of uncertificated Pledged Securities upon the pledge thereof and at any other
time promptly upon request of the Pledgee,
3.4 Change in Tax Law Event. If a Change in Tax Law Event occurs,
-----------------------
then the Pledgor shall forthwith pledge, mortgage or charge hereunder (or under
another pledge agreement in form and substance satisfactory to the Pledgee, if
required by applicable law or if otherwise desirable to carry into effect the
purposes of this Agreement), that portion of the Securities of each Foreign
Subsidiary or Foreign Joint Venture Vehicle, as relevant, held by the Pledgor
and not heretofore pledged, mortgaged or charged pursuant to this Agreement (or
another pledge agreement). Thereafter such Securities will constitute Pledged
Securities, and the Pledgor will promptly deliver to the Pledgee a certificate
executed by a Responsible Officer describing such Pledged Securities and
certifying that the same have been duly pledged, mortgaged or charged with the
Pledgee hereunder (or under such other pledge agreement, as the case may be).
3.5 Certain Pledged Securities.Notwithstanding anything to the
---------------------------
contrary contained in this Section 3, for the purpose of enabling the Pledgee to
exercise its rights under this Agreement, the Pledgor undertakes forthwith upon
the execution of this Agreement, if it has not already done so, at the cost of
the Pledgor, to procure the registration of the Pledged Securities issued by any
Legal Mortgage Subsidiary in the name of the Pledgee or its nominee and to
deposit or procure to be deposited with the Pledgee the certificates in respect
of such Pledged Securities together with signed and undated letters of
resignation in the form of Annex C from each director of each Legal Mortgage
Subsidiary appointed by the Pledgor. If the Pledgor shall acquire any additional
Securities issued by any Legal Mortgage Subsidiary, which Securities are
required to be pledged, mortgaged or charged hereunder pursuant to Sections 3.2
(ii) or 3.4, the Pledgor shall promptly upon receipt of such Securities (and at
its own expense) pledge, mortgage or charge such Securities hereunder (or under
another pledge agreement in form and substance satisfactory to the Pledgee, if
necessary under any applicable law or if otherwise desirable to carry into
effect the purposes of this Agreement) and register such Securities in the name
of the Pledgee or its nominee and deposit the certificates in respect of such
Securities with the Pledgee; provided, however, that so long as such
-----------------
Securities are not required to be deposited with the Pledgee pursuant to the
provisos to Section 3.2(ii), the Pledgor shall not be required to either
register such Securities in be name of the Pledgee or in nominee nor deposit
such Securities with the Pledgee. Thereafter such Securities will constitute
Pledged Securities, and the Pledgor will promptly deliver to the Pledgee a
certificate executed by a Responsible Officer describing such Pledged Securities
and certifying that the same have been duly pledged, mortgaged or charged with
the Pledgee hereunder (or under such other pledge agreement, as the case may
be).
5
<PAGE>
SECTION 4. APPOINTMENT OF AGENTS; ENDORSEMENTS. The Pledgee shall
-----------------------------------
have the right to appoint one or More agents for the purpose of retaining
physical possession of the Pledged Securities and other Pledge Collateral, which
may be held (in the discretion of the Pledgee) in the name of the Pledgor,
endorsed or assigned in blankor in favor of the Pledgee or any nominee or
nominees of the Pledgee or an agent appointed by the Pledgee.
SECTION 5. VOTING AND OTHER RIGHTS WHILE NO EVENT OF DEFAULT.
-------------------------------------------------
Unless and until an Event of Default shall have occurred and be continuing:
(a) the Pledgor shall be entitled to vote any and all Pledged
Securities other than those issued by Legal Mortgage Subsidiaries and to give
consents, waivers or ratifications in respect thereof;
(b) the Pledgee shall be entitled to vote any and all Pledged
Securities issued by Legal Mortgage Subsidiaries and to give consents, waivers
or ratifications in respect thereof and to otherwise exercise any and all rights
and powers attaching to such Pledged Securities, in each case as the Pledgor may
direct from time to time by notice in writing to the Pledgee; provided, however,
-----------------
that the Pledgee shall be under no obligation to so vote or give such consents,
waivers or modifications or otherwise act unless it shall have first received
from the Pledgor the amount of any payments required to be made in order for
such rights or powers to be validly exercised; and provided, further, that in
------------------
the absence of any such direction or receipt of such amounts from the Pledgor
the Pledgee shall abstain from exercising such voting or other rights or powers;
and
(c) The Pledgee shall not utilize any director's resignation letter
delivered in connection with Section 3.5 of this Agreement;
provided, that in no event shall the Pledgor cast any vote, or give any consent,
- --------
waiver or ratification or take any action or direct the Pledgee pursuant to
clause (b) above to take any such action which would violate or be inconsistent
with any of the terms of this Agreement, any other Note Document or any other
instrument or agreement referred to herein or therein or which would have the
effect of impairing the position or interests of the Pledgee or any Noteholder,
All such rights of the Pledgor to vote and to give consents, waivers and
ratifications or to direct the Pledgee pursuant to clause (b) above shall cease
upon the earlier to occur of: (i) delivery to the Pledgor of written notice from
any Noteholder pursuant to Section 9.1 of the Note Agreement or the Pledgee
stating that an Event of Default has occurred and is continuing; or (ii) a
Responsible Officer obtaining knowledge of any condition or event which
constitutes an Event of Default, when Section 7 shall become applicable;
provided, that the Pledgee shall be under no duty to deliver the written notice
- ---------
described in clause (i) of the foregoing unless and until it has received a
notice from any Noteholder stating that an Event of Default has occurred and is
continuing.
SECTION 6. DIVIDENDS AND OTHER DISTRIBUTIONS. Unless and until an
---------------------------------
Event of Default shall have occurred and be continuing:
6
<PAGE>
(a) all cash dividends payable in respect of the Pledged Securities
other than Pledged Securities issued by Legal Mortgage Subsidiaries shall be
paid directly to the Pledgor; and
(b) all cash dividends payable in respect of Pledged Securities issued
by Legal Mortgage Subsidiaries shall be paid directly to the Pledgee, which will
pay the amount of such dividends received by it (after taking into account
deductions for withholding or any similar tax) to the Pledgor as soon as
practicable after receipt;
provided, that, notwithstanding any of the foregoing, all cash dividends payable
- --------
in respect of the Pledged Securities which are determined by the Pledgee to
represent in whole or in part an extraordinary, liquidating or other
distribution in return of capital (each, a "Liquidating Dividend") shall be paid
directly to the Pledgee and retained by it as part of the Pledge Collateral
unless the event creating such Liquidating Dividend was permitted by, and did
not otherwise result in an Event of Default occurring under, the Note Agreement.
The Pledgee shall aho be entitled to receive directly, and to retain as part of
the Pledge Collateral:
(i) all other or additional stock or securities of a Subsidiary or
Joint Venture Vehicle, as relevant, paid or distributed by way of dividend in
respect of the Pledged Securities;
(ii) all other or additional stock or other securities or property
(including cash) paid or distributed in respect of the Pledged Securities by way
of stock-split, spin-off, split-up, reclassification, combination of shares or
similar rearrangement; and
(iii) all her or additional stock or other securities or property
which may be paid in respect of the Pledge Collateral by reason of any
consolidation, merger, exchange of stock, conveyance of assets, liquidation or
similar corporate reorganization or otherwise;
except, in each case, prior to the occurrence and continuance of an Event of
- ------
Default, to the extent the receipt of such stock dividends and other securities
distributions would cause the Pledged Securities in respect of any Foreign
Subsidiary or Foreign Joint Venture Vehicle, as relevant, to exceed such Foreign
Subsidiary's or Foreign Joint Venture Vehicle's Maximum Foreign Pledge, in which
case the Pledgee shall be entitled to receive directly and retain as part of the
Pledge Collateral such amount of stock dividends and securities distributions as
is equal, together with the Pledged Securities previously pledged, to such
Foreign Subsidiary's or Foreign Joint Venture Vehicle's then existing Maximum
Foreign Pledge.
SECTION 7. REMEDIES IN CASE OF EVENT Of DEFAULT. In case an Event of
------------------------------------
Default shall have occurred and be continuing, the Pledgee shall be entitled to
exercise all the rights, powers and remedies vested in it (whether vested in it
by this Agreement, by any other Note Document or by law) for the protection and
enforcement of its rights in respect of the Pledge Collateral, and the Pledgee
shall be entitled without limi-
7
<PAGE>
tation to exercise the following rights, which the Pledgor hereby agrees to be
commercially reasonable:
(a) to receive all amounts payable in respect of the Pledge
Collateral otherwise payable under Section 6 to the Pledgor;
(b) to the extent permitted by law and to the extent not previously
transferred, to transfer all or any part of the Pledged Securities into the
Pledgee's name or the name of its nominee or nominees;
(c) to vote all or any part of the Pledged Securities (whether or not
transferred into the name of the Pledgee) and give all consents, waivers and
ratifications in respect of the Pledge Collateral and otherwise act with respect
thereto as though it were the outright owner thereof (the Pledgor hereby
irrevocably constituting and appointing the Pledgee the proxy and attorney-in-
fact of the Pledgor, with full power of substitution to do so, as further
provided in paragraph (e) below);
(d) at any time or from time to time to sell, assign and deliver, or
grant options to purchase, all or any part of the Pledge Collateral, or any
interest therein, at any public or private sale, without demand of performance,
advertisement or notice of intention to sell or of the time or place of sale or
adjournment thereof or to redeem or otherwise (all of which are hereby waived by
the Pledgor), for cash, on credit or for other property, for immediate or future
delivery without any assumption of credit risk, and for such price or prices and
on such terms as the Pledgee may determine, provided that at least 10 days'
notice of the time and place of any such sale shall be given to the Pledgor.
The Pledgor hereby waives and releases to the fullest extent permitted by law
any right or equity of redemption with respect to the Pledge Collateral, whether
before or after sale hereunder, and all rights, if any, of marshalling the
Pledge Collateral and any other security for the Secured Obligations or
otherwise. At any such sale, unless prohibited by applicable law, the Pledgee
on behalf of the Noteholders may bid for and purchase all or any part of the
Pledge Collateral so sold free from any such right or equity of redemption.
None of the Pledgee or the Noteholders shall be liable for failure to collect or
realize upon any or all of the Pledge Collateral or for any delay in so doing
nor shall any of them be under any obligation to take any action whatsoever with
regard thereto; and
(e) (i) The Pledgor hereby irrevocably appoints the Pledgee as its
attorney-infact with right of substitution, so that the Pledgee or any other
Person empowered by the Pledgee shall be authorized, without need of further
authorization from the Pledgor, upon the occurrence and continuance of an Event
of Default and in preservation of the rights of the Pledgee and the Noteholders
hereunder:
(A) to effect the sale of any of the Pledge Collateral in one or
more transactions to the extent permitted by law and in such other
manner as may be determined by the attorney-in-fact, including the
direct sale without public auction of any such Pledge Collateral at
such price, and upon such terms as may be determined by such attorney-
in-fact;
8
<PAGE>
(B) to enter upon any premises where the Pledge Collateral or any
part thereof may be located Without the need for a court order or other
form of authority otherwise than upon the authority granted herein;
(C) to take and retain actual possession and control of any such
Pledge Collateral as receivers without bond or otherwise, and transport any
such Pledge Collateral to any location as determined by such attorney-in-
fact;
(D) to administer, manage and use any of the Pledge Collateral;
(E) to conclude any agreement and collect any moneys thereunder or
otherwise due to the Pledgor in respect of, or generated through the usage
of, any of the Pledge Collateral;
(F) to exercise any of the rights of the Pledgor arising under or in
connection with the Pledge Collateral or to delegate to another Person, in
substitution of such attorney-in-fact, the exercise of such rights of the
Pledgor, under such terms as such attomey-in-fact shall deem proper or
necessary;
(G) to collect, claim and receive all moneys and avail itself of all
benefits that accrue and that may become due and payable to the Pledgor
with respect to the Pledge Collateral and to hold the same as security for
the timely payment and discharge by the Pledgor of the Secured Obligations;
(H) to send written notice to any Subsidiary or Joint Venture Vehicle
of the Pledgor instructing such Subsidiary or Joint Venture Vehicle to pay
all moneys due and owing to the Pledgor from time to time (whether payable
in U.S. dollars, in another convertible foreign currency or otherwise),
with respect to the Pledge Collateral to such bank accounts as shall be
designated in the notice;
(I) to institute and maintain such suits and proceedings as such
attorney-in-fact shall deem expedient to prevent any impairment of the
Pledge Collateral or to preserve and protect such attorney-in-fact's
interest therein;
(J) to execute and deliver such deeds of conveyance or sale as may be
necessary or proper for the purpose of conveying full title and ownership,
free from any claims and rights of the Pledgor, to any of the Pledge
Collateral, after foreclosure thereof; and
(K) in general, to sign such agreements and documents and perform
such acts and things required, necessary or, in the opinion of such
attorney-in-fact, advisable, to fully accomplish the purpose hereof.
(ii) This special power of attorney shall be deemed coupled with an
interest, and cannot be revoked by the Pledgor until the discharge in full of
the Secured Obligations. Upon the earlier to occur of: (A) delivery to the
Pledgor of written notice from any Noteholder pursuant to a notice delivered
under Section 9.1 of the Note Agreement or
9
<PAGE>
the Pledgee stating that an Event of Default has occurred and is continuing; or
(B) a Responsible Officer obtaining knowledge of any condition or event which
constitutes an Event of Default, the Pledgor shall abstain from exercising any
rights with respect to the Pledge Collateral which shall be inconsistent with
the exercise of the rights and functions herein granted to the Pledgee as
attorney-in-fact, including abstaining from collecting, claiming and receiving
any moneys with respect to the Pledge Collateral; provided, that in the Pledgee
--------
shall be under no duty to deliver the written notice described in clause (A) of
the foregoing unless and until it has received a notice from any Noteholder
stating that an Event of Default has occurred and is continuing. To the extent
that the Pledgor shall receive any moneys in respect thereof notwithstanding the
provisions of this paragraph (ii), it shall be deemed to have received such
funds for the account of the Pledgee and shall hold the same in trust and
promptly pay the same to the Pledgee or as it may direct from time to time.
SECTION 8. APPLICATION OF PROCEEDS. All moneys collected by the
-----------------------
Pledgee upon any sale or other disposition of the Pledge Collateral, together
with all other moneys received by the Pledgee hereunder, shall be applied in the
following order of priority:
(a) FIRST, to the payment of such amounts as are due and payable to
the Pledgee or any of its agents (or any prior collateral agent) pursuant to
this Agreement or the Appointment Agreement, including the payment of all costs
and expenses incurred by the Pledgee in connection with such sale, the delivery
of the Pledge Collateral or the collection of any such moneys (including,
without limitation, attorneys' fees and expenses);
(b) SECOND, to the payment of the Secured Obligations in the
following order of priority to the extent such amounts are not sufficient to
repay the Secured Obligations in full and within each category on a pro rata
basis among the Noteholders:
(i) to the payment of charges, fees, indemnity obligations, costs
and expenses due under the Note Agreement or the other Note Documents to the
Noteholders;
(ii) to the payment of interest on interest which became overdue, if
any, with respect to the Notes;
(iii) to the payment of interest on principal with respect to the
Notes which became overdue;
(iv) to the payment of interest accrued with respect to the Notes;
(v) to the payment of principal with respect to the Notes; and
(vi) to the payment of premium, if any, with respect to the Notes.
(c) THIRD, any balance of such money as directed in writing by the
Pledgor.
10
<PAGE>
SECTION 9. PURCHASERS OF PLEDGE COLLATERAL. Upon any sale of the
-------------------------------
Pledge Collateral by the Pledgee hereunder (whether by virtue of the power of
sale herein granted, pursuant to judicial process or otherwise), the receipt of
the Pledgee or the officer making the sale shall be a sufficient discharge to
the purchaser or purchasers of the Pledge Collateral so sold; and such purchaser
or purchasers shall not be obligated to see to the application of any part of
the purchase money paid over to the Pledgee or such officer or be answerable in
any way for the misapplication or nonapplication thereof.
SECTION 10. FURTHER ASSURANCES. Without limitation to the provisions
------------------
of Section 7, the Pledgor agrees that it will (in each case at its own expense):
(a) prepare, execute, file and refile such financing statements,
continuation statements and other documents in such offices as may be necessary
or reasonably desirable and wherever required or permitted by law in order to
perfect and preserve the Pledgee's security interest in the Pledge Collateral,
and the Pledgee agrees to execute such financing statements and other documents
prepared by the Pledgor, and the Pledgor hereby irrevocably authorizes the
Pledgee following am Event of Default, as its attorney-in-fact, to file or cause
to be filed such financing statements and amendments thereto and other documents
relative to all or any part of the Pledge Collateral without the signature of
the Pledgor where permitted by law;
(b) comply with the requirements of Section 7.13 of the Note
Agreement (which provision is incorporated in full herein by reference);
(c) do such further acts and things (including, without limitation,
paying all required documentary and other stamp tax) and execute and deliver to
the Pledgee such additional conveyances, assignments, agreements and instruments
(including without limitation one or more pledge agreements in form and
substance satisfactory to the Pledgee) as may be reasonably required or deemed
advisable to carry into effect the purposes of this Agreement or to further
assure and confirm unto the Pledgee its rights, powers and remedies hereunder;
and
(d) cause its Legal Mortgage Subsidiaries and each director thereof
appointed at any time by the Pledgor or any Subsidiary of the Pledgor: (i) to
register immediately in the register of members or similar document of the Legal
Mortgage Subsidiary any transfer of Pledged Securities which the Pledgee may
request according to the terms of this Agreement; and (ii) to deliver to the
Pledgee a signed and undated letter of resignation from such director, in the
form of Annex C.
SECTION 11. THE PLEDGEE. (a) The Pledgee will hold in accordance with
------------
the terms and provisions of the Appointment Agreement (which terms and
provisions are incorporated in full herein by reference) all Pledge Collateral
at any time received by it under this Agreement. It is expressly understood and
agreed that the obligations of the Pledgee as holder of the Pledge Collateral
and interests therein and with respect to the disposition thereof, and otherwise
under this Agreement, are only those expressly set forth
11
<PAGE>
in this Agreement and in the Appointment Agreement, and no implied covenants or
obligations shall be read into this Agreement against the Pledgee.
(b) In case of any litigation under this Agreement, or in case of any
enforcement of remedies or exercise of rights upon the occurrence of an Event of
Default, or in case the Pledgee deems that, by reason of any present or future
law of any jurisdiction, it may not or may not effectively exercise any of the
powers, rights or remedies herein granted to it or hold title to the properties,
in trust, as herein granted, or take any other action which may be desirable or
necessary in connection therewith, the Pledgee shall be entitled to appoint, to
the extent consistent with applicable law, one or more separate or additional
co-agents.
In the event that the Pledgee appoints an individual or institution as
a separate or additional co-agent: (i) any appointment of any such co-agent by
the Pledgee shall be made only with the prior written consent of the Pledgor and
the Required Holder(s) (except that, if the Pledgee shall have received written
notice from any Holder of Secured Obligations that a Default or an Event of
Default has occurred and is continuing, such consent shall be required only of
the Required Holder(s)), which consent shall not be unreasonably withheld or
delayed; and (ii) each and every remedy, power, right, title, interest, trust,
duty and obligation expressed or intended by this Agreement to be exercised by
or vested in, conveyed to or imposed upon, the Pledgee with respect thereto
shall be exercisable by and vest in such separate or additional co-agent but
only to the extent necessary, appropriate or desirable to enable such separate
or additional co-agent to exercise or have vested in it such powers, rights,
trusts, titles, interests, duties and obligations and remedies, and every
covenant and obligation necessary, appropriate or desirable to the exercise
thereof by such separate or additional co-agent shall run to and be enforceable
by either or any of them.
The Pledgee shall have the right to terminate the appointment of any such
co-agent hereunder with the prior written consent of the Pledgor and the
Required Holder(s) (except that, if the Pledgee shall have received written
notice from any Holder that a Default or an Event of Default has occurred and is
continuing, such consent shall be required only of the Required Holder(s)),
which consent shall not be unreasonably withheld or delayed. Should any
instrument in writing from the Pledgor be required by the separate or additional
co-agent so appointed by the Pledgee to more fully and certainly vest in and
confirm to it such remedies, rights, powers, titles, interests, trusts, duties
and obligations, any and all such instruments in writing shall, on request, be
executed, acknowledged and delivered by the Pledgor. In case any separate or
additional co-agent, or a successor to either, shall become incapable of acting,
resign or be removed, all the remedies, rights, powers, titles, interests,
trusts, duties and obligations of such separate or additional co-agent; so far
as permitted by law, shall vest in and be exercised by the Pledgee until the
appointment of a new agent or successor to such separate or additional co-agent.
SECTION 12. TRANSFER BY THE PLEDGOR. The Pledgor will not assign,
------------------------
sell or otherwise dispose of grant any option with respect to, or create, incur,
assume or suffer to exist any Lien on any portion of the Pledge Collateral or
any other Securities, except: (i) liens in favor of Persons other than the
Noteholders permitted under
12
<PAGE>
Section 8.1 of the Note Agreement; and (ii) Liens created by this Agreement and
by any other Pledge Document.
SECTION 13. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE PLEDGOR.
---------------------------------------------------------
The Pledgor represents and warrants that: (i) it is the legal, record and
beneficial owner of, and has good and marketable title to, the Securities
described as owned by it on Annex A hereto in existence on the date hereof,
subject to no Lien (except the Lien created by this Agreement); (ii) it has full
power, authority and legal right to pledge all such Securities pursuant to this
Agreement; (iii) all the shares of such Securities have been duly and validly
issued, are fully paid and nonassessable; (iv) this Agreement (and any other
pledge agreement entered into as contemplated by this Agreement) creates, as
security for the Secured Obligations, a valid and enforceable first priority
perfected Lien on all of the Pledge Collateral in existence on the date hereof,
in favor of the Pledgee for the benefit of the Noteholders, subject to no Lien
in favor of any other Person; (v) other than registrations and filings described
on Annex B hereto (all of which have been made prior to the date hereof or will
be made within the relevant statutory period) no consent, filing, recording or
registration is required to perfect the Lien purported to be created by this
Agreement; and (vi) the stock powers are duly executed and delivered and give
the Pledgee the rights and authority they purport to give. The Pledgor covenants
and agrees that: (i) it will defend the Pledgee's right, tide and lien in and to
the Pledge Collateral against the claims and demands of all Persons; and (ii) it
will take all actions within its powers to ensure that it will have like title
to and right to pledge any other property at any time hereafter pledged to the
Pledgee as Pledge Collateral hereunder.
SECTION 14. PLEDGOR'S OBLIGATIONS ABSOLUTE. The obligations of the
------------------------------
Pledgor under this Agreement shall be absolute and unconditional and shall
remain in full force and effect without regard to, and shall not be released,
suspended, discharged, terminated or otherwise affected by, any circumstance or
occurrence whatsoever, including, without limitation: (i) any renewal,
extension, amendment or modification of, or addition or supplement to or
deletion from, the Note Agreement, any Note or any other instrument or agreement
referred to therein or any assignment or transfer of any thereof; (ii) any
waiver, consent, extension, indulgence or other action or inaction under or in
respect of the Note Agreement, any Note or any other such instrument or
agreement or any exercise or nonexercise of any right, remedy, power or
privilege under or in respect of the Note Agreement, any Note or any other such
instrument or agreement; (iii) any furnishing of any additional security to the
Pledgee or any acceptance thereof or any sale, exchange, release, surrender or
realization of or upon any security by the Pledgee; or (iv) any invalidity,
irregularity or unenforceability of all or part of the Secured Obligations or of
any security therefor or the termination or release of any security therefor.
SECTION 15. REGISTRATION. (a) If an Event of Default shall have
-------------
occurred and be continuing and the Pledgor shall have received from the Pledgee
a written request or requests that the Pledgor cause any registration,
qualification or compliance under any securities law or laws, or listing
requirements, to be effected with respect to all or any part of the Pledged
Securities, the Pledgor as soon as practicable and at its expense will use
13
<PAGE>
its best efforts to cause such registration to be effected (and be kept
effective) and will use its best efforts to cause such qualification and
compliance to be effected (and be kept effective) as may be so requested and as
would permit or facilitate the sale and distribution of such Pledged Securities,
including without limitation, registration under any applicable securities laws
(including the Securities Act) and appropriate compliance with any other
governmental and listing requirements, provided that the Pledgee shall furnish
to the Pledgor such information regarding the Pledgee as the Pledgor may request
in writing and as shall be required in connection with any such registration,
qualification or compliance. The Pledgor will cause the Pledgee to be kept
reasonably advised in writing as to the progress of each such registration,
qualification or compliance and as to the completion thereof, will furnish to
the Pledgee such number of prospectuses, offering circulars or other documents
incident thereto as the Pledgee from time to time may reasonably request, and
agrees to indemnify and hold harmless the Pledgee and all others participating
in such registration, qualification or compliance (or the distribution of such
Pledged Securities) against all losses, liabilities, claims or damages caused by
any untrue statement (or alleged untrue statement) of a material fact contained
therein (or in any related registration statement, notification or the like) or
by any omission (or alleged omission) to state therein (or in any related
registration statement, notification or the like) a material fact required to be
stated therein or necessary to make the statements therein not misleading,
except insofar as the same may have been caused by an untrue statement or
omission based upon information furnished in writing to the Pledgor by the
Pledgee expressly for use therein.
(b) If at any time when the Pledgee shall determine to exercise its
right to sell all or any part of the Pledged Securities pursuant to Section 7
such Pledged Securities or the part thereof to be sold shall not, for any reason
whatsoever, be effectively registered under any applicable securities law or
laws (including the Securities Act), the Pledgee may sell such Pledged
Securities or part thereof by private sale in such manner and under such
circumstances as the Pledgee may deem necessary or advisable in order that such
sale may legally be effected without such registration, provided that at least
10 days' notice of the time and place of any such sale shall be given to the
Pledgor. Without limiting the generality of the foregoing, in any such event
the Pledgee: (i) may proceed to make such private sale notwithstanding that a
registration statement for the purpose of registering such Pledged Securities or
part thereof shall have been filed under such securities laws; (ii) may approach
and negotiate with a single possible purchaser to effect such sale; and (iii)
may restrict such sale to a purchaser who will represent and agree that such
purchaser is purchasing for its own account, for investment, and not with a view
to the distribution or sale of such Pledged Securities or any part thereof. In
the event of any such sale, the Pledgee shall incur no responsibility or
liability for selling all or any part of the Pledged Securities at a price which
the Pledgee (acting in accordance with instructions from the Required Holder(s))
may in good faith deem reasonable under the circumstances, notwithstanding the
possibility that a substantially higher price might be realized if the sale were
deferred until after registration as aforesaid.
SECTION 16. INDEMNITY. (a) The Pledgor covenants and agrees to pay to
----------
the Pledgee from time to time, and the Pledgee shall be entitled to, reasonable
compensation for all services rendered by it, and the Pledgor will pay or
reimburse the Pledgee upon its request for all reasonable expenses,
disbursements and advances incurred
14
<PAGE>
or made by the Pledgee in accordance with any of the provisions of this
Agreement or any other Pledge Document (including the compensation and the
expenses and disbursements of its agents and counsel and of all Persons not
regularly in its employ).
(b) The Pledgor also covenants to indemnify the Pledgee (which, for
purposes of this Section 16, shall include in directors, officers, employees and
agents) for, and to hold it harmless from and against, any and all loss,
liability or expense reasonably incurred without gross negligence, wilful
misconduct or bad faith on the part of the Pledgee, arising out of or in
connection with the acceptance or administration of this trust, the exercise of
any rights and remedies arising out of this Agreement or any other Pledge
Document, or the performance of any of its duties, including the reasonable
costs and expenses of defending itself against any claim of liability and in
enforcing any provision of this Agreement or any other Pledge Document (except
any liability incurred with gross negligence, wilful misconduct or bad faith on
the part of the Pledgee), with interest thereon at a rate equal to that in the
Pledgee's customary banking practice with respect to overdrafts (including the
imposition of interest, fund, wage and administrative fees) from the date the
same shall have been paid until actually reimbursed.
(c) The obligations of the Pledgor under this Section 16 to
compensate and indemnify the Pledgee and to pay or reimburse the Pledgee for
reasonable expenses, disbursements and advances shall constitute additional
indebtedness hereunder and shall survive the satisfaction, discharge or other
termination of this Agreement and any other Pledge Document and the resignation
or removal of the Pledgee hereunder
(d) To secure payment of such compensation, reimbursement and
indemnification, the Pledgee shall have a claim and Lien prior to that of any
party, which claim and Lien shall constitute Secured Obligations secured by this
Agreement.
SECTION 17. TERMINATION: RELEASE, Upon:
--------------------
(a) the receipt by the Pledgee of a certificate executed by each
Purchaser certifying that the conditions set forth in Section 5.3 of the Note
Agreement to the release of the Pledge Collateral have been satisfied; or
(b) the date on which the Secured Obligations have been discharged in
full;
this Agreement shall terminate, and the Pledgee, at the written request and
expense of the Pledgor, will promptly execute and deliver to the Pledgor a
proper instrument or instruments acknowledging the satisfaction and termination
of this Agreement, and will duly assign, transfer and deliver to the Pledgor,
without recourse and without any representation or warranty, such of the Pledge
Collateral as may be in the possession of the Pledgee and has not theretofore
been sold or otherwise applied or released pursuant to this Agreement, together
with any moneys at the time held by the Pledgee hereunder,
SECTION 18. NOTICES. All notices and other communications hereunder
-------
shall be in the English language, in writing and made at the addresses, in the
manner and
15
<PAGE>
with the effect provided in Section 11.10 of the Note Agreement, provided that,
for this purpose, the address of the Pledgee shall be as follows:
The Chase Manhattan Bank, N.A.
Corporate Trust Administration
4 Chase MetroTech Center,
3rd Floor, Brooklyn,
New York 11245
Facsimile: (718) 242-5885 or
(718) 242-3529
or sent to the Pledgee at such other address as it may designate for itself by
notice given in accordance with this Section 18.
SECTION 19. MISCELLANEOUS.
-------------
19.1 Benefit of Agreement.
--------------------
This Agreement shall be binding upon and inure to the benefit of and be
enforceable by the respective successors and permitted assigns of the parties
hereto and shall inure to the benefit of the Noteholders; provided, however,
-----------------
that the Pledgor may not, without the prior written consent of the Pledgee
(acting on the instructions of all the Noteholders), assign or transfer any of
its rights or obligations hereunder. The Pledgee may transfer, assign or grant
its rights hereunder in connection with an assignment or transfer of all or any
part of its interest in and rights under this Agreement pursuant to the
provisions of Sections 10 and 11 of the Appointment Agreement,
19.2 Amendment, Waiver.
-----------------
This Agreement may be changed, waived, discharged or terminated only with the
written consent of the Required Holder(s), the Pledgor and the Pledgee.
19.3 Governing Law.
-------------
This Agreement is a contract made under the laws of the State of New York of
the United States and shall for all purposes be construed and enforced in
accordance with, and the rights of parties shall be governed by, the laws of
such State.
19.4 Section Headings, Counterparts.
------------------------------
The headings of the several sections and subsections in this Agreement and the
title of this Agreement are inserted for convenience only and shall not any way
affect the meaning or construction of any provision of this Agreement. This
Agreement may be executed in any number of counterparts and by the different
parties hereto on separate counterparts, each of which when so executed and
delivered shall be an original, but all of which together shall constitute one
and the same instrument.
19.5 Severability.
------------
Any prov Any provision of this Agreement which is prohibited orunenforceable
in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent
of such
<PAGE>
prohibition orunenforceability without invalidating the remaining
provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
16
<PAGE>
19.6 Consent to Jurisdiction: Service of-Process.
-------------------------------------------
For the purposes of assuring that the Pledgee and the Noteholders may enforce
their respective rights under this Agreement, the Pledgor for itself and its
successors and assigns, hereby irrevocably: (i) agrees that any legal or
equitable action, suit or proceeding against the, Pledgor arising out of or
relating to this Agreement or the other Note Documents (including, without
limitation, the Agreement of Assignment as Collateral, dated as of the date
hereof, among the Pledgor, the Pledgee and the Purchasers), or any transaction
contemplated hereby or the subject matter of any of the foregoing may be
instituted in any state or Federal court in the Borough of Manhattan in the
State of New York; (ii) waives any objection which it may now or hereafter have
to the venue of any action, suit or proceeding in the State of New York or any
claim of forum non conveniens in the State of New York; and (iii) irrevocably
--------------------
submits itself to the non-exclusive jurisdiction of any state or Federal court
of competent jurisdiction in the Borough of Manhattan in the State of New York
for purposes of any such action, suit or proceeding. Without limiting the
foregoing, the Pledgor hereby appoints, in the case of any such action or
proceeding brought in the courts of or in the State of New York, CT Corporation
System, with offices on the date hereof at 1633 Broadway, New York, New York
10019, to receive, for it and on its behalf, service of process in the State of
New York with respect thereto, provided the Pledgor may appoint any other
person, reasonably acceptable to the Pledgee (acting on the instructions of the
Required Holder(s)), with offices in the State of New York to replace such agent
for service of process upon delivery to the Noteholders of a reasonably
acceptable agreement of such new agent agreeing so to act. The Pledgor agrees
that service of process by means of notice (as provided in Section 11.10 of the
Note Agreement) of any such action, suit or proceeding with respect to any
matter as to which it has submitted to jurisdiction as set forth in this Section
19.6 shall be taken and held to be valid personal service upon it.
19.7 No Waiver: Remedies Cumulative.
------------------------------
No failure or delay on the part of the Pledgee or any Noteholder in exercising
any right, power or privilege hereunder or under any other Pledge Document, as
the case may be, and no course of dealing between the' Pledgor and the Pledgee
or any Noteholder shall operate as a waiver thereof; nor shall any single or
partial exercise of any right, power or privilege hereunder or under any other
Pledge Document preclude any other or further exercise thereof or the exercise
of any other right, power or privilege hereunder or thereunder. The rights,
powers and remedies herein or in any other Pledge Document expressly provided
are cumulative and not exclusive of any rights, powers or remedies which the
Pledgee or any Noteholder, as the case may be, would otherwise have. No notice
to or demand on the Pledgor in any case shall entitle the Pledgor to any other
or further notice or demand in similar or other circumstances or constitute a
waiver of the rights of the Pledgee or any Noteholder to any other or further
action in any circumstances without notice or demand.
19.8 New Secured Lenders.
-------------------
The parties acknowledge that Section 8.1 of the Note Agreement contemplates that
the Noteholders may enter into an intercreditor agreement for the purpose of
sharing the Pledge Collateral with the other parties to such agreement in
accordance with the terms thereof. It is understood that at the time of such
event, the Pledgor, the Pledgee and the Noteholders will investigate whether and
how this Agreement may be amended to accommodate and give effect to such an
intercreditor agreement.
17
<PAGE>
IN WITNESS WHEREOF, The Pledgor and the Pledgee have caused this
Agreement to be executed by their duly elected officers duly authorized as of
the date first above written.
MAGINET CORPORATION
By : /s/ James A. Barth
Name : James A. Barth
Title : Chief Financial Officer
THE CHASE MANHATTAN BANK, N.A., as
Collateral Agent
By: /s/
Name :
Title :
IN WITNESS WHEREOF, the Pledgor and the Pledgee have caused this
Agreement to be executed by their duly elected officers duly authorized as of
the date first above written.
MAGINET CORPORATION,
THE CHASE MANHATTAN BANK, N.A.
By: /s/ Rosama E. Abueva
Name: ROSANNA E. ABUEVA
Title: SECOND VICE PRESIDENT
<PAGE>
ANNEX A to
PLEDGE AGREEMENT
LIST OF SECURITIES AND PLEDGED SECURITIES
-----------------------------------------
<TABLE>
<CAPTION>
Number of Number of
Name of Subsidiary or Securities Pledged Securities Percentage of Outstanding
Joint Venture Vehicle (ordinary shares) (ordinary shares) Shares of Capital Stock
<S> <C> <C> <C> <C>
Owned by Pledged by
Pledgor Pledgor Pledgor
Pacific Pay Video (HK) Limited 10,000 6,600 100% 66%
PPV Signapore Pte Ltd. 100,000 66,000 100% 66%
PPV Signapore Pte Limited (ACN) 100 66 100% 66%
059 748 588)
Pacific Pay Video New Zealand 100 66 100% 66%
Limited
Pacific Pay Video (Korea) Ltd. 266,667 176,000 85% 66%
Pacific Pay Video International 1,000 1,000 100% 100P%
Pacific Pay Video Limited 100 100 100% 100%
</TABLE>
<PAGE>
ANNEX B to
PLEDGE AGREEMENT
Registrations and Filings
-------------------------
1. Hong Kong
---------
Registration of the name of the Pledgee in the register of members or
shareholders of the Subsidiary.
2. Singapore
---------
Registration of the name of the Pledgee in the register of members or
shareholders of the Subsidiary.
3. Australia
---------
Registration of the name of the Pledgee in the register of members or
shareholders of the Subsidiary.
4. New Zealand
-----------
Registration of the name of the Pledgee in the register of members or
shareholders of the Subsidiary.
5. Korea
-----
None.
6. California
----------
UCC-1 Financing Statement filed with the California Secretary of State.
7. Japan
-----
None.
<PAGE>
ANNEX C to
PLEDGE AGREEMENT
Form of Director's Resignation Letter
--------------------------------------
To: The Board of Directors of
[name of Subsidiary/Joint Venture Vehicle] (the "Company")
I, [name], hereby resign my position as a director of the Company with effect
from the date set forth below and waive all claims to fees or compensation in
connection with my resignation.
Dated this____ date of____.[signature]
[name]
<PAGE>
Pledge Agreement (Japanese law) also
appears as Exhibit 10.29 to
this Registration Statement
EXHIBIT B-2
(Pledge Agreement (Japanese law))
<PAGE>
AGREEMENT OF ASSIGNMENT AS COLLATERAL
This AGREEMENT OF ASSIGNMENT AS COLLATERAL, dated as of August 15, 1995
among MAGINET CORPORATION, a corporation organized under the laws of the State
of California, as assignor (the "Assignor"), and The Chase Manhattan Bank, N.A.,
a national banking association, as collateral agent for the benefit of the
Noteholders (the "Agent") and the banks and financial institutions named in
Schedule A attached hereto (collectively the "Purchasers"). Capitalized terms
used herein shall have the meanings provided in Section
W I T N E S S E T H :
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WHEREAS, the Assignor and the Purchasers have entered into the Note
Agreement providing for the issuance and sale of the Notes and the issuance of
the Warrants an contemplated therein;
WHEREAS, the Purchasers, the Assignor and the Agent have entered into the
Appointment Agreement providing for the appointment of the Agent to act as
collateral agent for the benefit of the Noteholders under the Security Documents
(including this Agreement);
WHEREAS, it is at condition precedent under the Note Agreement to each
Purchaser's obligation to purchase and pay for the Notes and to accept the
Warrants to be issued under the Note Agreement that the Assignor shall have
executed and delivered to the Purchasers this Agreement;
WHEREAS, the Assignor acknowledges and confirms that this is one of the
Pledge Agreements (as such term is defined in the Note Agreement);
WHEREAS, the Assignor desires to execute this Agreement to satisfy the
conditions described in the preceding paragraphs and to induce the Purchasers to
enter into the Note Agreement and to purchase and pay for the Notes and to
accept the Warrants (and to induce any future Noteholders so to do);
NOW, THEREFORE, the Assignor hereby makes the following representations and
warranties to the Assignees and hereby covenants and agrees with the Assignees
as follows:
SECTION 1. DEFINITIONS AND PRINCIPLES OF CONSTRUCTION. For all purposes of
------------------------------------------
this Agreement, (i) capitalized terms not otherwise defined herein shall have
the meanings set forth in the Note Agreement and (ii) as used herein, references
to "this Agreement", "hereunder" and words of like meaning shall refer to this
Agreement of Assignment as Collateral.
As used in this Agreement:
"Agreement" and "this Agreement" shall mean this Agreement of Assignment as
--------- --------
Collateral dated as of August 15, 1995, as the same may be modified, amended or
supplemented from time to time.
<PAGE>
"Assignee" or "Assignees" shall mean at any time all or each of the Agent
-------- ---------
and the then Noteholders, which are initially the Purchasers.
"Liquidating Dividend" shall have the meaning set forth in Section 5.
--------------------
"Maximum Foreign Pledge" shall mean, in respect of PPV Japan, (i) prior to
-----------------------
the occurrence of a Change in Tax Law Event, the number of securities
representing 66% (or such other threshold amount as may become relevant after
the date hereof in determining whether a security interest under this Agreement
would result in the undistributed earnings of PPV Japan as determined for
Federal income tax purposes being treated as a deemed dividend to the Assignor)
of the total combined voting power of all classes of securities of PPV Japan
entitled to vote and (ii) on and following the occurrence of a Change in Tax Law
Event, the number of securities representing the maximum total combined voting
power of all classes of securities of PPV Japan entitled to vote that may be
pledged or assigned as collateral without creating a deemed dividend to the
Assignor.
"Noteholder" shall mean from time to time a registered holder of the Notes.
----------
"Pledge Documents" shall mean (i) this Agreement (and any other pledge or
----------------
assignment as collateral agreement in form and substance satisfactory to the
Assignee entered into as contemplated by this Agreement), (ii) the Note
Agreement and (iii) any other Note Document to which any Assignee is or will be
a party.
"PPV Japan" shall mean PPV Japan, Inc, a Japanese corporation.
---------
"Secured ObligAtions" shall mean (i) the payment due of the principal of
------------------
and interest in respect of the Notes and payment of all other obligations and
liabilities (including without limitation indemnities premium, if any, fees and
interest thereon) of the Assignor owed to the Assignees (including the Agent in
its individual capacity), now existing or hereafter incurred under the Note
Agreement, each Note, the Appointment Agreement, any Pledge Document and this
Agreement and (ii) the due performance and compliance with the terms of the Note
Documents by the Assignor.
"Securities" shall mean all the issued and outstanding shares of capital
----------
stock of PPV Japan (and any options, warrants or other rights to purchase such
capital stock at any time prior to the date on which the Secured Obligations are
discharged in full) owned by the Assignor, including without limitation all such
shares of capital stock, options, warrants or other rights owned by the Assignor
on the date hereof and all such capital stock, options, warrants or other rights
acquired by the Assignor in the future. The Assignor hereby represents and
warrants that on the date hereof (i) the Assignor owns 360
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<PAGE>
shares of common stock of PPV Japan, which constitutes 90% of the issued and
outstanding shares of capital stock of PPV Japan and (ii) there are no options,
warrants, or other rights to purchase any Securities outstanding.
"Subject Securities" shall mean 264 shares of capital stock of PPV Japan
------------------
owned by the Assignor and all other Securities from time to time assigned as
collateral hereunder. The Subject Securities, together with all proceeds thereof
(including any securities, property and moneys) received and at the time held by
any of the Assignees hereunder, is hereinafter referred to as the "Subject
Collateral."
SECTION 2. ASSIGNMENT OF SECURITIES AS COLLATERAL.
--------------------------------------
2.1 Assignment. To secure the Secured Obligations, the Assignor hereby (i)
----------
assigns the Subject Securities to the Assignees as collateral (Jototanpo) and
---------
delivers to the Agent the share certificates representing the Subject Securities
to be held by the Agent on behalf of all the Assignees upon the terms and
conditions set forth in this Agreement and (ii) assigns the Subject Collateral
to the Assignees as collateral (Jototano). Each Assignee shall have an undivided
--------
interest in the Subject Collateral so assigned, each such interest determined
pro rata in accordance with the amount of the Secured Obligations from time to
time owed to such Assignee.
2.2 Subsequently Acquired Securities. If the Assignor shall acquire (by
--------------------------------
purchase stock dividend or otherwise), at any time or from time to time after
the date hereof, any additional shares or other securities in the capital stock
of PPV Japan and, as a result of such acquisition, the number of the Subject
Securities in respect of PPV Japan is less than PPV Japan's then existing
Maximum Foreign Pledge, then the Assignor will forthwith assign as collateral
hereunder (or under another agreement of assignment as collateral in form and
substance satisfactory to the Agent, if necessary under applicable law or if
otherwise desirable to carry into effect the purposes of this Agreement), and
deliver to the Agent the share certificates representing, such additional
Securities as is necessary so that the number of the Subject Securities is equal
to PPV Japan's then existing Maximum Foreign Pledge. Thereafter such Securities
shall constitute Subject Securities, and the Assignor shall promptly deliver to
the Agent a certificate executed by a Responsible officer describing such
Subject Securities and certifying that the same have been duly assigned as
collateral to the Assignees hereunder or under such other agreement of
assignment as collateral, as the case may be.
2.3 Change In Tax Law Event. If a Change in Tax Law Event occurs, then
------------------------
the Assignor shall forthwith assign as collateral hereunder (or under another
agreement of assignment as collateral in form and substance satisfactory to the
Agent, if necessary under applicable law or if otherwise desirable to carry into
effect the purposes of this Agreement) that portion of the securities of PPV
Japan hold by the Assignor and not heretofore assigned as collateral pursuant to
this Agreement (or
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<PAGE>
another agreement of assignment as collateral) and deliver the share
certificates representing such Securities to the Agent. Thereafter such
Securities shall constitute Subject Securities, and the Assignor shall promptly
deliver to the Agent a certificate executed by a Responsible Officer describing
such Subject Securities and certifying that the same have been duly assigned as
collateral to the Assignee hereunder (or under another agreement of assignment
as collateral, as the case may be).
2.4 Non-registration of Subject Securities in Shareholders' Register. The
----------------------------------------------------------------
Assignees shall not have the Subject Securities registered in the shareholders'
register of PPV Japan in any names other than that of the Assignor unless and
until the Subject Securities have been acquired by the Assignee or any other
Person through the enforcement of the security interest in the Subject
Securities created herein or until an Event of Default shall have occurred and
be continuing.
SECTION 3. APPOINTMENT OF AGENTS. The Agent shall receive and continue to
---------------------
retain possession of the Subject Collateral on behalf of the Assignees pursuant
to the terms and conditions of this Agreement and the Appointment Agreement. The
Agent shall have the right to appoint one or more agents (other than the
Assignor) for the purpose of retaining physical possession of the share
certificates representing the Subject Securities and other Subject Collateral on
behalf of the Agent.
SECTION 4. VOTING AND OTHER RIGHTS WHILE NO EVENT OF DEFAULT. Unless and
-------------------------------------------------
until an Event of Default shall have occurred and be continuing, the Assignor
shall be entitled to vote any and all Subject Securities and to give consents,
waivers or ratification in respect thereof; provided, that the Assignor shall
cast no vote, or give any consent, waiver or ratification or take any action
which would violate or be inconsistent with any of the terms of this Agreement,
any other Note Document or any other instrument or agreement referred to herein
or therein or which would have the effect of impairing the position or interests
of the Assignees. All such rights of the Assignor to vote and to give consents,
waivers and ratifications shall cease upon the earlier to occur of (i) delivery
to the Assignor of written notice from any Noteholder or pursuant to a notice
delivered under Section 9.1 of the Note Agreement or the Agent stating that an
Event of Default has occurred and is continuing or (ii) a Responsible Officer
obtaining knowledge of any condition or event which constitutes an Event of
Default, when Sections 2.4 and 6 shall become applicable; provided, that the
Agent shall be under no duty to deliver the written notice described in clause
(i) of the foregoing unless and until it has received a notice from any
Noteholder stating that an Event of Default has occurred and is continuing.
SECTION 5. DIVIDENDS AND OTHER DISTRIBUTIONS. Unless and until an Event of
---------------------------------
Default shall have occurred and be continuing, all cash dividends payable in
respect of the Subject Securities shall be paid directly to the Assignor;
provided, that the
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<PAGE>
Assignor shall cause to be paid to the Agent, and the Agent shall have the right
to receive and retain as part of the Subject Collateral, all cash dividends
payable in respect of the Subject Securities which are determined by the Agent
to represent in whole or in part an extraordinary, liquidating or other
distribution in return of capital (each a "Liquidating Dividend"), unless the
event creating such Liquidating Dividend was permitted by, and did not otherwise
result in an Event of Default occurring under, the Note Agreement. In case an
Event of Default shall have occurred and be continuing, the Assignor shall cause
to be paid to the Agent, and the Agent shall have the right to receive and
retain as part of the Subject Collateral, all cash dividends payable in respect
of the Subject Securities. The Assignor shall also cause to be delivered or
paid, as relevant, to the Agent, and the Agent shall have the right to receive
and retain as part of the Subject Collateral:
(a) all other or additional stock or securities of PPV Japan paid or
distributed by way of dividend in respect of the Subject Securities;
(b) all other or additional stock or other securities or property
(including cash) paid or distributed in respect of the Subject Securities by way
of stock-split, spin-off, split-up, reclassification, combination of shares or
similar rearrangement; and
(c) all other or additional stock or other securities or property
(including cash) which may be paid in respect of the Subject Securities by
reason of any consolidation, merger, exchange of stock, conveyance of assets,
liquidation or similar corporate reorganization or otherwise;
except, in each case, prior to the occurrence and continuance of an Event of
- ------
Default, to the extent the receipt of such stock dividends and other securities
distributions would cause the Subject securities of PPV Japan to exceed PPV
Japan's Maximum Foreign Pledge, in which case the Assignor shall cause to be
delivered to the Agent, and the Agent shall have the right to receive and retain
as part of the Subject Collateral, such amount of stock dividends and securities
distributions as is equal, together with the Subject Securities previously
assigned as collateral, to PPV Japan's then existing Maximum Foreign Pledge.
SECTION 6. REMEDIES IN CASE OF EVENT OF DEFAULT. In case an Event of
------------------------------------
Default shall have occurred and be continuing, the Noteholders (as Assignees)
directly or through the Agent shall be entitled to exercise all the rights,
powers and remedies vested in them or it as relevant (whether vested in them or
it by this Agreement, by any other Note Document or by law) for the protection
and enforcement of their or its rights, as relevant in respect of the Subject
Collateral, and the Noteholders (as Assignees) directly or through the Agent
shall be entitled without limitation to exercise the following rights, which the
Assignor hereby agrees to be commercially reasonable:
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<PAGE>
(a) to, upon giving written notice to the Assignor, dispose of the
Subject Collateral by such method, at such time and for such price as are
generally considered reasonable by the Agent (acting in accordance with the
instructions from the Required Holder(s)), and apply the proceeds toward the
payment of the Secured obligations in accordance with Section 7 below; and
(b) to, upon giving written notice to the Assignor, acquire the Subject
Collateral as payment of the whole or a part of the Secured Obligations, as
relevant, in the order set forth in Section 7 below at such time and for such
price as are generally (considered reasonable by the Agent (acting in accordance
with the instructions from the Required Holder(s)).
None of the Agent or the other Assignees shall be liable for failure to collect
or realize upon any or all of the Subject Collateral or for any delay in so
doing nor shall any of them be under any obligation to take any action
whatsoever with regard thereto.
SECTION 7. APPLICATION OF PROCEEDS. All moneys collected by the Agent or
-----------------------
the other Assignees upon any sale or other disposition of the Subject Collateral
(including, without limitation, the amount of the price at which the Noteholders
(as Assignees) may acquire the Subject Securities in accordance with Section
6(b), together with all other moneys received by the Agent or the other
Assignees hereunder, shall be applied in the following order of priority:
(a) FIRST, to the payment of such amounts an are due and payable to the
Agent (including in respect of its agents) or to any prior Agent hereunder
pursuant to the Appointment Agreement and this Agreement, including the payment
of all costs and expenses incurred by the Agent in connection with such sale,
the delivery of the Subject Collateral or the collection of any such moneys
(including without limitation reasonable attorneys' fees and expenses); and
(b) SECOND, to the payment of the other Secured Obligations in the
following order of priority to the extent such amounts are not sufficient to
repay such other Secured Obligations in full and within each category on a pro
rata basis among the Noteholders:
(i) to the payment of charges, fees, indemnity obligations, costs and
expenses due under the Note Agreement, each Note, the Appointment Agreement,
this Agreement or the other Pledge Documents to the Noteholders;
(ii) to the payment of interest on interest which became overdue, if any,
with respect to the Notes;
(iii) to the payment of interest on principal with respect to the Notes
which became overdue;
(iv) to the payment of interest accrued with respect
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<PAGE>
to the Notes;
(v) to the payment of principal with respect to the Notes;
(vi) to the payment of premium, if any, with respect to the Notes; and
(vii) to the payment of the remaining Secured Obligations, if any.
Following the foregoing applications, any balance of such moneys shall be
returned to the Assignor or otherwise disposed of as directed in writing by the
Assignor.
SECTION 8. PURCHASERS OF COLLATERAL. Upon any sale of the Subject
------------------------
Collateral by the Noteholders (as Assignees) or the Agent hereunder, the receipt
of the Noteholders (as Assignees), the Agent or the officer making the sale
shall be a sufficient discharge to the purchaser or purchasers of the Subject
Collateral so sold, and such purchaser or purchasers shall not be obligated to
see to the application of any part of the purchase money paid over to the
Noteholders (as Assignees), the Agent or such officer or be answerable in any
way for the misapplication or non-application thereof.
SECTION 9. FURTHER ASSURANCES. Without limitation to the provisions of
------------------
Section 6 the Assignor agrees that it shall at its own expense:
(a) do such further acts and things and execute and deliver to the Agent
and the other Assignees such additional conveyances, assignments agreements and
instruments (including, without limitation, one or more pledge or assignment as
collateral agreements in form and substance satisfactory to the Agent) as may be
reasonably required or deemed advisable to carry into effect the purposes of
this Agreement or to further assure and confirm unto the Agent and the other
Assignees its and their rights, powers and remedies hereunder; and
(b) comply with the requirements of Section 7.13 of the Note Agreement
(which provision is incorporated in full herein by reference).
SECTION 10. TRANSFER BY THE ASSIGNOR. The Assignor shall not assign, sell
------------------------
or otherwise dispose of, grant any option with respect to, or create, incur,
assume or suffer to exist any Lien on any portion of the Subject Collateral or
any other Securities, except (i) Liens in favor of Persons other than the
Noteholders permitted under Section 8.1 of the Note Agreement and (ii) Liens
created by this Agreement and by any other Pledge Document.
SECTION 11. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE ASSIGNOR. The
---------------------------------------------------------
Assignor represents and warrants that: (i) it is the owner of, and has good and
marketable title to, 360 shares of the capital stock of PPV Japan in existence
on the
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<PAGE>
date hereof, subject to no Lien (except the Lien created by this Agreement);
(ii) it has full corporate power, authority and legal right to assign as
collateral all such Securities pursuant to this Agreement; (iii) all such
Securities have been duly and validly issued, are fully paid and nonassessable;
(iv) this Agreement creates, as security for the Secured Obligations, a valid
and enforceable first priority security interest on all of the Subject
Securities in existence on the date hereof, in favor of the Noteholders (as
Assignees) and the Agent acting on behalf of such Assignees, subject to no Lien
in favor of any other Person; and (v) no consent, filing, recording or
registration is required to perfect the security interest in the Subject
Securities purported to be created by this Agreement. The Assignor covenants and
agrees that: (i) it shall not cause the article on the share transfer
restrictions to be incorporated in the Articles of Incorporation of PPV Japan;
(ii) it will defend the Assignees' right, title and Lien in and to the Subject
Collateral against the claims and demands of all Persons; and (iii) it will take
all actions within its powers to ensure that it will have like title to and
right to assign an collateral any other securities or property at any time
hereafter assigned as collateral to the Assignees as Subject Collateral
hereunder.
SECTION 12. THE AGENT. (a) The Agent will hold in accordance with the
---------
terms and provisions of the Appointment Agreement and this Agreement all Subject
Collateral at any time received by it under this Agreement. It is expressly
understood and agreed that the obligations of the Agent as holder of the Subject
Collateral and with respect to the disposition thereof are only those expressly
set forth in this Agreement and in the Appointment Agreement, and no implied
covenants or obligations shall be read into this Agreement against the Agent.
(b) In case of any litigation under this Agreement, or in case of any
enforcement of remedies or exercise of rights upon the occurrence of an Event of
Default, or in case the Agent deems that, by reason of any present or future law
of any jurisdiction, it may not or may not effectively exercise any of the
powers, rights or remedies herein granted to it or hold title to the properties
as herein granted, or take any other action which may be desirable or necessary
in connection therewith, the Agent shall be entitled to appoint, to the extent
consistent with any applicable law, one or more separate or additional
co-agents.
In the event that the Agent appoints an individual or institution as a
separate or additional co-agent (i) any appointment of any such co-agent by the
Agent shall be made only with the prior written consent of the Assignor and the
Required Holder(s) (except that, if the Agent shall have received written notice
from any Holder of Secured Obligations that a Default or an Event of Default has
occurred and is continuing, such consent shall be required only of the Required
Holder(s)), which consent shall not be unreasonably withheld or delayed and (ii)
each and every remedy, power, right, title, interest, duty and obligation
expressed or intended by this Agreement to be exercised by or vested in,
conveyed to or imposed upon, the Agent with respect
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<PAGE>
thereto shall be exercisable by and vest in such separate or additional co-agent
but only to the extent necessary, appropriate or desirable to enable such
separate or additional co-agent to exercise or have vested in it such powers,
rights, trusts, titles, interests, duties and obligations and remedies, and
every covenant and obligation necessary, appropriate or desirable to the
exercise thereof by such separate or additional co-agent shall run to and be
enforceable by either or any of them.
The Agent shall have the right to terminate the appointment of any such
co-agent hereunder with the prior written consent of the Assignor and the
Required Holder(s) (except that, if the Agent shall have received written notice
from any Holder that a Default or an Event of Default has occurred and is
continuing, such consent shall be required only of the Required Holder(s)),
which consent shall not be unreasonably withheld or delayed. Should any
instrument in writing from the Assignor be required by the separate or
additional co-agent so appointed by the Agent to more fully and certainly vest
in and confirm to it such remedies, rights, powers, titles, interest, duties and
obligations, any and all such instruments in writing shall, on request, be
executed, acknowledged and delivered by the Assignor. In case any separate or
additional co-agent, or a successor to either, shall become incapable of acting,
resign or be removed all the remedies, rights, powers, titles, interests,
trusts, duties and obligations of such separate or additional coagent, so far as
permitted by law, shall vest in and be exercised by the Agent until the
appointment of a new agent or successor to such separate or additional co-agent.
SECTION 13. ASSIGNOR'S OBLIGATIONS. The obligations of the Assignor under
----------------------
this Agreement shall be absolute and unconditional and shall remain in full
force and effect without regard to, and shall not be released, suspended,
discharged or terminated or otherwise affected by, any circumstance or
occurrence whatsoever, including without limitation; (i) any renewal, extension,
amendment or modification of, or addition or supplement to or deletion from, the
Note Agreement, any Note or any other instrument or agreement referred to
therein or any assignment or transfer of any thereof; (ii) any waiver, consent,
extension, indulgence or other action or inaction under or in respect of the
Note Agreement, any Note or any other such instrument or agreement or any
exercise or non-exercise of any right, remedy, power or privilege under or in
respect of the Note Agreement, any Note or any other such instrument or
agreement; (iii) any furnishing of any additional security to the Assignees or
any acceptance thereof or any sale, exchange, release, surrender or realization
of or upon any security by the Assignees; or (iv) any invalidity, irregularity
or unenforceability of all or part of the Secured Obligations or of any security
therefor or the termination or release of any security therefor.
SECTION 14. REGISTRATION. If an Event of Default shall have occurred and
------------
be continuing and any registration, qualification or compliance under any
securities law or laws is
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<PAGE>
required to be effected by any applicable law with respect to the enforcement of
the security interest in all or any part of the Subject Securities; the
Assignor, at the Agent's written request, as soon as practicable and at its
expense will use its best efforts to cause such registration to be effected (and
be kept effective) and will use its best efforts to cause such qualification and
compliance to be effected (and be kept effective) as may be so requested and as
would permit the enforcement of the security interest in such Subject
Securities, including without limitation, registration under any applicable
securities laws (including the Securities Act) and appropriate compliance with
any other governmental requirements, provided that the Agent shall furnish to
the Assignor such information regarding the Assignees as the Assignor may
request in writing and as shall be required in connection with any such
registration, qualification or compliance. The Assignor will cause the Agent to
be kept reasonably advised in writing as to the progress of each such
registration, qualification or compliance and as to the completion thereof, will
furnish to the Assignees such number of prospectuses, offering circulars or
other documents incident thereto as the Agent from time to time may reasonably
request, and agrees to indemnify the Agent and the other Assignees against all
losses, liabilities, claims or damages caused by any untrue statement (or
alleged untrue statement) of a material fact contained therein (or in any
related registration statement, notification or the like) or by any omission (or
alleged omission) to state therein (or in any related registration statement,
notification or the like) a material fact required to be stated therein or
necessary to make the statements therein not misleading, except insofar as the
same may have been caused by an untrue statement or omission based upon
information furnished in writing to the Assignor by the Agent expressly for use
therein.
SECTION 15. INDEMNITY. (a) The Assignor will pay or reimburse the Agent
---------
upon its request for all reasonable expenses, disbursements and advances
incurred or made by the Agent in accordance with any of the provisions of this
Agreement or any other Pledge Document (including the compensation and the
expenses and disbursements of its agents and counsel and of all Persons not
regularly in its employ).
(b) The Assignor also covenants to indemnify the Agent and the other
Assignees for any and all loss liability or expense reasonably incurred without
gross negligence, wilful misconduct or bad faith on the part of the Agent or the
other Assignees, arising out of or in connection with the acceptance or
administration of the Subject Collateral, the exercise of any rights and
remedies arising out of this Agreement, or the performance of any of its duties,
including the reasonable costs and expenses of defending itself against any
claim of liability and in enforcing any provision of this Agreement or any other
Pledge Document (except any liability incurred with gross negligence, wilful
misconduct or bad faith on the part of the Agent or the other Assignees), with
interest thereon (i) at the rate of 10.5% per annum with respect to amounts
owing to the Noteholders (as Assignees) and (ii) at a rate equal to the
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Agent's customary banking practices with respect to overdrafts (including the
imposition of interest, funds, wage charges and administrative fees), with
respect to amounts owing to the Agent, in each case from the date the same shall
have been paid until actually reimbursed.
(c) The obligations of the Assignor under this Section 15 to indemnify the
Agent and the other Assignees and to pay or reimburse the Agent and the other
Assignees for reasonable expenses, disbursements and advances shall for
avoidance of doubt be a Secured Obligation secured by this Agreement and shall
survive the satisfaction, discharge or other termination of this Agreement and
the resignation or removal of the Agent hereunder.
SECTION 16. TERMINATION; RELEASE. Upon:
--------------------
(a) the receipt by the Agent of a certificate executed by each Noteholder
certifying that the conditions set forth in Section 5.3 of the Note Agreement to
the release of the Subject Collateral have been satisfied; or
(b) the date on which the Secured Obligations have been discharged in
full;
this Agreement shall terminate, and the Agent, at the written request and
expense of the Assignor, shall promptly execute and deliver to the Assignor a
proper instrument or instruments acknowledging the satisfaction and termination
of this Agreement, and shall release, reassign and deliver to the Assignor,
without any representation or warranty, such of the Subject Collateral as maybe
in the possession of the Agent and has not theretofore been sold or otherwise
applied, released or reassigned pursuant to this Agreement, together with any
moneys at the time held by the Agent hereunder.
SECTION 17. NOTICES. All notices and other communications hereunder shall
be in the English language in writing and made at the addresses, in the manner
and with the effect provided in Section 11.10 of the Note Agreement, provided
that, for this purpose, the address of the Agent shall be as follows:
The Chase Manhattan Bank, N.A.
Corporate Trust Administration
4 Chase MetroTech Center
3rd Floor
Brooklyn, New York 11245
Facsimile: (718) 242-5885 or (718) 242-3529
or such other address as the Agent may designate for itself by notice given in
accordance with this Section 17.
SECTION 18. Change of the Assignees. Each of the Assignor, the Agent and
-----------------------
each of the other Assignees hereby (a) acknowledges that the Noteholders (and,
accordingly, the Assignees) may be changed and/or new Noteholders (and
accordingly, new Assignees) may be added from time to time in accordance
with the Note Agreement and the other Note Documents and agrees that, without
taking any action, the security interest created or to be created hereunder
shall automatically be effective for the benefit of the Agent and the then
current Noteholders who shall automatically be deemed to be Assignees hereunder.
The Agent further agrees that the Agent shall maintain possession of the Subject
Collateral in accordance with the terms of this Agreement on behalf of the
Assignees who may be changed or added to from time to time. The Assignor
further agrees that upon the Agent's request the Assignor shall execute and
deliver to the Agent a letter of confirmation in substantially the form attached
hereto as Appendix A, which letter shall be deemed upon delivery to the Agent to
have become an integral part of this Agreement,.
<PAGE>
SECTION 19. MISCELLANEOUS.
-------------
19.1 Benefit of Agreement. This Agreement shall be binding upon and inure
--------------------
to the benefit of and be enforceable by the Assignor, the Agent and the other
Assignees and their respective successors and permitted assigns; provided,
however, that the Assignor may not, without the prior written consent of the
Agent (acting on the instructions of all the other Assignees), assign or
transfer any of its rights or obligations hereunder. Each of the Assignees
(other than the Agent) may assign or transfer its rights hereunder in connection
with an assignment or transfer of all or any part of its interest in and rights
under its Notes and the Note Agreement pursuant to the provisions of the Note
Agreement. The Agent may be replaced by another entity pursuant to the
provisions of Sections 10 and 11 of the Appointment Agreement, in which case the
Subject Collateral shall be transferred, delivered and possessed by the
substituting agent in accordance with the Appointment Agreement and this
Agreement.
19.2 Amendment, Waiver. This Agreement may be changed, waived, discharged
-----------------
or terminated only with the written consent of the Required Holder(s), the Agent
and the Assignor.
19.3 Governing Law. This Agreement is a contract made under the laws of
-------------
Japan and shall for all purposes be construed and enforced in accordance with,
and the rights of parties shall be governed by the laws of Japan; provided,
however, that with respect to the Agent under Section 12 of this Agreement, the
laws of the State of New York shall apply.
19.4 Section Heading, Counterparts. The headings of the several sections
-----------------------------
and subsections in this Agreement are inserted for convenience only and shall
not in any way affect the meaning or construction of any provision of this
Agreement This Agreement may be executed in any number of counterparts and by
the different parties hereto on separate counterparts, each of which when so
executed and delivered shall be an original, but all of which together shall
constitute one and the same instrument.
19.5 Remedies Cumulative. The rights, powers and remedies herein or in
-------------------
any other Pledge Document expressly
- 12 -
<PAGE>
provided are cumulative and not exclusive of any rights, powers or remedies
which the Assignees would otherwise have.
19.6 Severability. Any provision of this Agreement which is prohibited or
------------
unenforceable in Japan shall be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof.
19.7 Consent to Jurisdiction; Service of Process. The Assignor for itself
-------------------------------------------
and its successors, hereby irrevocably; (i) agrees that any action, suit or
proceeding against the Assignor arising out of or relating to this Agreement or
the other Note Documents or any transaction contemplated hereby or the subject
matter of any of the foregoing may be instituted in the Tokyo District Court;
(ii) waives any objection which it may now or hereafter have to the venue of any
action, suit or proceeding in Tokyo or any claim of forum non conveniens in
Tokyo; and (iii) submits itself to the non-exclusive jurisdiction of the Tokyo
District Court or any court competent to hear any appeal from a decision of the
Tokyo District Court for purposes of any such action, suit or proceeding.
19.8 No Waiver. No failure or delay on the part of the Agent or any other
---------
Assignee in exercising any right, power of privilege hereunder and no course of
dealing between the Assignor and the Agent or any other Assignee shall operate
as a waiver thereof; nor shall any single or partial exercise of any right,
power or privilege hereunder preclude any other or further exercise thereof or
the exercise of any other right, power or privilege hereunder.
19.9 New Secured Lenders. The parties acknowledge that Section 8(i) of
-------------------
the Note Agreement contemplates that the Noteholders may enter into an
intercreditor agreement for the purpose of sharing the Subject Collateral with
the other parties to such agreement in accordance with the terms thereof. It is
understood that at the time of such event, the Assignor, the Agent and the other
Assignees will investigate whether and how this Agreement may be amended to
accommodate and give affect to such an intercreditor agreement.
- 13 -
<PAGE>
IN WITNESS WHEREOF, the Assignor, the Agent and the Purchasers have cause
this Agreement to be executed by their duly elected officers duly authorized as
of the date first above
written.
MAGINET CORPORATION, as Assignor
By /s/ J.A. Barth
Name: James A. Barth
Title: Chief Financial Officer
The Chase Manhattan Bank, N.A., as Agent
and an Assignee
By /s/ R.E. Abueva
Name: Rossana E. Abueva
Title: Second Vice President
New York Life Insurance Company, as an
Assignee
By /s/ Himi L. Kitner
Name: Himi L. Kittner
Title: Vice President
The Mutual Life Insurance Company of New
York, as an Assignee
By /s/ Diane Hom
Name: Diane Hom
Title: Managing Director
Namtor BVC LP, as an Assignee
By /s/ Michael Rothman
Name: Michael C. Rothman
Title: Partner
Waslic Company II, as an Assignee
By /s/ Daniel F. Lindley
Name: Daniel F. Lindley
Title: President & Secretary
- - 14 -
<PAGE>
Schedule A
to
Agreement of Assignment as Collateral
New York Life Insurance Company
51 Madison Avenue
New York, NY 10010
The Mutual Life Insurance Company of New York
1740 Broadway, 11th Floor
New York, NY 10019
Namtor BVC LP
311 South Wacker Drive,
Suite 4190
Chicago, IL 60606
Waslic Company II
c/o Ft. Washington Investment Advisors
400 Broadway
Cincinnati, OH 45202
- 15 -
<PAGE>
APPENDIX A
to Agreement of Assignment as Collateral
Form of a Letter of Confirmation under Section 18
--------------------------------------------------
Date: , 19__
The Chase Manhattan Bank, N.A.
as the Agent for the Noteholders (as Assignees)
Re: Noteholders of the Notes issued by MagiNet Corporation pursuant to the Note
Agreement dated August 15, 1995 and Assignees of the Agreement of
Assignment as Collateral referred to below
Dear Sirs:
We refer to the Agreement of Assignment as Collateral dated August 15, 1995 (as
amended to date, "Assignment as Collateral") made between you as the Agent and
an Assignee, the Purchasers and us. All capitalized terms defined or used
herein and not otherwise defined herein shall have the same meanings specified
in the Assignment as Collateral.
We understand that the current Noteholders, and accordingly the current
Assignees (excluding you), are those listed below and confirm that all security
interests created or to be created under the Assignment as Collateral are
effective for the benefit of you and such other Assignees as if they all were
Assignees on the date the Assignment as Collateral was first executed.
Very truly yours,
MagiNet Corporation
(Authorized Signatory)
(List of Assignees):
<PAGE>
Exhibit C
THIS WARRANT AND ANY SHARES OF CAPITAL STOCK TO BE ACQUIRED UPON THE
EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED (THE "ACT"). THESE SECURITIES HAVE BEEN ACQUIRED FOR
INVESTMENT AND NOT WITH A VIEW TO, OR IN CON NECTION WITH, THE DISTRIBUTION
THEREOF. THESE SECURITIES MAY NOT BE OFFERED, SOLD, PLEDGED, OR TRANSFERRED
UNLESS (I) A REGISTRATION STATEMENT UNDER THE ACT IS IN EFFECT AS TO THESE
SECURITIES OR (II) THERE IS AN OPINION OF COUNSEL, REASONABLY SATISFACTORY
TO THE COMPANY, THAT AN EXEMPTION THEREFROM IS AVAILABLE.
IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY
INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE
PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF
CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES.
MAGINET CORPORATION
COMMON STOCK PURCHASE WARRANT
AUGUST 15, 1995
VOID AFTER AUGUST 15, 2000
1. Number and Price of Shares Subject to Warrant.
---------------------------------------------
a. Subject to the terms and conditions set forth herein,
____________________________________________________, or its
registered assigns, is entitled to acquire from MAGINET CORPORATION, a
California corporation (the "Company"), at any time after the date
hereof and on or before the date of termination of this Warrant
provided for in Section 3 hereof, up to ____________________ shares
(as may be adjusted pursuant to clause 1(b) below) of duly authorized,
validly issued, fully paid, and non-assessable Common Stock of the
Company (the "Warrant Stock"), for a per share Warrant Price (as
defined below in Section 2). This Warrant is one of a series of
warrants (collectively, the "Warrants", as such term to include all
Warrants issued in substitution therefor) having substantially similar
terms and issued in connection with the sale of the Company's notes
(the "Notes") in a senior secured note financing transaction, which
issuance and sale were made pursuant to the Note Agreement dated
August 15, 1995 (the "Note Agreement").
b. Notwithstanding clause 1(a) above, if either
(x) the conditions set forth in Section 8.13(a) of the Note
Agreement have not been satisfied prior to January 1, 1996 or
<PAGE>
(y) the Company has not received additional investments in the
Company in the aggregate amount of at least $5,100,000 in cash prior
to January 1, 1996 in the form of (A) debt investments or equity
investments other than common equity or Preferred Equity (as
hereinafter defined) on terms and conditions satisfactory to the
Required Holders (as hereinafter defined), or (B) common or Preferred
Equity,
then the number of shares of Warrant Stock represented by this Warrant
shall automatically be increased to ____________ shares. For the avoidance
of doubt, the terms and conditions of any debt investment shall be deemed
to be unsatisfactory to the Required Holder(s) if (A) such debt investment
(i) has any scheduled principal payments due prior to the maturity of the
Notes, (ii) bears interest at a rate higher than that borne by the Notes or
(iii) allows the debt to be prepaid other than on a pro rata basis with the
holders of the Notes, or if (B) with respect to such debt investment, the
investors receive warrants to subscribe for Common Stock of the Company,
and such warrants either (i) are not in form and substance substantially
the same as this Warrant or (ii) provide that the amount of Common Stock
into which the warrants are exercisable is greater than 57,142.88 shares of
Common Stock for each $1,000,000 of debt investment, or if (C) the terms of
such debt investment described in clauses (A) and (B) above can be amended
without the consent of the Required Holders. "Required Holders" shall mean
the holders of Warrants exercisable into shares of Warrant Stock, which in
the aggregate amount to at least seventy percent (70%) of the aggregate
number of shares of Warrant Stock into which all the Warrants then
outstanding are exercisable. "Preferred Equity" shall mean securities which
have terms substantially of a kind similar to the terms of the Company's
outstanding Series A, Series B, and Series C Preferred Stock (such as
dividend and liquidation preferences, convertibility into Common Stock and
voting rights) and which do not have terms of a kind (such as mandatory
redemption or sinking fund provisions) functionally similar to terms found
in debt investments such as the Notes.
2. Warrant Price. Subject to the adjustments set forth in Section 9, this
-------------
Warrant shall be exercisable at a per share purchase price (the "Warrant
Price") of $7.00; provided, however, that if (A) no Liquidity Event (as
defined below) has occurred: (i) on or before June 30, 1998, the Warrant
Price shall be adjusted to $6.00 per share, (ii) on or before June 30,
1999, the Warrant Price shall be adjusted to $5.00 per share, and (iii) on
or before June 30, 2000, the Warrant Price shall be adjusted to $4.50 per
share, or (B) the conditions set forth in clause (x) and (y) of Section 1.b
hereof have not been satisfied, the Warrant Price shall be adjusted to
$4.50 per share; and provided further, that each of the per-share prices in
(A)(i), (ii), and (iii) or (B) of this Section 2 shall be adjusted, as
provided in Section 9, on the same basis as the then applicable Warrant
-2-
<PAGE>
Price. A "Liquidity Event" for purposes of this Section 2 shall mean the
closing of a firm commitment underwritten public offering of the Common
Stock of the Company pursuant to an effective registration statement under
the Act (provided that any such public offering results in gross proceeds
to the Company in excess of $10,000,000); the exchange of the Company's
Common Stock for securities of a corporation which corporation has a pre-
exchange market capitalization of at least $50,000,000 and whose shares are
listed for trading on a national securities exchange or automated quotation
system; or any other merger, acquisition or similar transaction in which
the holders of the Company's Common Stock receive cash in exchange for such
Common Stock, or receive a combination of cash and such listed securities.
3. Termination. This Warrant (and the right to purchase securities upon
-----------
exercise hereof) shall terminate upon the earlier of (i) five (5) years
from the date of this Warrant, or (ii) the closing of a firm commitment
underwritten public offering of the Common Stock of the Company pursuant to
an effective registration statement under the Act, which results in gross
proceeds to the Company in excess of $10,000,000; provided, that if the
holder of this Warrant has exercised its right to include the underlying
Warrant Stock in such public offering, and any such Warrant Stock is
excluded from such underwriting by reason of the underwriter's marketing
limitation, then the holder shall have a period of ten (10) Business Days
(as defined in the Note Agreement) to exercise its right pursuant to this
Warrant to purchase such Warrant Stock, or to effect an exchange described
in Section 8(c) below, at the then effective Warrant Price notwithstanding
the termination provision of this Warrant pursuant to either clause (i) or
(ii) above. The Company shall give the holder of this Warrant written
notice of such public offering at least twenty (20) and no more than ninety
(90) days prior to the closing of the effectiveness of such registration
statement and shall deliver a copy of the preliminary prospectus with
respect to any such public offering to the holder of this Warrant promptly
after it becomes available.
4. No Adjustments. Except as provided in Section 9, no adjustment on account
--------------
of dividends or interest on Warrant Stock will be made upon the exercise
hereof.
5. No Fractional Shares. No fractional shares of Warrant Stock will be issued
--------------------
in connection with any subscription hereunder. In lieu of any fractional
shares which would otherwise be issuable, the Company shall pay cash equal
to the product of such fraction multiplied by the Fair Market Value (as
defined in Section 8) of one (1) share of Warrant Stock on the date of
exercise (minus the Warrant Price if unpaid).
6. No Stockholder Rights. This Warrant shall not entitle its holder to any of
---------------------
the rights of a shareholder of the Company; or
-3-
<PAGE>
impose any liabilities on such holder to purchase any securities or as a
shareholder of the Company, whether such liabilities are asserted by the
Company or by creditors or shareholders of the Company or otherwise.
7. Reservation of Stock. The Company covenants that during the period this
--------------------
Warrant is exercisable, the Company will reserve from its authorized and
unissued Common Stock a sufficient number of shares to provide for the
issuance of Warrant Stock upon the exercise of this Warrant. The Company
agrees that its issuance of this Warrant shall constitute full authority to
its officers who are charged with the duty of executing stock certificates
to execute and issue the necessary certificates for shares of Warrant Stock
upon the exercise of this Warrant.
8. Exercise of Warrant.
-------------------
a. Procedure for Exercise. This Warrant may be exercised by the
----------------------
registered holder or its registered assigns, in whole or in part, by
the surrender of this Warrant at the principal office of the Company,
accompanied by payment in full of the Warrant Price in cash or by
check or by the cancellation of any present or future indebtedness
from the Company to the holder hereof, in accordance with Section
8(b). Upon partial exercise hereof, a new warrant or warrants
containing the same date and provisions as this Warrant shall be
issued by the Company to the registered holder for the number of
shares of Warrant Stock with respect to which this Warrant shall not
have been exercised. A Warrant shall be deemed to have been exercised
immediately prior to the close of business on the date of its
surrender for exercise as provided above, and the person entitled to
receive the shares of Warrant Stock issuable upon such exercise shall
be treated for all purposes as the holder of such shares of record as
of the close of business on such date. As promptly as practicable on
or after such date, and in any event within ten (10) business days
thereafter (unless such exercise shall be in connection with an
underwritten public offering, in which event three (3) business days
after such exercise), the Company at its expense (including the
payment by it of any applicable taxes payable by the Company) will
cause to be issued in the name of and delivered to the holder hereof
or, subject to Section 8, as such holder (upon payment by such holder
of any applicable transfer taxes) may direct, a certificate or
certificates for the number of full shares of Warrant Stock issuable
upon such exercise, together with cash in lieu of any fraction of a
share as provided above in Section 5.
b. Payment with Notes. Upon any exercise of this Warrant, the holder
------------------
hereof may, at its option, instruct the Company to apply to the
payment required by Section 8(a) all or any
-4-
<PAGE>
part of the principal amount then unpaid, the premium, if any, and the
interest on such principal amount then accrued on any one or more
Notes at the time held by such holder, in which case the Company will
accept the aggregate amount of principal and accrued interest on such
principal in satisfaction of a like amount of such payment. In case
less than the entire unpaid principal amount of any Note shall be so
specified, the principal amount so specified shall be credited, as of
the date of such exercise, on a pro rata basis against all future
installments of principal of such Note. In the event that the entire
unpaid principal amount of any Note is applied to the payment of the
Warrant Price, such Note shall be promptly surrendered and canceled
and shall be deemed no longer outstanding for all purposes of the Note
Agreement, except as provided in Section 6.4 thereof. Any interest on
the principal amount applied as payment upon such exercise shall be
paid through the date of payment as the next interest payment date
under the Note Agreement. No premium shall be payable on principal
amounts utilized to pay Warrant Price under this Section 8(b).
c. Net Exercise Rights. Notwithstanding the payment provisions set forth
-------------------
in this Section 8, the holder may elect to receive shares of Warrant
Stock equal to the value (as determined below) of this Warrant by
surrender of this Warrant at the principal office of the Company
together with notice of such election, in which event the Company
shall issue to the holder the number of shares of Common Stock
determined by use of the following formula:
X = Y(A-B)
------
A
Where: X = the number of shares of Common Stock to be issued to
the holder, pursuant to this Section 8(c).
Y = the number of shares of Warrant Stock subject to this
Warrant.
A = the Fair Market Value (as defined below) of one (1)
share of Warrant Stock.
B = Warrant Price per share of Warrant Stock.
For purposes of this Section 8, Fair Market Value of a share as of a
particular date shall mean:
i. If the Company's registration statement under the Act, covering
its initial underwritten public offering of stock has been
declared effective by the Securities and Exchange Commission,
then the fair market value of
-5-
<PAGE>
a share shall be the closing price (the last reported sales
price, if not so reported, the average of the last reported bid
and asked prices) of the Company's stock as of the last business
day immediately prior to the exercise of this Warrant.
ii. If such a registration statement has not been declared effective,
if it has been declared effective but the offering is not
consummated in accordance with the terms of the underwriting
agreement between the Company and its underwriters relating to
such registration statement, or if no such registration statement
has been filed or prepared, then as determined in good faith by
the Company's Board of Directors upon a review of relevant
factors. If the Required Holders disagree in writing with such
determination, then an investment banking firm mutually
acceptable to the Company and the Required Holders shall be
retained to appraise the Fair Market Value of the shares of
Warrant Stock in accordance with recognized appraisal standards
and the determination by such investment banking firm shall be
final and binding. If either (1) no such investment banking
appraisal has been performed within the prior six (6) months, or
(2) the appraised value of a share of Warrant Stock is more than
ten percent (10%) higher than the value determined by the Board
of Directors, then the cost of such appraisal shall be paid by
the Company; in all other circumstances, such cost shall be paid
pro rata by the holders of Warrant Stock requesting such an
appraisal.
d. In the event that the Company determines to effect a private sale of
its capital stock for cash or other consideration in an aggregate
amount equal to $1,000,000 or more, and either (x) the securities held
by other holder(s) of the Company's capital stock are included in such
sale or (y) the proceeds of any such sale are used to repurchase the
Company's outstanding securities, then the Company shall promptly give
the holder written notice thereof and include in such sale (and any
related qualification under blue sky laws or other compliance), and in
any placement involved therein, the Warrant Stock specified in a
written request by the holder received by the Company within fifteen
(15) days after the Company mails such written notice.
9. Adjustment of Warrant Price and Number of Shares. The number and kind of
------------------------------------------------
securities issuable upon the exercise of this Warrant shall be subject to
adjustment from time to time and the Company agrees to provide written
notice to each holder promptly upon the happening of certain events as
follows:
-6-
<PAGE>
a. Adjustment for Dividends in Stock. In case at any time or from time
---------------------------------
to time during the term of this Warrant the holders of the Common
Stock of the Company (or any shares of stock or other securities at
the time receivable upon the exercise of this Warrant) shall have
received, or, on or after the record date fixed for the determination
of eligible shareholders, shall have become entitled to receive,
without payment therefor, other or additional securities or other
property of the Company by way of dividend or distribution, then and
in each case, the holder of this Warrant shall, upon the exercise
hereof, be entitled to receive, in addition to the number of shares of
Common Stock receivable thereupon, and without payment of any
additional consideration therefor, the amount of such other or
additional securities or other property of the Company which such
holder would hold on the date of such exercise had it been the holder
of record of such Common Stock on the date hereof and had thereafter,
during the period from the date hereof to and including the date of
such exercise, retained such shares and/or all other additional
securities or other property receivable by it as aforesaid during such
period, giving effect to all adjustments called for during such period
by this Section 9.
b. Adjustment for Reclassification or Reorganization. In case of any
-------------------------------------------------
reclassification or change of the outstanding Common Stock of the
Company or of any reorganization of the Company during the term of
this Warrant (other than a merger of the Company with and into another
corporation), then and in each such case the Company shall give the
holder of this Warrant at least twenty (20) days notice of the
proposed effective date of such transaction, and the holder of this
Warrant, upon the exercise hereof at any time after the consummation
of such reclassification, change or reorganization, shall be entitled
to receive, in lieu of the stock or other securities and property
receivable upon the exercise hereof prior to such consummation, the
stock or other securities or property to which such holder would have
been entitled upon such consummation if such holder had exercised this
Warrant immediately prior thereto, all subject to further adjustment
as provided in this Section 9. The terms of this Section 9 shall
similarly apply to successive reclassifications, changes or
reorganizations.
c. Stock Splits and Reverse Stock Splits. If at any time during the term
-------------------------------------
of this Warrant the Company shall subdivide its outstanding shares of
Common Stock into a greater number of shares, the Warrant Price in
effect immediately prior to such subdivision shall thereby be
proportionately reduced and the number of shares receivable upon
exercise of the Warrant shall thereby be proportionately increased;
-7-
<PAGE>
and, conversely, if at any time on or after the date hereof the
outstanding number of shares of Common Stock shall be combined into a
smaller number of shares, the Warrant Price in effect immediately
prior to such combination shall thereby be proportionately increased
and the number of shares receivable upon exercise of this Warrant
shall thereby be proportionately decreased.
d. Adjustments with Respect to Certain Diluting Issuances. The Warrant
------------------------------------------------------
Price shall be subject to adjustment from time to time as follows:
i. Warrant Price Adjustment.
(1) If the Company shall issue any Additional Stock (as defined
hereafter) without consideration or for a consideration per
share less than the Warrant Price in effect immediately
prior to the issuance of such Additional Stock, then such
Warrant Price in effect immediately prior to each such
issuance shall (except as otherwise provided in this Section
9(d)) be adjusted by dividing (X) an amount equal to the sum
of (a) the product derived by multiplying the Warrant Price
in effect immediately prior to such issue by the number of
shares of Common Stock (including shares of Common Stock
issued or issuable upon conversion of the outstanding
Preferred Stock, upon exercise of outstanding stock options
and warrants or otherwise under Section 9(d)(i)(5))
outstanding immediately prior to such issue, plus (b) the
consideration, if any, received by or deemed to have been
received by the Company upon such issuance, by (Y) an amount
equal to the sum of (c) the number of shares of Common Stock
(including shares of Common Stock issued or issuable upon
conversion of the outstanding Preferred Stock, upon exercise
of outstanding stock options and warrants or otherwise under
Section 9(d)(i)(5)) outstanding immediately prior to such
issuance, plus (d) the number of shares of Common Stock
issued or deemed to have been issued in such issuance; or
(2) No adjustment of the Warrant Price shall be made in an
amount less than one cent per share, provided that any
adjustment that is not required to be made by reason of this
sentence shall be carried forward and taken into account in
any subsequent adjustment. Except to the limited extent
provided for in Sections 9(d)(i)(5)(c) and 9(d)(i)(5)(d), no
readjustment of the Warrant Price shall have the effect of
increasing the
-8-
<PAGE>
Warrant Price above the Warrant Price in effect immediately
prior to such adjustment.
(3) In the case of the issuance of Additional Stock for cash,
the consideration shall be deemed to be the amount of cash
paid therefor before deducting any reasonable discounts,
commissions or other expenses allowed, paid or incurred by
the Company for any underwriting or otherwise in connection
with the issuance and sale thereof.
(4) In the case of the issuance of Additional Stock for a
consideration in whole or in part other than cash, the
consideration other than cash shall be deemed to be the fair
value thereof as determined in good faith by the Board of
Directors. If the Required Holders disagree in writing with
such determination, then (A) if such consideration other
than cash is not securities, an appraisal firm experienced
in valuing property of such type which is mutually
acceptable to the Company and the Required Holders shall be
retained to appraise the fair market value of such
consideration in accordance with recognized appraisal
standards, and the determination by such appraisal firm
shall be final and binding, and (B) if such consideration
other than cash consists of securities, then an investment
banking firm mutually acceptable to the Company and the
Required Holders shall be retained to appraise the fair
market value of the securities in accordance with recognized
appraisal standards, and the determination by such
investment banking firm shall be final and binding. If
either (1) no such appraisal has been performed within the
prior six (6) months with respect to the same property or
securities, or (2) the appraised value of the consideration
is more than ten percent (10%) higher than the value
determined by the Board of Directors, then the cost of such
appraisal shall be paid by the Company; in all other
circumstances, such cost shall be paid pro rata by the
holders of Warrant Stock requesting such an appraisal
(5) In the case of the issuance of options to pur chase or
rights to subscribe for Common Stock, securities by their
terms convertible into or exchangeable for Common Stock or
options to purchase or rights to subscribe for such
convertible or exchangeable securities (where the shares of
Common Stock issuable upon exercise of such options or
rights or upon conversion or exchange of such securities are
not excluded from the definition of Additional Stock), the
following provisions shall apply:
-9-
<PAGE>
(a) the aggregate maximum number of shares of Common Stock
deliverable upon exercise of such options to purchase or
rights to subscribe for Common Stock shall be deemed to have
been issued at the time such options or rights were issued
and for a consideration equal to the consideration
(determined in the manner provided in Sections 9(d)(i)(3)
and 9(d)(i)(4)), if any, received by the Company upon the
issuance of such options or rights plus the minimum purchase
price provided in such options or rights for the Common
Stock covered thereby;
(b) the aggregate maximum number of shares of Common Stock
deliverable upon conversion of or in exchange for any such
convertible or exchangeable securities or upon the exercise
of options to purchase or rights to subscribe for such
convertible or exchangeable securities and subsequent con
version or exchange thereof shall be deemed to have been
issued at the time such securi ties were issued or such
options or rights were issued and for a consideration equal
to the consideration, if any, received by the Company for
any such securities and related options or rights (excluding
any cash received on account of accrued interest or accrued
dividends), plus the additional consideration, if any, to be
received by the Company upon the conversion or exchange of
such securities or the exercise of any related options or
rights (the consideration in each case to be determined in
the manner provided in Sections 9(d)(i)(3) and 9(d)(i)(4));
(c) in the event of any change in the number of shares of Common
Stock deliverable upon exercise of such options or rights or
upon conversion of or in exchange for such convertible or
exchangeable securities, including, but not limited to, a
change resulting from the anti-dilution provisions thereof,
the Warrant Price in effect at the time shall forthwith be
readjusted to such Warrant Price as would have applied had
the adjustment that was made upon the issuance of such
options, rights or securities not converted prior to such
change or the options or rights related to such securities
not converted prior to such change been made
-10-
<PAGE>
upon the basis of such change, but no further adjustment
shall be made for the actual issuance of Common Stock upon
the exercise of any such options or rights or the conversion
or exchange of such securities; and
(d) upon the expiration of any such options or rights, the
termination of any such rights to convert or exchange or the
expiration of any options or rights related to such
convertible or exchangeable securities (or upon purchase by
the Company and cancellation or retirement of any such
options or rights not exercised or of any such convertible
securities, the rights of conversion or exchange under which
shall not have been exercised), the Warrant Price shall
forthwith be readjusted to such Warrant Price as would have
applied had the adjustment which was made upon the issuance
of such options, rights or securities or options or rights
related to such securities been made upon the basis of the
issuance of only the number of shares of Common Stock
actually issued upon the exercise of such options or rights,
upon the conversion or exchange of such securities or upon
the exercise of the options or rights related to such
securities.
ii. "Effective Date" means the date of the first sale by the
Company of the Notes.
iii. "Additional Stock" shall mean any shares of Common Stock issued
(or deemed to have been issued pursuant to Section 9(d)(i)(5))
by the Company after the Effective Date other than:
(1) Common Stock issued in a transaction deemed to be a
"liquidation" within the meaning of the Company's Articles
of Incorporation in effect as of the Effective Date.
(2) Common Stock issued or issuable to employees, officers, or
directors of, or consultants to the Company approved by the
Board.
(3) Common Stock issued pursuant to the acquisition of another
corporation by merger, purchase of all or substantially all
of the assets, or other reorganization.
-11-
<PAGE>
(4) Common Stock issued or issuable upon conversion of the
shares of Series A, Series B and Series C Preferred Stock.
(5) Common Stock issued or issuable pursuant to the exercise of
warrants granted in connection with any lease, loan, or
other financing transaction, approved by the Board.
10. Certificate of Adjustment. Whenever the Warrant Price or the number or
-------------------------
type of securities issuable upon exercise of this Warrant is adjusted or
readjusted, as herein provided, the Company at its expense shall promptly
deliver to the record holder of this Warrant a certificate of an officer of
the Company setting forth such adjustment or readjustment and showing in
reasonable detail the facts upon which such adjustment or readjustment is
based, including without limitation a statement of (a) the consideration
received or to be received by the Company for any Additional Stock issued
or sold or deemed to have been issued, (b) the number of shares of Common
Stock outstanding or deemed to be outstanding, and (c) the Warrant Price in
effect immediately prior to such issue or sale and as adjusted and
readjusted (if required by Section 9) on account thereof.
11. No Dilution or Impairment. The Company covenants that it shall not, by
-------------------------
amendment of its Articles of Incorporation or through any reorganization,
consolidation, merger, transfer of assets, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms of this Warrant, but shall at
all times in good faith assist in carrying out all those terms and in
taking all actions necessary or appropriate to protect the rights of the
holder of this Warrant against dilution or other impairment. Without
limiting the generality of the above provision, the Company (a) will not
take any action which results in any adjustment of the Warrant Price then
in effect if the total number of shares of Common Stock (or other
securities) issuable after the action upon the exercise of all of the
Warrants would exceed the total number of shares of Common Stock (or other
securities) then authorized by the Company's Articles of Incorporation and
available for the purpose of issue upon such exercise, and (b) will take
all necessary or appropriate action in order that the Company may validly
and legally issue fully paid and nonassessable shares upon the exercise of
this Warrant.
12. Transfer of Warrant. The rights and obligations of the Company and the
-------------------
holders of this Warrant shall be binding upon and benefit the successors,
assignors, heirs, administrators and transferees of the parties. Any
transferee hereof agrees to be
-12-
<PAGE>
bound by the restrictions set forth herein and in the Note Agreement.
13. Compliance with Securities Laws. This Warrant or the Warrant Stock may not
-------------------------------
be transferred or assigned, in whole or in part, by the holder hereof
(except to any affiliate hereof) without compliance with applicable federal
and state securities laws. The holder represents and agrees that this
Warrant is being acquired only for investment, for holder's own account,
and not with a view to or for sale in connection with any distribution
thereof within the meaning of the Act, and the holder acknowledges and
agrees that, at any time that it exercises its Warrant, it will represent,
among other things, to the Company that the Warrant Stock that it acquires
through exercise of the Warrant is being acquired by it for its own account
and not with a view to or for sale in connection with any distribution
thereof within the meaning of the Act; provided, that in any case, the
disposition of its property shall at all times be and remain within its
control. The holder of this Warrant acknowledges and agrees that this
Warrant and the Shares have not been registered under the Securities Act
and accordingly will not be transferable except as permitted under the
various exemptions contained in the Securities Act, or upon satisfaction of
the registration and prospectus delivery requirements of the Securities
Act. Therefore, the Warrant and the Warrant Stock must be held indefinitely
unless they are subsequently regis tered under the Securities Act or an
exemption from such regis tration is available. The holder understands that
the certi ficate evidencing the Warrant Stock will be imprinted with a
legend which prohibits the transfer of the Warrant Stock unless they are
registered or unless the Company receives an opinion of counsel (which may
be an opinion of in-house counsel) reasonably satisfactory to the Company
that such registration is not required. The holder is aware of the adoption
of Rule 144 by the Securities and Exchange Commission and that Company is
not now and, at the time it wishes to sell the Warrant Stock, may not be
satisfying the current public information requirements of Rule 144 and, in
such case, holder would be precluded from selling the securities under Rule
144. The holder understands that a stop-transfer instruction will be in
effect with respect to transfer of the Warrant and the Warrant Stock
consistent with the requirements of the securities laws.
14. Waiver and Amendment. Any provision of this Warrant may be amended or
--------------------
waived upon the written consent of the Company and the Required Holders,
and any such amendment or waiver shall be binding upon the remaining
holders of Warrants, except that, without the written consent of the holder
of each Warrant, no amendment or waiver to this Warrant that increases the
Warrant Price, changes the Termination Date, changes the number of shares
purchasable hereunder, changes the method set forth in Sections 8 and 9 for
calculating adjustments thereto, amends this Section 14, or reduces the
percentage required for
-13-
<PAGE>
modification, may be made.. All holders of Warrants, by acceptance hereof,
specifically consent to the binding effect of a written consent authorized
by this Section 14. No failure or delay by any party in exercising any
right or remedy hereunder shall operate as a waiver thereof, and a waiver
of a particular right or remedy on one occasion shall not be deemed a
waiver of any other right or remedy or a waiver of the same right or remedy
on any subsequent occasion.
15. Miscellaneous. This Warrant shall be governed by the laws of the State of
-------------
New York. The headings in this Warrant are for purposes of convenience and
reference only, and shall not be deemed to constitute a part hereof.
Neither this Warrant nor any term hereof may be changed, waived, discharged
or terminated orally but only by an instrument in writing signed by the
Company and, except as provided in Section 14 hereof, the registered holder
hereof. All notices and other communications from the Company to the holder
of this Warrant shall be sent either by facsimile copy to such number and
to the attention of such person as the last holder of this Warrant shall
have furnished to the Company, or shall be mailed by first-class registered
or certified mail, postage prepaid , or sent by courier, to the address
furnished to the Company in writing by the last holder of this Warrant who
shall have furnished an address to the Company in writing.
-14-
<PAGE>
[Signature Page to Warrant]
ISSUED this 15th day of August, 1995.
MAGINET CORPORATION
By:_______________________________________
James A. Barth, Chief Financial Officer
-15-
<PAGE>
EXHIBIT D-1
-----------
(Form of Opinion of Counsel to the Company)
<PAGE>
EXHIBIT D-1
-----------
FORM OF OPINION OF COUNSEL TO THE COMPANY
re: $30,000,000 Senior Secured Notes of
Pacific Pay Video Holdings (the "Company")
------------------------------------------
The opinion shall be addressed to each of the Purchasers, dated the
date of closing, and may contain such customary assumptions and indicate such
investigations as are deemed necessary and appropriate by special US counsel to
the Company and are acceptable to the Purchasers. The opinion shall state that
it may be relied upon by any transferee of Securities and by White & Case,
special counsel to Purchasers, in delivering their opinion.
The opinion shall express a favorable opinion as to:
1. The due organization, valid existence and good standing of the
Company;
2. The fact that the Company has the corporate power and authority (i)
to enter into and perform its obligations under each of the Note Documents to
which it is a party and (ii) to own its properties and carry on its business;
3. The due authorization by all requisite corporate action, execution
and delivery of each of the Note Documents to which it is a party by the
Company, and that each such Note Document constitutes a valid and binding
agreement of the Company enforceable in accordance with its terms;
4. The issuance, sale and delivery of the Securities and the
execution, delivery and performance by the Company of the Note Agreement, each
Pledge Agreement and the Shareholders Agreement do not conflict with, nor result
in any breach of, nor constitute a default under, nor result in the creation of
any Lien upon any of the properties or assets of the Company pursuant to (a) the
charter documents of the Company, (b) any statute, law, rule or regulation of
the United States or the State of California, (c) any judgement, decree, writ,
injunction, order or award of any arbitrator, court or governmental authority
applicable to the Company or (d) any material agreement or other instrument to
which the Company is a party or by which the Company may be bound;
5. The determination that no approval, consent or withholding of
objection on the part of, or filing, registration or qualification with, any
governmental body or regulatory authority or agency is necessary in the United
States in connection with the issuance, sale and
<PAGE>
delivery of the Securities or the execution and delivery by the Company of the
Note Agreement, each Pledge Agreement and the Shareholders Agreement;
6. The fact that the Company has the corporate power to submit to the
jurisdiction of any court of the State of New York sitting in New York City and
the federal courts of the United States sitting in New York City in respect of
any legal action or proceeding relating to the Note Agreement or the Notes;
7. The enforceability in the State of California of a judgment
rendered in any court of the State of New York sitting in New York City or in
the federal courts of the United States sitting in New York City against the
Company on the Note Agreement, any Pledge Agreement or the Securities without a
substantive relitigation of the relevant issues;
8. The determination that a court in sitting in California will
accept, and give effect to, the choice of New York law as the governing law of
the Note Agreement and the Notes;
9. The absence of any material litigation pending or, to the knowledge
of such counsel, threatened against the Company;
10. It is not necessary in connection with the offering, issuance, sale
and delivery of the Securities under the circumstances contemplated by the Note
Agreements to register the Notes or the Warrants under the Securities Act of
1933, as amended, or to qualify an indenture in respect of the Notes under the
Trust Indenture Act of 1939, as amended; and
11. The extension of the credit represented by the Notes does not
violate Regulation G of the Board of Governors of the Federal Reserve System;
12. The Company is not an "investment company" within the meaning of
the Investment Company Act of 1940.
<PAGE>
EXHIBIT D-2
-----------
(Form of opinion of counsel to the Agent)
<PAGE>
[LETTERHEAD OF WHITE & CASE APPEARS HERE]
JMD:MAC:ES August 15, 1995
re MagiNet Senior Secured Notes Due 2000 with Warrants
---------------------------------------------------
To the Parties Listed on
the Attached Schedule I
Dear Ladies and Gentlemen:
We have acted as counsel for The Chase Manhattan Bank, N.A. (the
"Collateral Agent") in connection with each of the Pledge Agreements dated as of
August 15, 1995 by and between the Collateral Agent and MagiNet corporation, as
Pledgor, the Collateral Assignment Agreement, dated as of August 15, 1995 by and
between Pacific Pay Video Limited and The Chase Manhattan Bank, N.A. as
assignee, (the "Assignee"), and the Appointment Agreement dated an of August 15,
1995 by and among MagiNet Corporation, the Purchasers listed therein, and The
Chase Manhattan Bank, N.A. as Collateral Agent (the "Agent"). The Chase
Manhattan Bank, N.A., whether acting as Agent, Collateral Agent or Assignee
shall be referred to herein as the "Agent." The documents referenced immediately
above shall be referred to herein as the "Agent Documents."
In this connection, we have examined such certificates of public
officials, such certificates of officers of the Agent, and copies certified to
our satisfaction of such corporate documents and records of the
<PAGE>
To the Parties Listed on
the Attached Schedule I -2
Agent, and of such other papers, as we have deemed relevant and necessary for
our opinion hereinafter set forth. We have relied upon such certificates of
public officials and of officers of the Agent with respect to the accuracy of
material factual matters contained therein which were not independently
established. In rendering the opinion expressed below, we have assumed the
genuineness of all signatures, the authenticity of all documents submitted to us
as originals and the conformity to authentic original documents of all documents
submitted to us as certified, conformed or photostatic copies.
Based upon the foregoing, it is our opinion that:
l. The Agent has been duly incorporated and is validly existing as a
national banking association under the laws of the United States of America and
has the power and authority to enter into, and to take all action required of it
under, the Agent Documents.
2. The Agent Documents been duly authorized, executed and delivered
by the Agent and constitute valid and binding obligations of the Agent
enforceable against the Agent in accordance with their terms, except as the
enforceability thereof may be limited by (i) bankruptcy, insolvency,
reorganization, or other similar laws affecting the enforcement of creditors'
rights generally, as such laws would apply in the event of a bankruptcy,
insolvency or reorganization or similar occurrence affecting the Agent, and (ii)
general principles of equity (regardless of whether such enforceability is
considered in a proceeding in equity or at law).
3. The execution and delivery of the Agent Documents by the Agent
and the performance by the Agent of their terms do not conflict with or result
in a violation of (A) any law or regulation of the United States of America or
the State of New York governing the banking or trust powers of the Agent or (B)
the By-laws of the Agent.
4. No approval authorization or other action by, or filing with, any
governmental authority of the United States of America or the State of New York
having jurisdiction over the banking or trust powers of the Agent is required in
connection with the execution and delivery
<PAGE>
To the Parties Listed on
the Attached Schedule 1 -3
of the Agent Documents or the performance by the Agent of the terms of the Agent
Documents.
We express no opinion as to matters governed by any law other than the
law of the State of New York and the Federal law of the United States.
Very truly yours,
/s/ White & Case
<PAGE>
Schedule I
----------
The Chase Manhattan Bank, N.A.
4 MetroTech Center, 3rd Floor
Brooklyn, New York 11245
MagiNet Corporation
405 Tasman Drive
Sunnyvale, California 94089
Purchasers:
----------
New York Life Insurance Company
The Mutual Life Insurance Company of New York
Waslic Company II
Namtor BVC LP
<PAGE>
EXHIBIT D-3
-----------
FORM OF OPINION OF COUNSEL TO EACH SUBSIDIARY
re: US$30,000,000 Senior Secured Notes of
Pacific Pay Video Holdings (the "Company")
------------------------------------------
Each opinion with respect to a Subsidiary whose shares are pledged
pursuant to a Pledge Agreement shall be addressed to the Purchasers, dated the
date of closing, and may contain such customary assumptions and indicate such
investigations as are deemed necessary and appropriate by the counsel to such
Subsidiary and are acceptable to such Purchasers. The opinion shall state that
it may be relied upon and by White & Case, special counsel to the Purchasers, in
delivering their opinion, and by any transferee of a Note.
The opinion shall express a favorable opinion as to:
1. The due organization and valid existence of such Subsidiary.
2. The taking of all requisite action by such Subsidiary to perfect
the interest of the Trustee in the shares of such Subsidiary pledged under the
Pledge Agreement.
3. The fact that such Subsidiary (i) has the corporate power and
authority to own its properties and carry on its business and (ii) is duly
qualified to do business and is, if applicable, in good standing, in each
jurisdiction in which the character of the properties owned or held under lease
by it or the nature of the business transacted by it requires such
qualification.
4. The absence of any requirement to register the Pledge Agreement
under the laws of the relevant jurisdictions.
5. The determination that no approval consent or withholding of
objection on the part of, or filing, registration or qualification with, any
governmental body is necessary in the jurisdiction of such Subsidiary in
connection with the execution and delivery of the Pledge Agreement.
6. The determination that no stamp or stamp duty reserve tax will be
payable in the jurisdiction of such Subsidiary in respect of the execution and
delivery of the Pledge Agreement.
<PAGE>
7. The enforceability in the jurisdiction in which such Subsidiary is
established of a New York judgment rendered in any court of the State of New
York sitting in New York City or in the federal courts sitting in New York City
against the Collateral in the Pledge Agreement without a substantive
relitigation of the relevant issues.
8. In the case of a Pledge Agreement governed by New York law, the
determination that a court in the jurisdiction in which such Subsidiary is
established will accept, and give effect to, the choice of New York law as the
governing law of the Pledge Agreement.
9. The absence of withholding or similar taxes imposed by the
jurisdiction in which such Subsidiary is established or any taxing jurisdiction
thereof on payments under the Pledge Agreement.
10. With respect to such Subsidiary, the execution and delivery of the
Pledge Agreement and fulfillment of and compliance with the respective
provisions of the Pledge Agreement do not conflict with, or result in a breach
of the terms, conditions or provisions of, or constitute a default under, or
result in any violation of, or result in the creation of any Lien upon any of
the properties or assets of such Subsidiary pursuant to, the charter or by-laws
of such Subsidiary, any applicable law (including any securities laws), statute,
rule or regulation or (insofar as is known to us after having made due inquiry
with respect thereto) any agreement (including, without limitation, any
agreement listed in Exhibit C to the Note Agreement), instrument, order,
judgment or decree to which such Subsidiary is a party or otherwise subject.
2
<PAGE>
EXHIBIT E
TO NOTE AGREEMENT
Collateral Assignment Agreement
also appears as Exhibit 10.46
to this Registration Statement
COLLATERAL ASSIGNMENT AGREEMENT
-------------------------------
THIS COLLATERAL ASSIGNMENT AGREEMENT (this "Agreement") dated as of
August 15, 1995, between PACIFIC PAY VIDEO LIMITED, a corporation organized
under the laws of the State of California, as assignor (the "Assignor"), and THE
--------
CHASE MANHATTAN BANK, N.A., as collateral agent (the "Assignee") for the benefit
--------
of the Noteholders. Unless otherwise defined herein, capitalized terms used
herein shall have the meanings provided in the Note Agreement, as defined below.
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, MagiNet Corporation (the "Company") has entered into the Note
Agreement dated as of August 15, 1995 with certain U.S. financial institutions,
providing for the issuance and sale of up to $30,000,000 aggregate principal
amount of its 10.5% Senior Secured Notes and the issuance of warrants (the "Note
Agreement");
WHEREAS, the Company, the Assignee and the Purchasers have entered
into the Appointment Agreement dated as of August 15, 1995 (the "Appointment
Agreement") providing for the appointment of The Chase Manhattan Bank, N.A. to
act as collateral agent for the benefit of the Noteholders under the Security
Documents (including this Agreement);
WHEREAS, it is a condition precedent under the Note Agreement to each
Purchaser's obligation to purchase and pay for the Notes and to accept the
Warrants to be issued under the Note Agreement that the Assignor shall have
executed and delivered to the Assignee this Agreement;
WHEREAS, the Assignor desires to execute this Agreement to satisfy the
conditions described in the preceding paragraphs and to induce the Purchasers to
enter into the Note Agreement and to purchase and pay for the Notes and the
Warrants (and to induce any future Noteholders so to do);
NOW, THEREFORE, in consideration of the benefits accruing to the
Assignor and the Company, the receipt and sufficiency of which are hereby
acknowledged, the Assignor hereby makes the following representations and
warranties to the Assignee and hereby covenants and agrees with the Assignee as
follows:
1. Grant of Security Interest. Assignor hereby grants to Assignee a
--------------------------
security interest in the contract and related items described in Paragraph 2
below (the "Collateral") for the benefit of the Assignee as collateral trustee
for the Noteholders to secure (i) the payment due of the principal of and
interest in respect of the Notes and payment of all other obligations and
liabilities
<PAGE>
(including without limitation indemnities, premium, if any, fees and interest
thereon) of the Company, now existing or hereafter incurred under, arising out
of or in connection with the Note Agreement, each Note or any other Note
Document (other than the Warrants) and (ii) the due performance and compliance
with the terms of the Note Documents (other than the Warrant) by the Company
(all such principal, interest, obligations and liabilities, collectively, the
"Secured Obligations"). In no event solely as a consequence of the grant of
-------------------
this security interest shall the Assignee be liable for any obligations and/or
amounts owing to On Command Video Corporation pursuant to the terms of the
Technology License Agreement; provided that nothing in this sentence shall
diminish the obligation of a transferee of the rights under the Technology
License Agreement pursuant to Section 6 of this Agreement to pay royalties
thereunder.
2. Collateral. The Collateral shall consist of all right and interest of
----------
Assignor in and to (A) all of Assignor's right and interest in the Technology
License Agreement as now or hereafter amended, modified or supplemented, in
accordance with the terms hereof and the Note Agreement and (B) all proceeds of
the foregoing collateral, including whatever is receivable or received when the
foregoing collateral is sold, collected, assigned, exchanged or otherwise
disposed of, whether such disposition is voluntary or involuntary.
3. Representations and Warranties. Assignor hereby represents and warrants
------------------------------
that: (i) except as disclosed in Annex A, Assignor has a valid interest in the
Collateral and that no other person has any right, title, claim or interest (by
way of security interest or other lien or charge or otherwise) in, against or to
the Collateral, (ii) it has full power, authority and legal right to assign its
right and interest in the Collateral pursuant to this Agreement; and (iii) other
than registrations or filings described in Annex B hereto (all of which have
been made prior to the date hereof or will be made within the relevant statutory
period) no consent, filing, recording or registration is required to perfect the
Lien purported to be created by this Agreement.
4. Covenants of the Assignor. The Assignor covenants and agrees that (i)
-------------------------
it will defend the Assignee's right, title and Lien in and to the Collateral
against the claims and demands of all Persons, (ii) it will procure, execute and
deliver from time to time any endorsements, assignments, financing statements
and other writings deemed reasonably necessary or appropriate to perfect,
maintain and protect the Assignee's security interest hereunder and the priority
thereof (iii) except as otherwise permitted by Sections 8.1 and 8.8 of the Note
Agreement, it will not sell, encumber, or otherwise dispose of or transfer the
Collateral or right or interest therein except as hereinafter provided, and to
keep the Collateral free of all levies and security interests or other liens or
charges except those approved in writing by the Required Holders and Permitted
Liens, (iv) except as otherwise permitted by Section 8.11 of the Note Agreement,
it will not amend, modify or supplement the Technology License Agreement and (v)
it will duly fulfill all obligations on its part to be fulfilled under or in
connection with the Technology License Agreement and will do nothing to impair
the rights of the Assignor in respect of the Collateral.
5. Authorized Action by Assignee. Effective upon and during the
-----------------------------
continuance of an Event of Default, Assignor hereby irrevocably appoints
Assignee as its attorney-in-fact to do (but Assignee shall not be obligated to
and shall incur no liability to Assignor or any third party for failure so to
do) any act which Assignor is obligated by this Agreement to do, and to cure a
failure by Assignor to perform its obligations under the Technology License
Agreement and, after an Event of Default and upon acceleration of the Notes in
accordance with the terms of the Note
<PAGE>
Agreement, to exercise such rights and powers as Assignor might exercise with
respect to the Collateral, including, without limitation, to the extent
permitted by law and the terms of the Technology License Agreement, the right to
(i) collect by legal proceedings or otherwise and endorse, receive and receipt
for proceeds and other sums and property now or hereafter payable on or on
account of the Collateral, (ii) enter into any extension or other agreement
pertaining to, or deposit, surrender, accept, hold or apply other property in
exchange for the Collateral, (iii) transfer the Collateral to its own or its
nominee's name, and (iv) make any compromise or settlement, and take any action
it deems advisable, with respect to the Collateral. Assignor agrees to reimburse
Assignee upon demand for any costs and expenses, including, without limitation,
attorneys' fees, Assignee may incur while acting as Assignor's attorney-in-fact
hereunder, all of which costs and expenses are included in the Secured
Obligations secured hereby. Assignee shall not be required to make any
presentment, demand or protest, or give any notice and need not take any action
to preserve any rights against any prior party or any other person in connection
with the Secured Obligations or with respect to the Collateral.
6. Default and Remedies. Assignor shall be deemed in default under this
--------------------
Agreement upon the occurrence of an Event of Default. Upon the occurrence and
continuance of an Event of Default, Assignee may, at its option, and without
notice to or demand on Assignor and in addition to all rights and remedies
available to Assignee under any guaranty, this Agreement or any agreement with
Assignor, or by law, do any one or more of the following: (i) enforce Assignee's
security interest in any manner permitted by law, or provided for in this
Agreement, (ii) sell, transfer, assign or otherwise dispose of any Collateral,
for cash or credit or future delivery, on such terms and in such manner as
Assignee may determine; and (iii) recover from Assignor all costs and expenses,
including, without limitation, reasonable attorneys' fees, incurred or paid by
Assignee in exercising any right, power or remedy provided by any guaranty, this
Agreement, any agreement with Assignor, or by law.
7. Termination; Release. Upon:
--------------------
(a) the receipt by the Assignee of a certificate, satisfactory to the
Assignee executed by each Noteholder certifying that the conditions set forth
in Section 5.3 of the Note Agreement to the release of the Collateral have been
satisfied; or
(b) the date on which the Secured Obligations have been discharged in
full;
this Agreement shall terminate, and the Assignee, at the written request and
expense of the Assignor, will promptly execute and deliver to the Assignor a
proper instrument or instruments acknowledging the satisfaction and termination
of this Agreement, and will duly assign, transfer and deliver to the Assignor,
without recourse and without any representation or warranty, such of the
Collateral as may be in the possession of the Assignee and has not theretofore
been sold or otherwise applied or released pursuant to this Agreement, together
with any moneys at the time held by the Assignee hereunder.
8. Cumulative Rights. The rights, powers and remedies of Assignee under
-----------------
this Agreement shall be in addition to all rights, powers and remedies given to
Assignee by virtue of any statute or rules of law, or any agreement, all of
which rights, powers and remedies shall be
<PAGE>
cumulative and may be exercised successively or concurrently without impairing
Assignee's security interest in the Collateral.
9. Amendment; Waiver. Any forbearance or failure or delay by Assignee in
-----------------
exercising any right, power or remedy shall not preclude the further exercise
thereof, and every right, power or remedy of Assignee shall continue in full
force and effect until such right, power or remedy is specifically waived in a
writing executed by Assignee. Assignor waives any right to require Assignee to
proceed against any person or to pursue any remedy in Assignee's power. This
Agreement may be changed, waived, discharged or terminated only by an instrument
in writing in accordance with Section 11.3 of the Note Agreement.
10. Binding Upon Successors. All rights of Assignee under this Agreement
-----------------------
shall inure to the benefit of its successors and (subject to the prior written
consent of On Command Video Corporation) assigns, and the Secured Obligations of
Assignor shall bind its heirs, executors, administrators, successors and
assigns; provided, however, that the Assignor may not, without the prior written
-------- -------
consent of the Assignee (acting on the instructions of all the Noteholders),
assign or transfer any of its rights or obligations under this Agreement. The
Assignee may transfer, assign or grant its rights hereunder in connection with
an assignment or transfer of all or any part of its interest in and rights under
this Agreement pursuant to the provisions of Section 11 of the Appointment
Agreement.
11. Severability. If any of the provisions of this Agreement shall be held
------------
invalid or unenforceable, this Agreement shall be construed as if not containing
those provisions and the rights and obligations of the parties hereto shall be
construed and enforced accordingly. If any agreement or obligation contained in
this Agreement shall be held to be in violation of law, then such agreement or
obligation shall be deemed to be the agreement or obligation of the party hereto
to the full extent permitted by law.
12. Choice of Law. This Agreement is a contract made under the laws of the
-------------
State of New York of the United States and shall for all purposes be construed
and enforced in accordance with, and the rights of parties shall be governed by,
the laws of such State and except as otherwise defined herein, terms used herein
shall have the meanings given them in the New York Uniform Commercial Code.
13. Notice. Any written notice, consent or other communication provided for
------
in this Agreement shall be delivered or sent in accordance with Section 11.10 of
the Note Agreement, provided that, for this purpose, the address of the Assignor
and the Assignee shall be as follows:
If to the Assignor:
405 Tasman Drive
Sunnyvale, California 94089
Attention: Chief Financial Officer
Facsimile: 408 734 1687
<PAGE>
With a copy to:
On Command Video Corporation
3301 Olcott
Santa Clara, California 95054
Facsimile: 408 496 0668
If to the Assignee:
The Chase Manhattan Bank, N.A.
Corporate Trust Administration
4 Chase Metro Tech Center
Third Floor
Brooklyn, New York 11245
Facsimile: 718 292 5885
or sent to the Assignee at such other address as it may designate for itself by
notice given in accordance with this Section 13.
14. Consent to Jurisdiction; Service of Process. For the purposes of
-------------------------------------------
assuring that the Assignee and the Noteholders may enforce their respective
rights under this Agreement, the Assignor for itself and its successors and
assigns, hereby irrevocably (i) agrees that any legal or equitable action, suit
or proceeding against the Assignor arising out of or relating to this Agreement
or the Note Documents or any transaction contemplated hereby or the subject
matter of any of the foregoing may be instituted in any state or Federal court
in the Borough of Manhattan in the State of New York, (ii) waives any objection
which it may now or hereafter have to the venue of any action, suit or
proceeding in the State of New York or any claim of forum non conveniens in the
--------------------
State of New York, and (iii) irrevocably submits itself to the non-exclusive
jurisdiction of any state or Federal court of competent jurisdiction in the
Borough of Manhattan in the State of New York for purposes of any such action,
suit or proceeding. Without limiting the foregoing, the Assignor hereby
appoints, in the case of any such action or proceeding brought in the courts of
or in the State of New York, CT Corporation System, with offices on the date
hereof at 1633 Broadway, New York, New York 10019, to receive, for it and on its
behalf, service of process in the State of New York with respect thereto,
provided the Assignor may appoint any other person, reasonably acceptable to the
Assignee (acting on the instructions of the Required Holder(s)), with offices in
the State of New York to replace such agent for service of process upon delivery
to the Noteholders of a reasonably acceptable agreement of such new agent
agreeing so to act. The Assignor agrees that service of process by means of
notice (as provided in Section 11.10 of the Note Agreement) of any such action,
suit or proceeding with respect to any matter as to which it has submitted to
jurisdiction as set forth in this Section 14 shall be taken and held to be valid
personal service upon it.
<PAGE>
15. Counterparts. This Agreement may be executed in one or more
------------
counterparts, and each of which when so executed and delivered shall be deemed
an original for all purposes but all of which together shall constitute but one
and the same instrument.
<PAGE>
IN WITNESS WHEREOF, the Assignor and the Assignee have caused this
Collateral Assignment Agreement to be executed by their duly elected officers
duly authorized as of the date first above written.
PACIFIC PAY VIDEO LIMITED,
as Assignor
By /s/ James A. Barth
-------------------------
Name: James A. Barth
Title: Chief Financial Officer
THE CHASE MANHATTAN BANK, N.A.,
as Assignee
By /s/ Rossana E. Abueua
-------------------------
Name: Rossana E. Abueua
Title: Second Vice President
APPROVAL AND AGREEMENT
The undersigned, being the licensor under the Technology License Agreement
referred to in the foregoing Collateral Assignment Agreement, hereby approves
said Collateral Assignment Agreement and the assignment of the Technology
License Agreement thereunder for all purposes of said Collateral Assignment
Agreement subject to the terms and conditions of the Technology License
Agreement.
ON COMMAND VIDEO CORPORATION
By /s/ Robert Snyder
-------------------------
Name: Robert Snyder
Title: President
Schedule A
to
Agreement of Assignment as Collateral
New York Life Insurance Company
51 Madison Avenue
New York, NY 10010
The Mutual Life Insurance Company of New York
1740 Broadway, 11th Floor
New York, NY 10019
Namtor BVC LP
311 South Wacker Drive,
Suite 4190
Chicago, IL 60606
Waslic Company II
c/o Ft. Washington Investment Advisors
400 Broadway
Cincinnati, OH 45202
APPENDIX A
to Agreement of Assignment as Collateral
Form of a Letter of Confirmation under Section 18
-------------------------------------------------
Date: ,19__
The Chase Manhattan Bank, N.A.
as the Agent for the Noteholders (as Assignees)
Re: Noteholders of the Notes issues by MagiNet Corporation
pursuant to the Note Agreement dated August 15, 1995 and
Assignees of the Agreement of Assignment as Collateral
referred to below
--------------------------------------------------------
Dear Sirs:
We refer to the Agreement of Assignment as Collateral dated August 15, 1995 (as
amended to date, "Assignment as Collateral") made between you as the Agent and
an Assignee, the Purchasers and us. All Capitalized terms defined or used
herein and not otherwise defined herein shall have the same meanings specified
in the Assignment as Collateral.
We understand that the current Noteholders, and accordingly the current
Assignees (excluding you), are those listed below and confirm that all security
interests created or to be created under the Assignment as Collateral are
effective for the benefit of you and such other Assignees as if they all were
Assignees on the date the Assignment as Collateral was first executed.
Very truly yours,
MagiNet Corporation
______________________
(Authorized Signatory)
(List of Assignees):
<PAGE>
ANNEX A
TO
COLLATERAL ASSIGNMENT AGREEMENT
Assignor has sublicensed its territorial rights under the Technology License
Agreement to the territories of Central and South America and the republics of
the Former Soviet Union to Comsat Video Enterprises, Inc. ("Comsat") pursuant to
an Exclusive Sublicense Agreement, dated as of March 15, 1993, between Assignor
and Comsat.
<PAGE>
ANNEX B
TO
COLLATERAL ASSIGNMENT AGREEMENT
The filing of a UCC-1 financing statement naming Assignor as Debtor and Agent
as Secured party with the Secretary of State of California.
<PAGE>
EXHIBIT F
TO NOTE AGREEMENT
APPOINTMENT AGREEMENT
APPOINTMENT AGREEMENT (this "Agreement") dated as of August 15, 1995
among MAGINET CORPORATION, a corporation organized under the laws of the State
of California (the "Company"); each of the Purchasers set forth on the Purchaser
Schedule to the Note Agreement referred to below (herein, together with their
respective successors and assigns, the "Purchasers") of the senior secured notes
(herein called the "Notes") of the Company pursuant to the Note Agreement, dated
as of August 15, 1995 (herein, as the same may be supplemented or amended from
time to time, called the "Note Agreement") between the Company and the
Purchasers; and The Chase Manhattan Bank, N.A., a national association organized
under the laws of the United States, as collateral agent (the "Agent" which
expression shall include any successor agent or agents holding the security
constituted by the Security Documents hereinafter referred to). Capitalized
terms used herein but not otherwise defined herein shall have the meaning
assigned thereto in the Note Agreement.
W I T N E S S E T H :
WHEREAS, it is a condition precedent to the Purchasers purchasing the
Notes that the Purchasers, the Company and the Agent execute and deliver this
Agreement;
WHEREAS, any and all amounts owing to the Purchasers or the Agent
under the Note Agreement, the Notes and any other Note Document are to be
secured by the Security Documents;
NOW, THEREFORE, in consideration of the premises and of the
commitments made hereunder by the parties hereto, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto, intending to be legally bound, hereby agree as
follows:
Section 1. Appointment. The Purchasers hereby designate The Chase
Manhattan Bank, N.A. as Agent to act as specified herein and in the Security
Documents. Each Purchaser hereby authorizes the Agent to take such action on
its behalf under the provisions of this Agreement, the Note Agreement and the
Security Documents and to exercise such powers and to perform such duties
hereunder and thereunder as are specifically delegated to or required of the
Agent by the terms hereof and thereof and such other powers as are reasonably
incidental thereto. The Agent may perform any of its duties hereunder and
thereunder by or through its agents or employees. The Agent shall have no
duties except those expressly set forth in this Agreement, the Note Agreement
and the Security Documents. Neither the
<PAGE>
Agent nor any of its officers, directors, employees or agents shall be liable
for any action taken or omitted by it or any of them as such hereunder or in
connection herewith, unless caused by its or their gross negligence or wilful
misconduct.
Section 2. Authority to Execute Documents. The Purchasers hereby
authorize and direct the Agent to execute and deliver the Security Documents to
which the Agent is to be a party in the respective forms thereof in which
delivered from time to time by the Noteholders to the Agent for execution and
delivery and, subject to the terms hereof, to execute and deliver such other
agreements, instruments and documents, to exercise its rights and perform its
duties under each of the Security Documents to which it is a party as set forth
in such documents, and to take such further actions, not otherwise specified
herein, as may be necessary to consummate the transactions contemplated by this
Agreement, the Note Agreement and the Security Documents and perform the duties
and obligations of the Agent hereunder and under the Note Agreement and the
Security Documents to which the Agent is to be a party and to do all other
things which are incidental to the rights, powers, discretions, duties,
obligations and responsibilities given or imposed on the Agent by the Note
Agreement, the Security Documents or hereunder. The Purchasers hereby
irrevocably agree that so long as any obligation is owed to any Noteholder under
the Notes, the Note Agreement or any of the other Note Documents, the Agent
shall, subject as hereinafter provided, take any and all actions, and refrain
from taking any and all actions, pursuant to the written instructions of the
Required Holder(s), and shall be deemed irrevocably to be bound by any
limitations or restrictions expressly imposed on the rights of the Agent
pursuant to the terms of any such other Note Document to which the Agent may be
a party. The form of such other agreements, instruments and documents and the
nature of such further actions shall be reasonably acceptable to the Agent.
Section 3. Duties and Liabilities of the Agent Generally. The Agent,
prior to its receipt of a notice from the Required Holder(s) informing it of the
occurrence and continuance of a Default or an Event of Default, undertakes to
perform such duties and only such duties as are specifically set forth in this
Agreement, the Note Agreement and any other Security Document. In the event
that the Agent has been so notified of a Default or an Event of Default (which
has not been notified to the Agent as having been cured or waived), the Agent
shall exercise such of the rights and powers vested in it by this Agreement, the
Note Agreement and any other Security Document, and use the same degree of care
and skill in their exercise, required of an agent by law and otherwise as a
prudent person would exercise or use under the circumstances in the conduct of
his or her own affairs. If the Agent shall not have received written
instructions from the Required Holder(s) within twenty (20) days after receipt
of such notice of Default or Event of Default, the Agent, until instructed
otherwise by the Required Holder(s) may, but shall be under no duty to, take or
refrain from taking such action with respect to such Default or Event of
Default, as it shall deem advisable in the
EXHIBIT F
APPOINTMENT AGREEMENT
<PAGE>
best interests of the Noteholders.
No provision of this Agreement, the Note Agreement or any other
Security Document shall be construed to relieve the Agent from liability for its
own gross negligence or its own wilful misconduct, except that:
(i) No Implied Obligation; Reliance on Certificates and Opinions.
------------------------------------------------------------
(a) The duties and obligations of the Agent shall be determined solely by
the express provisions of this Agreement, the Note Agreement and the other
Security Documents, and the Agent shall not be liable except for the
performance of such duties and obligations as are specifically set forth in
this Agreement, the Note Agreement and the other Security Documents, and no
implied covenants or obligations shall be read into this Agreement, the
Note Agreement or any other Security Document against the Agent; and (b) in
the absence of bad faith on the part of the Agent, the Agent may
conclusively rely, as to the truth of the statements and the correctness of
the opinions expressed therein, upon any certificates or opinions furnished
to the Agent which conform on their face to the requirements of this
Agreement, the Note Agreement or the other Security Documents, but in the
case of any such certificates or opinions which by any provision hereof or
thereof are specifically required to be furnished to the Agent, the Agent
shall be under a duty to examine the same to determine whether or not they
conform on their face to the requirements of this Agreement, the Note
Agreement or the other Security Documents; provided, that the Agent shall
--------
be under no obligation to investigate any of the underlying facts or
circumstances recited in any such certificate or opinion;
(ii) Errors of Judgment. The Agent shall not be liable for any
------------------
error of judgment made in good faith by any responsible officer or
officers;
(iii) Actions in Accord with Direction. The Agent shall not be liable
--------------------------------
with respect to any action taken or omitted to be taken by it in good faith
in accordance with the direction of the Required Holder(s) (or such other
greater or lesser number of holders of the Notes as shall be expressly
provided for herein or in the Note Agreement) relating to the time, method
and place of conducting any proceeding for any remedy available to the
Agent or exercising any trust or power conferred upon the Agent under this
Agreement, the Note Agreement or any other Security Document; and
(iv) Validity and Perfection of Agreement. Notwithstanding anything
------------------------------------
to the contrary herein, the Agent shall have no responsibility as to the
validity or perfection of any Lien purported to be created hereunder or
under any other Security Document. The Agent shall have no duty to do,
cause to be done or advise with respect to any
EXHIBIT F
APPOINTMENT AGREEMENT
<PAGE>
filing or recording or to the maintenance of any such filing or recording
with any governmental agency or office or otherwise, unless and until it
shall have been in each case directed by the Required Holder(s) with
reasonable specificity to do so. At the expense of the Company, the Agent
shall have the right, from time to time, where reasonable to seek advice of
its own counsel in the United States and in each other jurisdiction in
which an entity listed on Schedule 1.2 as a Foreign Subsidiary is organized
regarding the recording, filing and registration of any Lien in connection
herewith.
None of the provisions of this Agreement, the Note Agreement or any other
Security Document shall require the Agent to expend or risk its own funds or
otherwise to incur any personal financial liability in the performance of any of
its duties or in the exercise of any of its rights or powers howsoever arising.
Section 4. Particular Duties and Liabilities of the Agent. Subject
to the provisions of Section 3:
(i) Reliance Generally. The Agent may rely and shall be protected
------------------
in acting or refraining from acting upon any resolution, certificate,
statement, instrument, opinion, report, notice, request, consent, order,
approval or other paper or document believed by it to be genuine and to
have been signed or presented by the proper party or parties, and the Agent
shall not be liable with respect to any action taken or omitted to be taken
by it in good faith and without gross negligence in accordance with such
resolution, certificate, statement, instrument, opinion, report, notice,
request, consent, order, approval or other paper or document;
(ii) Requests of the Company. Any request, direction, order or
-----------------------
demand of the Company mentioned herein or in any Security Document shall be
sufficiently evidenced (unless other evidence in respect thereof be herein
or therein specifically prescribed) by a certificate signed by a
Responsible Officer;
(iii) Reliance on Legal Advisers. The Agent may consult with legal
--------------------------
advisers (including without limitation in-house counsel for the Agent), and
any advice or written opinion of such legal advisers shall be full and
complete authorization and protection in respect of any action taken or
omitted by it hereunder in good faith and without gross negligence and in
accordance with such written advice;
(iv) Duty to Investigate. The Agent shall not be bound to make any
-------------------
investigation into the facts or matters stated in any resolution,
certificate, statement, instrument, opinion, report, notice, request,
consent, order, approval or other paper or document, unless requested in
writing to do so by the Required Holder(s). The Agent
EXHIBIT F
APPOINTMENT AGREEMENT
<PAGE>
may require indemnity against any such expense or liability as a condition
to proceeding in much manner;
(v) Action Through Agents or Attorneys. The Agent may execute any
----------------------------------
of the trusts or powers hereunder or under any other Security Document or
perform any duties hereunder or thereunder either directly or by or through
agents (including, without limitation, any affiliates of the Agent, and
prior to the occurrence of a Default or an Event of Default of which the
Agent has received notice as specified in Section 3, the Company and any of
its Affiliates) or attorneys appointed with due care;
(vi) Delegation of Duties. The Agent may execute any of the trusts
--------------------
or powers hereunder or perform any duties hereunder by or through any of
its affiliates;
(vii) Delay Awaiting Directions. The Agent shall not be liable for
-------------------------
any delay or failure to act unless and until the Agent shall have been
directed in writing to act in accordance with this Agreement;
(viii) Marshaling of Assets. The Agent (a) need not marshal in any
--------------------
particular order any particular part or piece of the Collateral held by the
Agent in its capacity as Agent hereunder or as the secured party under any
other document entered into in connection herewith or any of the funds or
assets that the Agent may be entitled to receive or have claim upon and (b)
may, but shall not be required, to vary, exchange, renew, modify, release,
refuse to complete or to enforce or to assign any judgments, guarantees or
other securities or instruments (negotiable or otherwise) held by it,
whether or not satisfied by payment; and
(ix) Right to Seek Direction. The Agent shall have the right to
-----------------------
request instructions from the Noteholders with respect to taking or
refraining from taking any action in connection with this Agreement, the
Note Agreement or any other Security Document and shall be entitled to act
or refrain from taking such action unless and until the Agent shall have
received written instructions from the Required Holder(s), and the Agent
shall not incur liability by reason of so refraining.
Section 5. Responsibility for Documents; Recitals in Documents. The
Agent is hereby directed by the Purchasers to execute and deliver each of the
other Security Documents as may be necessary or appropriate on the date hereof
and as may become so after the date hereof. The recitals contained in this
Agreement, the Note Agreement and the Security Documents shall be taken as the
statements of the Company, and the Agent assumes no responsibility for the
correctness of the same. The Agent shall have no responsibility with respect to
and shall have no obligation to
EXHIBIT F
APPOINTMENT AGREEMENT
<PAGE>
familiarize itself with any document other than this Agreement, the Note
Agreement and the other Security Documents to which it is a signatory and makes
no representation as to the validity or sufficiency of this Agreement or such
other documents.
Section 6. Segregation of Funds and Property; Interest. Subject to
the provisions of Sections 3 and 4, moneys and other property received by the
Agent shall, until used or applied as herein provided, be held in trust for the
purposes for which they were received, and shall be segregated from other funds.
The Agent shall not be under any liability for interest on any moneys received
by it hereunder.
Section 7. Compensation, Indemnification and Reimbursement of the
Agent. The Company covenants and agrees to pay to the Agent from time to time,
and the Agent shall be entitled to, reasonable compensation (which to the extent
permitted by law shall not be limited by any provision of law in regard to the
compensation of an agent of an express trust) for all services rendered by it,
and the Company will pay or reimburse the Agent upon its request for all
reasonable expenses, disbursements and advances incurred or made by the Agent in
accordance with any of the provisions of this Agreement, the Note Agreement or
any other Security Document (including the compensation and the expenses and
disbursements of its agents and counsel and of all Persons not regularly in its
employ).
The Company also covenants to indemnify the Agent (which for purposes
of this Section 7 shall include its directors, officers, employees and agents)
for, and to hold it harmless from and against, any and all loss, liability or
expense (including counsel fees and expenses) reasonably incurred without gross
negligence, wilful misconduct or bad faith on the part of the Agent, arising out
of or in connection with the acceptance or administration of this trust, the
exercise of any rights and remedies arising out of this Agreement, the Note
Agreement or any other Security Document, or the performance of any of its
duties, including the reasonable costs and expenses of defending itself against
any claim of liability and in enforcing any provision of this Agreement, the
Note Agreement or any other Security Document (except any liability incurred
with gross negligence, wilful misconduct or bad faith on the part of the Agent),
with interest thereon at a rate equal to that in the Agent's customary banking
practice with respect to overdrafts (including the imposition of interest,
funds, wage and administrative fees) from the date the same shall have been paid
until actually reimbursed.
The obligations of the Company under this Section 7 to compensate and
indemnify the Agent and to pay or reimburse the Agent for reasonable expenses,
disbursements and advances shall constitute additional indebtedness under the
Note Agreement and the Security Documents and shall survive the satisfaction,
discharge or other termination of this Agreement and the resignation or removal
of the Agent hereunder. The Company agrees to reimburse the Agent for any costs
or expenses reasonably and properly
EXHIBIT F
APPOINTMENT AGREEMENT
<PAGE>
incurred by the Agent in connection with this Agreement, the Note Agreement and
the other Security Documents.
To secure payment of such compensation, reimbursement and
indemnification, the Agent shall have a claim and Lien prior to that of any
party, which Lien and claim and Lien shall constitute obligations secured by
this Agreement and the Security Documents.
Section 8. Reliance on Certificate. Subject to the provisions of
Section 1, whenever in the administration of the provisions of this Agreement,
the Note Agreement or the Security Documents, the Agent shall deem it necessary
or desirable that a matter be proved or established prior to taking or suffering
any action to be taken hereunder, such matter (unless other evidence in respect
thereof be herein or therein specifically prescribed) may in the absence of
gross negligence, wilful misconduct or bad faith on the part of the Agent, be
deemed to be conclusively proved and established by a certificate signed by the
required Holder(s) delivered to the Agent, and such certificate, in the absence
of gross negligence, wilful misconduct or bad faith on the part of the Agent,
shall be full warrant to the Agent for any action taken, suffered or omitted by
it under the provisions of this Agreement the Note Agreement or the Security
Documents, upon the faith thereof.
Section 9. Qualification of the Agent. The Agent hereunder shall at
all times be a corporation or national association doing business under the laws
of the United States or any State thereof which is authorized under such laws to
exercise corporate trust powers and is subject to supervision or examination by
the Office of the Comptroller of the Currency and the Board of Governors of the
Federal Reserve System or the equivalent State authority, as the case may be.
In case at any time the Agent shall cease to be eligible in accordance with the
provisions of this Section 9, the Agent shall resign immediately in the manner
and with the effect specified in Section 10.
Section 10. Resignation; Removal. (i) Resignation of the Agent. The
------------------------
Agent, or any agent or agents hereafter appointed, may at any time resign by
giving not less than three months' written notice of resignation to the Company
and each Noteholder. Upon receiving such notice of resignation and evidence
satisfactory to them of the giving of such notice to all such holders of Notes,
the Required Holder(s) (after consultation with the Company unless a Default or
Event of Default has occurred and is continuing) shall promptly appoint a
successor agent, by written instrument, in triplicate, one copy of which
instrument shall be delivered to the Company, one copy to the resigning Agent
and one to the successor agent, and upon such appointment, the Agent is hereby
automatically, without any further act, released from its obligations hereunder
(other than any causes of action arising prior to such resignation). If no
successor agent shall have been so appointed and have accepted appointment
within forty five (45) days after the giving of
EXHIBIT F
APPOINTMENT AGREEMENT
<PAGE>
such notice of resignation, the resigning Agent may petition any court of
competent jurisdiction for the appointment of a successor agent, or any
Noteholder which has been a bona fide holder thereof for at least six (6) months
may, on behalf of itself and all others similarly situated, petition any such
court for appointment of a successor agent. Such court may thereupon, after such
notice, if any, as it may deem proper and as it may prescribe, appoint a
successor agent.
(ii) Removal of the Agent for Cause. In case at any time any of the
------------------------------
following shall occur:
(a) the Agent shall cease to be eligible in accordance with the
provisions of Section 9 and shall fail to resign after written request
therefor by the Required Holder(s);
(b) the Agent shall become incapable of acting, or shall be adjudged a
bankrupt or insolvent, or a receiver of the Agent or its property shall be
appointed, or any public officer shall take charge or control of the Agent
or of its property or affairs for the purpose of rehabilitation,
conservation or liquidation; or
(c) any gross negligence or willful misconduct by the Agent in the
performance by it of its duties or the exercise of its power hereunder;
then the Required Holder(s) (after consultations with the Company, unless a
Default or an Event of Default has occurred and is continuing) may remove the
Agent and appoint a successor by written instrument, in triplicate, one copy of
which instrument shall be delivered to the Company, one copy to the Agent so
removed and one to the successor agent, or, failing such removal and appointment
within forty-five (45) days after delivery of the written instrument of removal,
any Noteholder which has been a bona fide holder thereof for at least six (6)
months may, on behalf of itself and all others similarly situated, petition any
court of competent jurisdiction for the removal of the Agent and the appointment
of a successor agent. Such court may thereupon, after such notice, if any, as
it may deem proper and as it may prescribe, remove the Agent and appoint a
successor agent.
(iii) Removal of Agent Without Cause. The Required Holder(s) may
(after consultations with the Company, unless a Default or an Event of Default
has occurred and is continuing) at any time remove the Agent and appoint a
successor agent by written notice of such action to the Company, the Agent and
the successor agent. If no successor agent shall have been so appointed and have
accepted appointment within forty-five (45) days after the giving of such notice
of removal, the Agent may petition any court of competent jurisdiction for the
appointment of a successor agent, or any Noteholder which has been a bona fide
holder thereof for at least six (6) months may, on behalf of itself and all
others similarly situated, petition any
EXHIBIT F
APPOINTMENT AGREEMENT
<PAGE>
such court for appointment of a successor agent. Such court may thereupon, after
such notice, if any, as it may deem proper and as it may prescribe, appoint a
successor agent.
(iv) Effective Date of Removal, Resignation and New Appointment. Any
----------------------------------------------------------
resignation or removal of the Agent and appointment of a successor agent
pursuant to any of the provisions of this Section 10 shall become effective upon
acceptance of appointment by the successor agent as provided in Section 11.
Section 11. Successor Agent. Any successor agent appointed as provided
in Section 10 shall execute, acknowledge and deliver to each Noteholder, the
Company and to its predecessor agent an instrument accepting such appointment
hereunder, and thereupon the resignation or removal of the predecessor agent
shall become effective and such successor agent, without any further act, deed
or conveyance, shall become vested with all the rights, powers, duties and
obligations of its predecessor hereunder, with like effect as if originally
named as Agent herein; but, nevertheless, on the written request of the Required
Holder(s) or of the successor agent, the agent ceasing to act shall, upon
payment of all amounts then due it pursuant to the provisions of Section 7,
execute and deliver an instrument or instruments transferring and assigning to
such successor agent all the rights and powers of the agent so ceasing to act.
Upon the request of any such successor agent, the Company shall execute any and
all instruments in writing in order more fully and certainly to vest in and
confirm to such successor agent all such rights and powers. Any agent ceasing to
act shall nevertheless have a prior claim and Lien to that of the Noteholders
upon all property or funds held or collected by such agent to the extent of all
amounts then due it pursuant to the provisions of Section 7.
Upon acceptance of appointment by a successor agent as provided in this
Section 11, the Company shall give notice of the succession of such agent
hereunder to the Noteholders and such other Persons as may be required by law or
desirable to protect perfection of Lien within 20 days. If the Company fails to
give such notice within such time, the successor agent shall give such notice in
the name and at the expense of the Company.
Section 12. Merger, Conversion or Consolidation of the Agent. Any
corporation into which the Agent may be merged or converted or with which it may
be consolidated, or any corporation resulting from any merger, conversion or
consolidation to which the Agent shall be a party, or any corporation succeeding
to the corporate trust business of the Agent, shall, if eligible hereunder, be
the successor of the Agent hereunder; provided, that such corporation shall be
--------
eligible under the provisions of Section 9 without the execution or filing of
any paper with any party hereto or any further act on the part of any of the
parties hereto except where an instrument of transfer or assignment is required
by law to effect such succession, anything herein to the contrary
notwithstanding.
EXHIBIT F
APPOINTMENT AGREEMENT
<PAGE>
Section 13. Appointment of Co-Agent. In case of any litigation under this
Agreement, the Note Agreement or any other Security Document, or in case of any
enforcement of remedies or exercise of rights upon the occurrence of a Default
or an Event of Default, or in case the Agent deems that, by reason of any
present or future law of any jurisdiction, it may not or may not effectively
exercise any of the powers, rights or remedies herein or in any Security
Document granted to it or hold title to the properties, in trust, as herein or
in any Security Document granted, or take any other action which may be
desirable or necessary in connection therewith, the Agent shall be entitled to
appoint, to the extent consistent with applicable law, one or more separate or
additional co-agents.
In the event that the Agent appoints an individual or institution as a
separate or additional co-agent, (i) any appointment of any such co-agent by the
Agent (other than an appointment, if consistent with applicable law in effect at
the time of such appointment, of a local affiliate of the Agent shall be made
only with the prior written consent of the Company and the Required Holder(s)
(except that, if the Agent shall have received written notice from any
Noteholder that a Default or an Event of Default has occurred and is continuing,
such consent shall be required only of the Required Holder(s)), which consent
shall not be unreasonably withheld or delayed, and (ii) each and every remedy,
power, right, title, interest, trust, duty and obligation expressed or intended
by this Agreement or by any Security Document to be exercised by or vested in,
conveyed to or imposed upon, the Agent with respect thereto shall be exercisable
by and vest in such separate or additional co-agent but only to the extent
necessary, appropriate or desirable to enable such separate or additional co-
agent to exercise or have vested in it such powers, rights, trusts, titles,
interests, duties and obligations and remedies, and every covenant and
obligation necessary, appropriate or desirable to the exercise thereof by such
separate or additional co-agent shall run to and be enforceable by either of
them.
The Agent shall have the right to terminate the appointment of any such
co-agent hereunder with the prior written consent of the Company and the
Required Holder(s) (except that, if the Agent shall have received written notice
from any Noteholder that a Default or an Event of Default has occurred and is
continuing, such consent shall be required only of the Required Holder(s)),
which consent shall not be unreasonably withheld or delayed. Should any
instrument in writing from the Company be required by the separate or additional
co-agent so appointed by the Agent to more fully and certainly vest in and
confirm to it such remedies, rights, powers, titles, interests, trusts, duties
and obligations, any and all such instruments in writing shall, on request, be
executed, acknowledged and delivered by the Company. In case any separate or
additional co-agent, or a successor to either, shall become incapable of acting,
resign or be removed, all the remedies, rights, powers, titles, interests,
trusts, duties and obligations of such separate or additional co-agent, so far
as permitted by law, shall vest in and be exercised by the Agent until the
appointment of a new agent or successor to such separate or
EXHIBIT F
APPOINTMENT AGREEMENT
<PAGE>
additional co-agent.
Section 14. New Noteholders. Any Transferee of all or any part of any
Note shall enter into an agreement acceding to the terms of this Agreement in
the form set out in Annex I whereby it agrees to be bound by the provisions of
this Agreement binding upon the Noteholders.
Section 15. Treatment of Noteholders. The Agent may deem and treat the
person registered as the holder of any Note in the register maintained by the
Company (the "Register") as the owner thereof for all purposes hereof. Any
request, authority or consent of any Person who, at the time of making such
request or giving such authority or consent, is the holder of any Note shall be
conclusive and binding on any subsequent holder, transferee, assignee or
indorsee, as the case may be, of such Note or any Note issued in exchange
therefor.
Section 16. Entire Agreement; Waivers. Each of the Agent, the Company
and the Noteholders party hereto hereby agrees that this instrument contains the
entire agreement between the parties and that there is and can be no other oral
or written agreement or understanding whereby the provisions of this instrument
have been or can be terminated, affected, varied, waived, amended or modified in
any manner, unless the same be set forth and consented to in writing by the
Required Holder(s).
Section 17. Successors and Assigns. This Agreement shall without
further consent of the Company or the Agent, pass to, and may be relied upon and
enforced by, any successor or assignee of any Noteholder and any transferee or
subsequent registered holder of any Note.
Section 18. Notices. All communications provided for hereunder shall be
in writing and in English and shall be sent by national overnight delivery
service (with charges prepaid) or by facsimile with confirmation sent by first
class mail and
(i) if to any Purchaser, addressed to such Purchaser at the address
specified for such communications in the Purchaser Schedule attached to the
Note Agreement, or at such other address as such Purchaser shall have
specified to the Company and the Agent in writing,
(ii) if to any other holder of a Note, addressed to such other holder at
such address as such other holder shall have specified to the Company and
the Agent in writing or, if any such other holder shall not have so
specified an address to the Company and the Agent, then addressed to such
other holder in care of the last holder of such Note which shall have so
specified an address to the Company and the Agent, and
(iii) if to the Agent, addressed to the Agent at The Chase Manhattan
EXHIBIT F
APPOINTMENT AGREEMENT
<PAGE>
Bank, N.A., 4 MetroTech Center, 3rd Floor, Brooklyn, New York 11245;
Facsimile: (718) 242-5885 or 5886 or (718) 242-3529, and
(iv) if to the Company, addressed to the Company at the address specified
for such communications in the Note Agreement.
Section 19. Governing Law, etc. This Agreement shall be construed and
enforced in accordance with, and the rights of the parties shall be governed by,
the internal laws of the State of New York, without regard to conflicts of law.
Section 20. No Waiver. No delay on the part of any holder of a Note,
the Company or the Agent in exercising any rights hereunder or failure to
exercise the same shall operate as a waiver of such rights; and no notice to or
demand on the Agent shall be deemed to be a waiver of the obligation of the
Agent or of the rights of any holder of a Note to take further action without
notice or demand as provided herein.
Section 21. Headings. The descriptive headings of the several Sections
of this Agreement are inserted for convenience only and do not constitute a part
of this Agreement.
Section 22. Counterparts. This Agreement may be executed simultaneously
in two or more counterparts, each of which shall be deemed an original, and it
shall not be necessary in making proof of this Agreement to produce or account
for more than one such counterpart.
EXHIBIT F
APPOINTMENT AGREEMENT
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Appointment
Agreement to be duly executed and delivered by their duly authorized officers on
the day and year first above written.
MAGINET CORPORATION
By:/s/ James A. Barth
-------------------------------
Name: James A. Barth
Title: Chief Financial Officer
THE CHASE MANHATTAN BANK, N.A.
By:/s/ Rossana E. Abueun
-------------------------------
Name: Rossana E. Abueum
Title: Second Vice President
NEW YORK LIFE INSURANCE COMPANY
By:/s/ Himi Kittner
-------------------------------
Name: Himi Kittner
Title: Vice President
THE MUTUAL LIFE INSURANCE
COMPANY OF NEW YORK
By:/s/ Peter W. Oliver
-------------------------------
Name: Peter W. Oliver
Title: Managing Director
WASLIC COMPANY II
By:/s/ Daniel F. Lindley
-------------------------------
Name: Daniel F. Lindley
Title: President & Secretary
NAMTOR BVC LP
By:/s/ Noel Rothman
-------------------------------
Name: Noel Rothman
Title: Partner
EXHIBIT F
APPOINTMENT AGREEMENT
<PAGE>
<PAGE>
ANNEX 1
-------
INSTRUMENT OF ACCESSION
-----------------------
INSTRUMENT OF ACCESSION dated ________, _____, made by [New Noteholder], a
----------------
company organized under the laws of __________ (the "Acceding Noteholder") in
respect of the Appointment Agreement dated August 15, 1995 (the "Appointment
Agreement") among The Chase Manhattan Bank, N.A., as collateral agent (the
"Agent"), each of the Purchasers set forth on the Purchaser Schedule to the Note
Agreement referred to below of the senior secured notes of MagiNet Corporation
(the "Company") pursuant to the Note Agreement, dated as of August 15, 1995 (as
the same may be supplemented or amended from time to time, herein called the
"Note Agreement") among the Purchasers, the Company and the Agent. This
Instrument of Accession is entered into pursuant to Section 11.5 of the Note
Agreement and Section 14 of the Appointment Agreement. Capitalized terms used
herein without definition shall have the meanings assigned to such terms in the
Note Agreement.
1. Assumption. The Acceding Noteholder hereby expressly assumes and
----------
agrees, with effect from and after the date hereof, to perform and observe each
and every one of the covenants, conditions, obligations, duties and liabilities
applicable to a "Noteholder" under the Appointment Agreement, jointly and
severally with all other Noteholders under the Appointment Agreement, as if the
Acceding Noteholder had been an original party thereto. All references to any
Noteholder in any Note Document or any document, instrument or agreement
executed and delivered or furnished in connection therewith shall be deemed to
be and include references to the Acceding Noteholder.
2. Governing Law. This Agreement shall be construed and enforced in
-------------
accordance with, and the rights of the parties shall be governed by, the law of
the State of New York.
IN WITNESS WHEREOF, the a Acceding Noteholder has caused this Agreement to
be duly executed and delivered as a deed as of the day and year first above
written.
[ACCEDING NOTEHOLDER]
By
-----------------------
Title:
EXHIBIT F
APPOINTMENT AGREEMENT
<PAGE>
The subsequent, executed Agreement is included as Exhibit 4.3 to this
Registration Statement, the amendment to that agreement is included as Exhibit
4.4 to that agreement.
SECOND AMENDMENT
TO SHAREHOLDERS' AGREEMENT
This SECOND AMENDMENT dated as of August 15, 1995, (the "Second Amendment")
----------------
to the Shareholders' Agreement dated as of September 29, 1994, (the
"Shareholders' Agreement"), as amended by the First Amendment dated May 16,
-----------------------
1995, attached hereto as Exhibit A, is entered into among MagiNet Corporation, a
California corporation (the "Company") (formerly known as Pacific Pay Video
-------
Limited), the Holders of the Registration Rights pursuant to the Company's
Shareholders' Agreement (individually, an "Existing Rights Holder", and
----------------------
collectively, the "Existing Rights Holders") and the holders of Common Stock
-----------------------
Warrants listed on Exhibit B attached hereto (the "the New Rights Holders").
----------------------
The Company and the Existing Rights Holders have, pursuant to Section 1.12
of the Shareholders' Agreement, agreed to amend the Shareholders' Agreement as
set forth herein.
SECTION 1. ADDITIONAL SHAREHOLDERS.
-----------------------
In consideration of the purchase by the New Rights Holders of the Company's
Senior Secured Notes due 2000 (the "Notes") in the aggregate principal amount of
-----
up to $30,000,000 and the issue of such Notes pursuant to the Note Agreement
(the "Note Agreement") dated as of August 15, 1995 by and between the New
--------------
Rights Holders and the Company, the Company, the Existing Rights Holders and the
New Rights Holders agree that:
(a) The New Rights Holders shall be considered Holders under the
Shareholders' Agreement for all purposes, to the same extent as if they had been
one of the original parties to the Shareholders' Agreement and the New Rights
Holders accept the terms, conditions, rights and obligations of the
Shareholders' Agreement; provided, however, that the New Rights Holders shall
not be considered "Shareholders" for purposes of the Shareholders' Agreement.
(b) The definition of "Common Warrants" shall be added to Section 1.1 of
the Shareholders' Agreement as follows:
""Common Warrants" means those warrants to purchase shares of
---------------
Common stock of the Company granted to certain investors in
connection with the purchase and sale of the Company's Senior Secured
Notes due 2000 in the aggregate principal amount of up to $30,000,000
pursuant to the Note Agreement dated August 15, 1995."
<PAGE>
(c) The definition of "Holder" in Section 1.1 of the Shareholders'
Agreement is restated as follows:
""Holder" means any holder of outstanding Registrable Securities;
------
provided, however, that for all purposes under this Section, a holder
of Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, the COMSAT Warrant, the Original Warrants (as
defined below), the First Bridge Warrants, the SVB\H&Q Warrants, the
Second Bridge Warrants, Series C Warrants, the SVB Warrants, or the
Common Warrants shall be deemed to be a Holder of the Registrable
Securities into which such shares are then convertible or for which
such warrants are then exercisable."
(d) The definition of "Registrable Securities," in Section 1.1 of the
Shareholders' Agreement is restated as follows:
""Registrable Securities" means (i) the shares of Common Stock
----------------------
issuable upon conversion of the Company's Series A Preferred Stock,
Series B Preferred Stock and Series C Preferred Stock (the
"Conversion Stock"), (ii) the shares of Common Stock issuable upon
exercise of the warrants issued pursuant to the Second Series B
Agreement (the "Original Warrants"), the COMSAT Warrant, the First
Bridge Warrants, the SVB\H&Q Warrants, the Second Bridge Warrants,
the SVB Warrants, the Common Warrants, or the Common Stock issuable
upon conversion of the Series C Preferred Stock issuable upon
exercise of the Series C Warrants (collectively, the "Warrant
Shares"), (iii) the shares of Common Stock currently outstanding and
not issued pursuant to the exercise of options or warrants (the
"Founders' Stock"), and (iv) any shares of Common Stock of the
Company issued or issuable, directly or indirectly, in respect of the
stock described in (i), (ii) and (iii) upon any stock split, stock
dividend, recapitalization, or similar event, or any shares of Common
Stock otherwise issued or issuable with respect to such stock;
provided, however, that Registrable Securities shall not include
shares of Common Stock that have been sold to or through a broker or
dealer or underwriter in a public distribution or a public securities
transaction, sold in a transaction exempt from the registration and
prospectus delivery requirements of the Securities Act under Section
4(1) thereof so that all transfer restrictions, and restrictive
legends with respect thereto, if any, are removed upon the
consummation of such sale, or Registrable Securities sold by a person
in a transaction in which rights under this Section 1 are not
assigned."
(e) The definition of "Registration Expenses" in Section 1.1 of the
Shareholders' Agreement is restated as follows:
""Registration Expenses" means all expenses incurred by the
---------------------
Company in complying with Sections 1.2, 1.3, and 1.4, including,
without limitation, all registration, qualification and filing fees,
printing expenses, escrow fees, fees and disbursements of counsel for
the Company, blue sky fees and expenses, and the expense of any
special audits incident to or required by any such registration (but
excluding the compensation
-2-
<PAGE>
of regular employees of the Company which shall be paid in any event
by the Company). Registration Expenses shall not include expenses of
the holders of Registrable Securities to the extent limited or
precluded in applicable blue sky laws. Registration Expenses shall
include the fees or expenses of one legal counsel to the Holders and
one legal counsel to the New Rights Holders. Registration Expenses
shall not include selling commissions, discounts or other
compensation paid to underwriters or other agents or brokers to
effect the sale, or the fees or expenses of any additional legal
counsel retained by any Holder or Holders."
(f) The definition of "Restricted Securities" in Section 1.1 of the
Shareholders' Agreement is restated as follows:
""Restricted Securities" means the Company's currently
---------------------
outstanding Series A Preferred Stock, Series B Preferred Stock and
Series C Preferred Stock, the Conversion Stock, the Founders' Stock,
the Original Warrants, the COMSAT Warrant, the First Bridge Warrants,
the SVB\H&Q Warrants, the Second Bridge Warrants, the Series C
Warrants, the SVB Warrants, the Common Warrants and the Warrant
Shares, and any other securities issued in respect thereof upon any
stock split, stock dividend, recapitalization, merger, consolidation
or similar event."
(g) Section 1.3(b) of the Shareholders' Agreement is restated as follows:
"(b) Underwriting. The right of any Holder to registration pursuant
------------
to Section 1.3 shall be conditioned upon the participation by such
Holder in such underwriting, if any, and the inclusion of the
Registrable Securities of such Holder in the underwriting to the
extent provided herein. All Holders proposing to distribute their
securities through such underwriting shall (together with the Company
and the other holders distributing their securities through such
underwriting) enter into an underwriting agreement in customary form
with the managing underwriter selected for such underwriting by the
Company. Notwithstanding any other provision of this Section 1.3, if
the managing underwriter determines that marketing factors require a
limitation of the number of shares to be underwritten, the managing
underwriter may limit the Registrable Securities held by Holders. If
a limitation of the number of shares to be included in such
registration is required, then the Company shall so advise all
Holders, and the number of shares of Registrable Securities and other
securities that may be included in the registration and underwriting
shall be allocated among all Holders and other holders of securities
thereof: first, among all Holders of the Common Warrants in
proportion as nearly as practicable, to the respective amounts of
securities entitled to inclusion (determined without regard to any
requirement of a request to be included in such registration) in such
registration held by all such Holders at the time of filing the
registration statement; second, should the underwriter's limitation
permit inclusion of any additional securities, among all remaining
Holders and other holders in proportion, as nearly as practicable, to
the respective amounts of securities, other than Founders Shares,
entitled to inclusion (determined without regard to any requirement
of a request to be included in such
-3-
<PAGE>
registration)in such registration held by all such remaining Holders
and other holders at the time of filing the registration statement;
and third, should the underwriter's limitation permit inclusion of
any additional securities, among all Holders in proportion, as nearly
as practicable, to the respective amounts of Founders Shares entitled
to inclusion (determined without regard to any requirement of a
request to be included in such registration) in such registration
held by all such Holders at the time of filing the registration
statement; provided, however, that the number of Registrable
Securities entitled to inclusion in any such registration, except for
the registration of the initial public offering of the Company's
securities, shall be no less than twenty percent (20%) of the total
number of shares covered by such registration. To facilitate the
allocation of shares in accordance with the above provisions, the
Company may round the number of shares allocated to any Holder to the
nearest 100 shares. If any Holder or other holder disapproves of the
terms of any such underwriting, he may elect to withdraw therefrom by
written notice to the Company and the managing underwriter. Any
securities excluded or withdrawn from such underwriting shall be
withdrawn from such registration."
(h) Section 1.7(b) of the Shareholders' Agreement is restated as follows:
"(b) Each Holder will, if Registrable Securities held by such Holder
are included in the securities as to which such registration,
qualification or compliance is being effected, indemnify the Company,
each of its directors and officers and its legal counsel and
independent accountants, each underwriter, if any, of the Company's
securities covered by such a registration statement, each person who
controls the Company or such underwriter within the meaning of
Section 15 of the Securities Act, and each other such Holder, each of
its officers and directors and each person controlling such Holder
within the meaning of Section 15 of the Securities Act, against all
claims, losses, damages and liabilities (or actions in respect
thereof) arising out of or based on any untrue statement (or alleged
untrue statement) of a material fact contained in any such
registration statement, prospectus, offering circular or other
document, or any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading, and will reimburse the Company,
such Holders, such directors, officers, persons, underwriters or
control persons for any legal or any other expenses reasonably
incurred in connection with investigating or defending any such
claim, loss, damage, liability or action, in each case to the extent,
but only to the extent, that such untrue statement (or alleged untrue
statement) or omission (or alleged omission) is made in such
registration statement, prospectus, offering circular or other
document in reliance upon and in conformity with written information
(which information shall be limited to a brief description of the
Holder, its holdings of the Registrable Securities to be sold, and
its plan of distribution therefor) furnished to the Company by an
instrument duly executed by such Holder and stated to be specifically
for use therein; provided, however, that the obligations of each
Holder hereunder shall be limited to an amount equal to the net
proceeds to each such Holder of Registrable Securities sold pursuant
to such registration statement."
-4-
<PAGE>
(i) Section 1.7(d) of the Shareholders' Agreement is amended to add the
following proviso to the end of such section:
"provided, however, that the obligations of each Holder to make
contributions shall be limited to an amount equal to the net proceeds
received by each such Holder of Registerable Securities sold pursuant
to such registration statement."
(j) Section 1.7 of the Shareholders' Agreement is amended by adding the
following Section 1.7(e) thereto:
"(e) The indemnity and contribution provided by each Holder of
Registrable Securities under this Section 1.7 shall be provided
severally and not either jointly or jointly and severally with any
other Holder."
(k) Section 1.12 of the Shareholders' Agreement is restated as follows:
"1.12 Amendment of Registration Rights. The registration rights
--------------------------------
provided in this Section may be amended or waived with the written
consent of the Company and the holders of a majority of the
Registrable Securities except (i) the rights of Holders of the
Registrable Securities issuable upon exercise of the Common Warrants
may only be amended or waived with the written consent of the Company
and Holders of Common Warrants exercisable into shares of common
stock which in the aggregate amount to at least seventy percent (70%)
of the aggregate number of shares of common stock into which all the
Common Warrants are exercisable, to the extent such rights are
adversely affected by such amendment or waiver in a manner different
from other Holders, and (ii) the rights provided in Section 1.3 may
not be amended or waived, so as to adversely affect the holders of
Founders Shares in a manner different from other Holders, without the
written consent of the holders of a majority of the Founders Shares."
(l) Section 3.3(a) of the Shareholders' Agreement is restated as follows:
"(a) Common Stock issuable upon conversion of Preferred Stock or
exercise of common stock warrants (to the extent such common stock
warrants are outstanding as of the closing of the transactions
contemplated by the Note Agreement) or upon conversion of the Series
C Preferred Stock issuable upon exercise of the Series C Warrants."
SECTION 2. CONDITIONS OF EFFECTIVENESS.
---------------------------
This Second Amendment shall become effective as of the date hereof only
upon satisfaction in full of the following conditions precedent (the date upon
which all such conditions have been satisfied being herein called the "Effective
---------
Date"):
- ----
(a) The closing of the transaction set forth in the Note Agreement shall
have occurred.
-5-
<PAGE>
(b) The New Rights Holders, the Company and the holders of a majority in
interest of the Existing Rights Holders shall have executed this Second
Amendment, and counterparts hereof bearing the signature of such parties shall
have been delivered to the Company.
SECTION 3. APPLICABLE LAW.
--------------
This Second Amendment shall be governed by and construed in accordance with
the laws of the State of California.
SECTION 4. COUNTERPARTS.
------------
This Second Amendment may be executed in two or more counterparts, each of
which shall constitute an original, but all of which when taken together shall
constitute but one instrument.
SECTION 5. AGREEMENT; TERMS.
----------------
Except as expressly amended or waived hereby, the Shareholders' Agreement,
as amended by the First Amendment, shall continue in full force and effect in
accordance with the provisions thereof on the date hereof. Capitalized terms
used and not defined herein shall have the meanings assigned to such terms in
the Shareholders' Agreement, as amended.
SECTION 6. HEADINGS.
--------
The headings of this Second Amendment are for reference only and shall not
limit or otherwise affect the meaning hereof.
-6-
<PAGE>
[Signature Page to Second Amendment to Shareholders' Agreement]
IN WITNESS WHEREOF, the parties have caused this Second Amendment to be
duly executed by their duly authorized officers, all as of the date first above
written.
COMPANY:
MAGINET CORPORATION
By:_________________________________________
Name:_______________________________________
Title:______________________________________
-7-
<PAGE>
[Signature Page to Second Amendment to Shareholders' Agreement]
EXISTING RIGHTS HOLDERS:
____________________________________________
ROBERT R. CREAGER
SUNSET PARTNERS, L.P.
By:_________________________________________
Name:_______________________________________
Title:______________________________________
SUNSET PARTNERS II, L.P.
By:_________________________________________
Name:_______________________________________
Title:______________________________________
SUNSET PARTNERS III, L.P.
By:_________________________________________
Name:_______________________________________
Title:______________________________________
-8-
<PAGE>
[Signature Page to Second Amendment to Shareholders' Agreement]
NEW RIGHTS HOLDER:
By:_________________________________________
Name:_______________________________________
Title:______________________________________
-9-
<PAGE>
PACIFIC PAY VIDEO LIMITED
SHAREHOLDERS' AGREEMENT
This Shareholders' Agreement (the "Shareholders' Agreement") is made as of
September 29, 1994 by and among PACIFIC PAY VIDEO LIMITED, a California
corporation (the "Company"), and the persons and entities listed on Exhibit A
---------
attached hereto (the "Shareholders").
R E C I T A L S
A. On July 23, 1992, the Company and certain securityholders of the
Company entered into a Series A Preferred Stock Purchase Agreement (the "Series
A Agreement"), which, among other things, conferred upon certain securityholders
of the Company rights regarding the registration of shares of the Company's
Common Stock, certain covenant rights, and rights of first refusal upon the sale
of securities by any Purchasers (as those terms are defined in the Series A
Agreement).
B. On August 31, 1992, the Company and certain securityholders of the
Company entered into a Series B Preferred Stock Purchase Agreement (the "Series
B Agreement"), which, among other things, conferred upon certain securityholders
of the Company certain covenant rights and rights regarding the registration of
shares of the Company's Common Stock which superseded the registration rights
granted in the Series A Agreement.
C. On March 17, 1993, the Company and certain securityholders of the
Company entered into a Series B Preferred Stock and Warrant Purchase Agreement
(the "Second Series B Agreement"), which, among other things, conferred upon
certain securityholders of the Company certain covenant rights, rights of first
refusal, and rights regarding the registration of shares of the Company's Common
Stock which superseded the registration rights granted in the Series B
Agreement.
D. On September 29, 1993, the Company granted to COMSAT Video
Enterprises a warrant to purchase up to 1,575,000 shares of the Company's Common
Stock (the "COMSAT Warrant") and in connection therewith, the Company and
certain other parties to the Second Series B Agreement entered into an Amendment
No. 1 to the Second Series B Agreement (the "Series B Amendment"), which
provided that the shares of Common Stock issuable upon exercise of the COMSAT
Warrant would be deemed "Registrable Securities" under Section 8 of the Series B
Agreement.
E. On March 10, 1994, in connection with the Note and Warrant Purchase
Agreement, the Company issued Warrants to purchase Common Stock (the "First
Bridge Warrants"); and the Company and certain parties to the Second Series B
Agreement, as amended, entered into a new agreement (the "Registration Rights
Agreement"), which superseded Section 8 of the Second Series B Agreement, as
amended by the Series B Amendment, in its entirety, contained provisions
<PAGE>
substantially similar to those of Section 8 of the Second Series B Agreement, as
amended by the Series B Amendment, and granted such rights to the holders of
First Bridge Warrants.
F. On June 20, 1994, the Company granted to Silicon Valley Bank ("SVB")
and Hambrecht & Quist Guaranty Finance ("H&Q") warrants to purchase Common Stock
of the Company (the "SVB/H&Q Warrants"), and in connection therewith, the
Company and certain other parties to the Registration Rights Agreement entered
into the First Amendment to Registration Rights Agreement (the "First
Amendment"), which provided that the shares of Common Stock issuable upon
exercise of the SVB/H&Q Warrants would be deemed "Registrable Securities" under
the Registration Rights Agreement.
G. On September 12, 1994, in connection with the Second Note and
Warrant Purchase Agreement, the Company agreed to issue certain warrants to
purchase Common Stock (the "Second Bridge Warrants"); and the Company and
certain parties to the Registration Rights Agreement, as amended, entered into
the Second Amendment to Registration Rights Agreement (the "Second Amendment"),
which provided that the shares of Common Stock issuable upon exercise of the
Second Bridge Warrants would be deemed "Registrable Securities" under the
Registration Rights Agreement, as amended.
H. In connection with the issuance of Series C Preferred Stock (the
"Series C Preferred") and warrants to purchase Series C Preferred Stock (the
"Series C Warrants") pursuant to the Series C Preferred Stock Purchase Agreement
(the "Series C Agreement"), the Shareholders constituting the holders of a
majority of the Registrable Securities (as that term is defined in the
Registration Rights Agreement, as amended) desire to enter into a new agreement
which will restate and supersede the Registration Rights Agreement, in its
entirety, and which will grant such registration rights to the holders of the
Series C Preferred and Series C Warrants. In addition, the Shareholders desire
to provide for certain rights and restrictions as to the securities held by
certain Shareholders as provided herein.
The parties hereto agree as follows:
SECTION 1
REGISTRATION RIGHTS
-------------------
1.1 Certain Definitions. As used in this Shareholders' Agreement, the
-------------------
following definitions shall apply:
"Commission" means the Securities and Exchange Commission or any
----------
other federal agency at the time administering the Securities Act.
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<PAGE>
"Holder" means any holder of outstanding Registrable Securities;
------
provided, however, that for all purposes under this Section, a holder of Series
A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, the
COMSAT Warrant, the Original Warrants (as defined below), the First Bridge
Warrants, the SVB\H&Q Warrants, the Second Bridge Warrants, or the Series C
Warrants shall be deemed to be a Holder of the Registrable Securities into which
such shares are then convertible or for which such warrants are then
exercisable.
"Initiating Holders" means Holders of not less than 40% of the
------------------
Registrable Securities.
"Registrable Securities" means (i) the shares of Common Stock
----------------------
issuable upon conversion of the Company's Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock (the "Conversion Stock"), (ii) the
shares of Common Stock issuable upon exercise of the warrants issued pursuant to
the Second Series B Agreement (the "Original Warrants"), the COMSAT Warrant, the
First Bridge Warrants, the SVB\H&Q Warrants, the Second Bridge Warrants, or the
Common Stock issuable upon conversion of the Series C Preferred Stock issuable
upon exercise of the Series C Warrants (collectively, the "Warrant Shares"),
(iii) the shares of Common Stock currently outstanding and not issued pursuant
to the exercise of options or warrants (the "Founders' Stock"), and (iv) any
shares of Common Stock of the Company issued or issuable, directly or
indirectly, in respect of the stock described in (i), (ii) and (iii) upon any
stock split, stock dividend, recapitalization, or similar event, or any shares
of Common Stock otherwise issued or issuable with respect to such stock;
provided, however, that Registrable Securities shall not include shares of
- -------- -------
Common Stock that have been sold to or through a broker or dealer or underwriter
in a public distribution or a public securities transaction, sold in a
transaction exempt from the registration and prospectus delivery requirements of
the Securities Act under Section 4(1) thereof so that all transfer restrictions,
and restrictive legends with respect thereto, if any, are removed upon the
consummation of such sale, or Registrable Securities sold by a person in a
transaction in which rights under this Section 1 are not assigned.
"Registration Expenses" means all expenses incurred by the Company
---------------------
in complying with Sections 1.2, 1.3 and 1.4, including, without limitation, all
registration, qualification and filing fees, printing expenses, escrow fees,
fees and disbursements of counsel for the Company, blue sky fees and expenses,
and the expense of any special audits incident to or required by any such
registration (but excluding the compensation of regular employees of the Company
which shall be paid in any event by the Company). Registration Expenses shall
not include expenses of the holders of Registrable Securities to the extent
limited or precluded in applicable blue sky laws. Registration Expenses shall
not include selling commissions, discounts or other compensation paid to
underwriters or other agents or brokers to effect the sale. Registration
Expenses shall include the fees or expenses of one legal counsel to the Holders.
-3-
<PAGE>
"Restricted Securities" means the Company's currently outstanding
---------------------
Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock,
the Conversion Stock, the Founders' Stock, the Original Warrants, the COMSAT
Warrant, the First Bridge Warrants, the SVB\H&Q Warrants, the Second Bridge
Warrants, the Series C Warrants, and the Warrant Shares, and any other
securities issued in respect thereof upon any stock split, stock dividend,
recapitalization, merger, consolidation or similar event.
"Securities Act" means the United States Securities Act of 1933, as
--------------
amended, or any similar federal statute and the rules and regulations of the
Commission thereunder, as shall be in effect at the time.
The terms "register", "registered" and "registration" refer to a
-------- ---------- ------------
registration effected by preparing and filing a registration statement in
compliance with the Securities Act (and any post-effective amendments filed or
required to be filed), and the declaration or ordering of the effectiveness of
such registration statement; provided, however, that the foregoing terms shall
also include a registration in a foreign jurisdiction to the extent set forth in
Section 1.18.
1.2 Requested Registration.
----------------------
(a) Request for Registration. In case the Company shall receive
------------------------
from Initiating Holders a written request six (6) months after the effective
date of the initial registration of the Company's securities, that the Company
effect any underwritten registration, qualification, or compliance with respect
to Registrable Securities held by such Initiating Holders, then the Company
shall:
(i) promptly give written notice of the proposed
registration, qualification, or compliance to all other Holders; and
(ii) as soon as practicable, use its most diligent efforts
to effect all such registration, qualification, or compliance (including,
without limitation, the execution of an undertaking to file post-effective
amendments, appropriate qualification under applicable blue sky or other state
securities laws, and appropriate compliance with applicable regulations issued
under the Securities Act and any other governmental requirements or regulations)
as may be so requested and as would permit or facilitate the sale and
distribution of all or such portion of such Registrable Securities as are
specified in such request, together with all or such portion of the Registrable
Securities of any Holders joining in such request as are specified in a written
request received by the Company within 20 days after the date the Company mails
such written notice;
Provided, however, that the Company shall not be obligated to
take any action to effect any such registration, qualification, or compliance
pursuant to this Section 1.2:
-4-
<PAGE>
(A) In any jurisdiction in which the Company would be
required to execute a general consent to service of process in effecting such
registration, qualification, or compliance unless the Company is already subject
to service in such jurisdiction and except as may be required by the Securities
Act;
(B) During the period starting with the date sixty
days prior to the Company's estimated date of filing of, and ending on the date
six months immediately following the effective date of any registration
statement pertaining to equity securities of the Company (other than a
registration of securities in a Rule 145 transaction or with respect to an
employee benefit plan or initiated by security holders);
(C) Unless the registration will be requested for at
least ten percent (10%) of the Registrable Securities; or
(D) At any time during which the Company is qualified
to use Form S-3 for registration of the Registrable Securities held by the
Holders.
Subject to the foregoing clauses (A) through (D), the Company
shall file a registration statement covering the Registrable Securities so
requested to be registered as soon as practicable, and in any event within 90
days, after receipt of the request or requests of the Initiating Holders;
provided, however, that if the Company shall furnish to Holders requesting a
registration statement under this Section 1.2, a certificate signed by the
President of the Company stating that in the good faith judgment of the Board of
Directors of the Company, it would be seriously detrimental to the Company and
its shareholders for such registration statement to be filed and it is therefore
essential to defer the filing of such registration statement, the Company shall
have the right to defer such filing for a period of not more than ninety (90)
days after receipt of the request of the Initiating Holders; provided further,
that the Company may not utilize this right more than once in any twelve month
period.
(b) Underwriting. The right of any Holder to registration
------------
pursuant to this Section 1.2 shall be conditioned upon such Holder's
participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting to the extent requested (unless
otherwise mutually agreed by a majority in interest of the Initiating Holders
and such Holder) and to the extent provided herein.
The Company shall (together with all Holders and holders of
other securities proposing to distribute their securities through such
underwriting) enter into an underwriting agree ment in customary form with the
managing underwriter selected for such underwriting by a majority in interest of
the Initiating Holders. Notwithstanding any other provision of this Section 1.2,
if the managing underwriter advises the Initiating Holders in writing that
marketing factors require a limitation of the number of shares to be
underwritten, then the securities of the Company entitled to be included in such
registration which are not Registrable Securities shall be
-5-
<PAGE>
excluded from such registration to the extent required by such limitation. If a
limitation of the number of shares is still required, then the Company shall so
advise all Holders, and the number of shares of Registrable Securities that may
be included in the registration and underwriting shall first be allocated among
Holders thereof in proportion, as nearly as practicable, to the respective
amounts of Registrable Securities, other than Founders Shares, entitled to
inclusion (determined without regard to any requirement of a request to be
included in such registration) in such registration held by all such Holders at
the time of filing the registration statement and, second, should the
underwriter's limitation permit inclusion of any additional securities, among
all Holders in proportion, as nearly as practicable, to the respective amounts
of Founders Shares entitled to inclusion (determined without regard to any
requirement of a request to be included in such registration) in such
registration held by all such Holders at the time of filing the registration
statement. No Registrable Securities or other securities excluded from the
underwriting by reason of the underwriter's marketing limitation shall be
included in such registration. To facilitate the allocation of shares in
accordance with the above provisions, the Company or the underwriters may round
the number of shares allocated to any Holder to the nearest 100 shares.
If any Holder of Registrable Securities disapproves of the
terms of the underwriting, such person may elect to withdraw therefrom by
written notice to the Company, the managing underwriter and the Initiating
Holders. The Registrable Securities and/or other securities so withdrawn shall
also be withdrawn from registration, and such Registrable Securities shall not
be transferred in a public distribution prior to 90 days after the effective
date of such registration, or such other shorter period of time as the
underwriters may require. If by the withdrawal of such Registrable Securities a
greater number of Registrable Securities held by other Holders may be included
in such registration (up to the maximum of any limitation imposed by the
underwriters), then the Company shall offer to all Holders who have included
Registrable Securities in the registration the right to include additional
Registrable Securities in the same proportion and manner used in determining the
underwriter limitation in this Section 1.2(b).
If the managing underwriter has not limited the number of
Registrable Securities to be underwritten, the Company may include securities
for its own account or for the account of others in such registration if the
underwriter so agrees and if the number of Registrable Securities which would
otherwise have been included in such registration and underwriting will not
thereby be limited.
-6-
<PAGE>
1.3 Company Registration.
--------------------
(a) Notice of Registration. If at any time or from time to time,
----------------------
the Company shall determine to register any of its securities, either for its
own account or the account of a security holder or holders exercising their
respective demand registration rights, other than (i) a registration relating
solely to employee benefit plans, or (ii) a registration relating solely to a
Rule 145 transaction, the Company shall:
(i) promptly give to each Holder written notice thereof; and
(ii) include in such registration (and any related
qualification under blue sky laws or other compliance), and in any underwriting
involved therein, all the Registrable Securities specified in a written request
by each Holder received by the Company within 15 days after the Company mails
such written notice, subject to the provisions below.
(b) Underwriting. The right of any Holder to registration
------------
pursuant to Section 1.3 shall be conditioned upon the participation by such
Holder in such underwriting, if any, and the inclu sion of the Registrable
Securities of such Holder in the underwriting to the extent provided herein. All
Holders proposing to distribute their securities through such underwriting shall
(together with the Company and the other holders distributing their securities
through such underwriting) enter into an underwriting agreement in customary
form with the managing underwriter selected for such underwriting by the
Company. Notwithstanding any other provision of this Section 1.3, if the
managing underwriter determines that marketing factors require a limitation of
the number of shares to be underwritten, the managing underwriter may limit the
Registrable Securities held by Holders. If a limitation of the number of shares
to be included in such registration is required, then the Company shall so
advise all Holders, and the number of shares of Registrable Securities and other
securities that may be included in the registration and underwriting shall be
allocated among all Holders and other holders of securities thereof first among
all Holders and other holders in proportion, as nearly as prac ticable, to the
respective amounts of securities, other than Founders Shares, entitled to
inclusion (determined without regard to any requirement of a request to be
included in such registration) in such registration held by all such Holders and
other holders at the time of filing the registration statement and, second,
should the underwriter's limitation permit inclusion of any additional
securities, among all Holders in proportion, as nearly as practicable, to the
respective amounts of Founders Shares entitled to inclusion (determined without
regard to any requirement of a request to be included in such registration) in
such registration held by all such Holders at the time of filing the
registration statement; provided, however, that the number of Registrable
Securities entitled to inclusion in any such registration, except for the
registration of the initial public offering of the Company's securities, shall
be no less than twenty percent (20%) of the total number of shares covered by
such registration. To facilitate the allocation of shares in accordance with the
above provisions, the Company may round the number of shares allocated to any
Holder to the nearest 100 shares. If any Holder or other holder disapproves of
the terms of any such underwriting, he may elect to
-7-
<PAGE>
withdraw therefrom by written notice to the Company and the managing
underwriter. Any securities excluded or withdrawn from such underwriting shall
be withdrawn from such registration.
(c) Right to Terminate Registration. The Company shall have the
-------------------------------
right to terminate or withdraw any registration initiated by it under this
Section 1.3 prior to the effectiveness of such registration whether or not any
Holder has elected to include securities in such registration.
1.4 Form S-3 Registration. In case the Company shall receive from a
---------------------
Holder or Holders a written request that the Company effect a registration on
Form S-3 and any related qualification or compliance with respect to an amount
of the Registrable Securities owned by such Holder or Holders for which the
anticipated aggregate offering price would be at least $500,000, the Company
shall:
(a) promptly give written notice of the proposed registration, and
any related qualification or compliance to all other Holders; and
(b) as soon as practicable, effect such registration and all such
qualifications and compliances as may be so requested and as would permit or
facilitate the sale and distribution of all or such portion of such Holder's or
Holders' Registrable Securities as are specified in such request, together with
all or such portion of the Registrable Securities of any other Holder or Holders
joining in such request as are specified in a written request given within 20
days after receipt of such written notice from the Company; provided, however,
that the Company shall not be obligated to effect any such registration,
qualification, or compliance pursuant to this Section 1.4: (1) if Form S-3 is
not available for such offering by the Holders; (2) if the Company shall furnish
to the Holders a certificate signed by the president of the Company stating that
in the good faith judgment of the board of directors of the Company, it would be
seriously detrimental to the Company and its shareholders for such Form S-3
Registration to be effected at such time, in which event the Company shall have
the right to defer the filing of the Form S-3 registration statement for a
period of not more than 90 days after receipt of the initiating request of the
Holder or Holders under this Section 1.4; provided, however, that the Company
shall not utilize this right more than twice in any twelve month period; (3) if
the Company has, within the 12 month period preceding the date of such request,
already effected one (1) registration on Form S-3 for the Holders pursuant to
this Section 1.4; or (4) in any jurisdiction in which the Company would be
required to execute a general consent to service of process in effecting such
registration, qualification or compliance unless the Company is already subject
to service in such jurisdiction and except as may be required by the Securities
Act.
Subject to the foregoing, the Company shall effect such
registration, qualification, or compliance (including, without limitation, the
execution of an undertaking to file post-effective amendments, appropriate
qualification under applicable blue sky or other state
-8-
<PAGE>
securities laws and appropriate compliance with applicable regulations issued
under the Securities Act and any other governmental requirements or regulations)
covering the Registrable Securities and other securities so requested to be
registered as soon as practicable after receipt of the request or requests of
the Holders. Registrations effected pursuant to this Section 1.4 shall not be
counted as demands for registration or registrations effected pursuant to
Sections 1.2 or 1.3.
If the registration to be effected pursuant to this Section 1.4
is to be an underwritten public offering, it shall be managed by an underwriter
or underwriters acceptable to the Company selected by a majority in interest of
the Holders requesting registration. In such event, the right of any Holder to
registration pursuant to Section 1.4 shall be conditioned upon the participation
by such Holder in such underwriting and the inclusion of the Registrable
Securities of such Holder in the underwriting to the extent provided herein. If
the managing underwriter so selected determines that marketing factors require a
limitation of the number of shares to be underwritten, the managing underwriter
may limit the Registrable Securities held by such Holders to be included in such
registration. The Company shall so advise such Holders, and the number of shares
of Registrable Securities that may be included in the registration shall be
allocated among such Holders in propor tion to the respective amounts of
Registrable Securities which would be held by each of such Holders at the time
of filing of the registration statement. Any Registrable Securities that are so
excluded from the underwriting shall be excluded from the registration. As used
throughout this Section the term "Form S-3" shall be deemed to include any
equivalent successor form for registration pursuant to the Act.
1.5 Expenses of Registration.
------------------------
All Registration Expenses incurred in connection with the
registration, qualification or compliance pursuant to Sections 1.2, 1.3, and 1.4
shall be borne by the Company; provided, however, that the Company shall not be
required to pay for expenses of (i) any registrations requested pursuant to
Section 1.2 after the Company has effected three (3) such registrations pursuant
to Section 1.2 or 1.4 and such registrations have been declared or ordered
effective, and (ii) any registration proceeding begun pursuant to Section 1.2,
the request of which has been subsequently withdrawn by the Initiating Holders,
in which case such expenses shall be borne by the Holders of securities
(including Registrable Securities) pro rata in accordance with the number of
shares initially sought to be registered requesting or causing such withdrawal,
unless the Holders shall agree that such withdrawn registration shall be counted
as a registration for purposes of Section 1.2(a)(ii)(D). Notwithstanding the
foregoing, if such withdrawal is occasioned by the disclosure to the Initiating
Holders of a material adverse fact regarding the Company not known by the
Initiating Holders at the time of their request for registration then the
Company will bear such Registration Expenses and the Holders will retain their
rights under Section 1.2 hereof.
1.6 Registration Procedures. If and whenever the Company is required by
-----------------------
the provisions of this Section to use its most diligent efforts to effect
promptly the registration of Registrable Securi ties, the Company shall:
-9-
<PAGE>
(a) Prepare and file with the Commission a registration statement
with respect to such Registrable Securities and use its most diligent efforts to
cause such registration statement to become and remain effective as provided
herein.
(b) Prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement effective and
current and to comply with the provisions of the Securities Act with respect to
the sale or other disposition of all Registrable Securities covered by such
registration statement, including such amendments and supplements as may be
necessary to reflect the intended method of disposition of the prospective
seller or sellers of such Registrable Securities, but for no longer than one
hundred twenty (120) days subsequent to the effective date of such registration
in the case of a registration statement on Form S-1 (or any similar form of
registration statement required to set forth substantially identical
information) and for no longer than 90 days in the case of a registration
statement on Form S-3.
(c) Furnish to each prospective seller of Registrable Securities
such number of copies of a prospectus, including a preliminary prospectus, in
conformity with the requirements of the Securities Act, and such other
documents, as such seller may reasonably request in order to facilitate the
public sale or other disposition of the Registrable Securities of such seller.
1.7 Indemnification. In the event any of the Registrable Securities are
---------------
included in a registration statement under this Section:
(a) The Company will indemnify each Holder, each of its officers
and directors and partners and such Holder's separate legal counsel and
independent accountants, and each person con trolling such Holder within the
meaning of Section 15 of the Securities Act, and each underwriter, if any, and
each person who controls any underwriter within the meaning of Section 15 of the
Securities Act, against all expenses, claims, losses, damages or liabilities (or
actions in respect thereof), including any of the foregoing incurred in
settlement of any litigation, commenced or threatened, arising out of or based
on any untrue statement (or alleged untrue statement) of a material fact
contained in any registration statement, prospectus, offering circular or other
document, or any amendment or supplement thereto, incident to any such
registration, qualification or compliance, or based on any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances in which
they were made, not misleading, or any violation by the Company of any rule or
regulation promulgated under the Securities Act applicable to the Company in
connection with any such registration, qualification or compliance, and the
Company will reimburse each such Holder, each of its officers and directors and
partners and such Holders' separate legal counsel and independent accountants
and each person con trolling such Holder, each such underwriter and each person
who controls any such underwriter, for any legal and any other expenses
reasonably incurred in connection with investigating, preparing or defending any
such claim, loss, damage, liability or action, provided that the Company will
not be liable in any such
-10-
<PAGE>
case to the extent that any such claim, loss, damage, liability or expense
arises out of or is based on any untrue statement or omission or alleged untrue
statement or omission, made in reliance upon and in conformity with written
information furnished to the Company by an instrument duly executed by such
Holder or underwriter and stated to be specifically for use therein.
(b) Each Holder will, if Registrable Securities held by such Holder
are included in the securities as to which such registration, qualification or
compliance is being effected, indemnify the Company, each of its directors and
officers and its legal counsel and independent accountants, each underwriter, if
any, of the Company's securities covered by such a registration statement, each
person who controls the Company or such underwriter within the meaning of
Section 15 of the Securities Act, and each other such Holder, each of its
officers and directors and each person con trolling such Holder within the
meaning of Section 15 of the Securities Act, against all claims, losses, damages
and liabilities (or actions in respect thereof) arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact contained in
any such registration statement, prospectus, offering circular or other
document, or any omission (or alleged omission) to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, and will reimburse the Company, such Holders, such directors,
officers, persons, underwriters or control persons for any legal or any other
expenses reasonably incurred in connection with investigating or defending any
such claim, loss, damage, liability or action, in each case to the extent, but
only to the extent, that such untrue statement (or alleged untrue statement) or
omission (or alleged omission) is made in such registration statement,
prospectus, offering circular or other document in reliance upon and in
conformity with written information furnished to the Company by an instrument
duly executed by such Holder and stated to be specifically for use therein;
provided, however, that the obligations of each Holder hereunder shall be
limited to an amount equal to the proceeds to each such Holder of Registrable
Securities sold as contemplated herein.
(c) Each party entitled to indemnification under this Section (the
"Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or litigation, shall be
approved by the Indemnified Party (whose approval shall not unreasonably be
withheld), and the Indemnified Party may participate in such defense at such
party's expense. No Indemnifying Party, in the defense of any such claim or
litigation, shall, except with the consent of each Indemnified Party, consent to
entry of any judgment or enter into any settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
Indemnified Party of a release from all liability in respect to such claim or
litigation.
(d) If the indemnification provided for in this Section is held by
a court of competent jurisdiction to be unavailable to an Indemnified Party with
respect to any loss, liability,
-11-
<PAGE>
claim, damage or expense referred to herein, then the Indemnifying Party, in
lieu of indemnifying the Indemnified Party, shall contribute to the amount paid
or payable by such Indemnified Party with respect to such loss, liability,
claim, damage or expense in the proportion that is appropriate to reflect the
relative fault of the Indemnifying Party and the Indemnified Party in connection
with the state ments or omissions that resulted in such loss, liability, claim,
damage or expense, as well as any other relevant equitable considerations. The
relative fault of the Indemnifying Party and the Indemnified Party shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of material fact or the omission to state a material fact
relates to information supplied by the Indemnifying Party or by the Indemnified
Party, and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission.
1.8 Information by Holder. The Holder or Holders of Registrable
---------------------
Securities included in any registration shall furnish to the Company such
information regarding such Holder or Holders and the distribution proposed by
such Holder or Holders as the Company may request in writing and as shall be
required in connection with any registration, qualification or compliance
referred to in this Section.
1.9 Rule 144 Reporting. With a view to making available the benefits of
------------------
certain rules and regulations of the Commission which may at any time permit the
sale of the Restricted Securities to the public without registration, after such
time as a public market exists for the Common Stock of the Company and until
five years from the date hereof, the Company shall use its best efforts to:
(a) Make and keep public information available, as those terms are
understood and defined in Rule 144 under the Securities Act, beginning 90 days
after (i) the effective date of the first registration statement filed by the
Company for an offering of its securities to the general public, (ii) the
Company registers a class of securities under Section 12 of the Securities
Exchange Act of 1934, as amended, or (iii) the Company issues an offering
circular meeting the requirements of Regulation A under the Securities Act;
(b) File with the Commission in a timely manner all reports and
other documents required of the Company under the Securities Act and the
Securities Exchange Act of 1934, as amended (at any time after it has become
subject to such reporting requirements);
(c) Furnish to any Holder promptly upon request a written statement
as to its compliance with the reporting requirements of Rule 144 (at any time
after 90 days after the effective date of the first registration statement filed
by the Company for an offering of its securities to the general public), and of
the Securities Act and the Securities Exchange Act of 1934 (at any time after it
has become subject to such reporting requirements), a copy of the most recent
annual or quarterly report of the Company, and such other reports and documents
of the Company and other information in the possession of or reasonably
obtainable by the Company as a Holder
-12-
<PAGE>
may reasonably request in availing itself of any rule or regulation of the
Commission allowing a Holder to sell any such securities without registration.
1.10 Assignment of Registration Rights. The rights to cause the
---------------------------------
Company to register securities granted under this Section may be assigned to a
transferee or assignee in connection with the transfer or assignment of
Registrable Securities only if such shares represent at least 1% of the
outstanding shares of the Company's capital stock (assuming conversion of all
Preferred Stock to Common Stock, exercise of all warrants for Common Stock and
the conversion of all Series C Preferred Stock issuable upon the exercise of the
Series C Warrants) on the date of such assignment.
1.11 Limitations on Subsequent Registration Rights. From and after the
---------------------------------------------
date of this Shareholders' Agreement, the Company shall not, without the prior
written consent of the Holders of a majority of the outstanding Registrable
Securities, enter into any agreement with any holder or prospective holder of
any securities of the Company which would allow such holder or prospective
holder (a) to include such securities in any registration filed under Section
1.2 hereof, unless under the terms of such agreement, such holder or prospective
holder may include such securities in any such registration only to the extent
that the inclusion of his securities will not reduce the amount of the
Registrable Securities of the Holders which is included or (b) to make a demand
registration which could result in such registration statement being declared
effective prior to the earlier of either of the dates set forth in subsection
1.2(a) or within 120 days of the effective date of any registration effected
pursuant to Section 1.2.
1.12 Amendment of Registration Rights. The registration rights provided
--------------------------------
in this Section may be amended or waived with the written consent of the Company
and the holders of a majority of the Registrable Securities except that the
rights provided in Section 1.3 may not be amended or waived, so as to adversely
affect the holders of Founders Shares in a manner different from other Holders,
without the written consent of the holders of a majority of the Founders Shares.
1.13 Termination of Registration Rights. No Holder shall be entitled to
----------------------------------
exercise any right provided for in this Section 1 after five years following the
consummation of the sale of securities pursuant to a registration statement
filed by the Company under the Securities Act in connection with the initial
firm commitment underwritten offering of its securities to the general public or
at such time as all Registrable Securities held by such Holder may immediately
be sold under Rule 144 during any 90-day period.
1.14 Lock-Up Provision. If requested by the Company and an underwriter
-----------------
of securities of the Company, no Holder shall sell or otherwise transfer or
dispose of any Restricted Securities (other than those securities included in
the registration) during the up to 180-day period following the effective date
of a registration statement filed in connection with the public offering of the
Company's securities, provided that all officers and directors enter into
similar agreements. The obligations described in this Section 1.14 shall not
apply to a registration relating solely to
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<PAGE>
employee benefit plans on Form S-1 or Form S-8 or similar form that may be
promulgated in the future. The Company may impose stop-transfer instructions
with respect to the securities subject to the foregoing restriction until the
end of the one hundred eighty (180) day period.
1.15 Option to Conduct Foreign Registration. To the extent the Company
--------------------------------------
is obligated to register securities pursuant to this Section 1, such obligation
may be satisfied, at the Company's option, by effecting a registration in a
jurisdiction other than the United States, pursuant to the applicable securities
laws of such jurisdiction. In the event the Company effects a registration in a
foreign jurisdiction, provided that in the good faith judgment of the board of
directors of the Company registration in such jurisdiction is in the best
interests of the Company and its shareholders, and the Holders will not be
materially adversely affected by such choice of jurisdiction, (i) the rights of
holders of Registrable Securities pursuant to Section 1.3 hereof shall apply to
such registration, and (ii) references in this Section 1 to laws, rules, and
customary practices applicable to a registration under United States securities
laws shall be interpreted so as to reflect as nearly as possible the relevant
laws, rules, and customary practices related to a securities registration in the
jurisdiction in which such registration is made.
1.16 Coordination of Prior Rights. Certain of the Shareholders,
----------------------------
constituting a majority in interest of the Holders (as defined in the
Registration Rights Agreement, as amended) hereby agree that the execution and
delivery of this Shareholders' Agreement is an amendment of the Registration
Rights Agreement, as amended, and that the registration rights contained therein
shall be null and void as of the execution hereof and shall be superseded in
their entirety by the terms of this Shareholders' Agreement.
SECTION 2
VOTING
------
2.1 Voting of Shares. The Shareholders each agree to hold all shares of
----------------
voting capital stock of the Company registered in their respective names or
beneficially owned by them or any of their respective affiliates as of the date
hereof (and any and all other securities of the Company legally or beneficially
acquired by each such Shareholder after the date hereof) (hereinafter
collectively referred to as the "Shares") subject to, and to vote the Shares in
accordance with, the provisions of this Section 2.
2.2 Election of Directors. Each time the Shareholders shall meet, or
---------------------
act by written consent in lieu of acting at a meeting, for the purpose of
electing one or more directors of the Company, each Shareholder agrees to vote
its Shares for the election of (i) three (3) representatives of Sunset Partners
(hereinafter defined as Sunset Partners, L.P., Sunset Partners II, L.P., and
Sunset Partners III, L.P. collectively), and (ii) one (1) representative of
Pomona Capital and its affiliated partnerships; provided, however, that each
-------- -------
Shareholder also agrees to vote its
-14-
<PAGE>
shares for the election of two representatives of the holders of Series C
Preferred Stock as two additional directors (resulting in a board of nine
directors) if the Company fails to meet any one or more of the following three
criteria for the period (the "Relevant Period") commencing on the date hereof
and ending December 31, 1996:
(a) average gross revenues per room of not less than $30 per month for the
Relevant Period,
(b) at least 100,000 rooms installed by the end of the Relevant Period,
and
(c) a capital cost per room (including the cost of interactive shopping,
but excluding the cost of televisions) of not more than $600 based on rooms
added during the Relevant Period.
The obligation assumed by each Shareholder hereunder to vote its Shares as set
forth above shall be deemed to be a right coupled with an interest in favor of
each other Shareholder, and each other Shareholder may, by acting through a
person designated by Shareholders holding a majority of the Shares subject to
this provision, vote such Shareholder's Shares by proxy. The parties to this
Agreement shall vote their Shares to maintain a board of seven directors, unless
one or more of the foregoing three criteria are not met during the Relevant
Period. In which case, the parties hereto shall vote their Shares to increase
the board to nine directors with the additional two directors nominated and
elected as set forth above.
2.3 Successors; Directors. In the event that any of the individuals or
---------------------
entities identified in Section 2.2 is unable or unwilling to serve on the Board
of Directors of the Company, his successor shall be chosen by the person or
entity (or persons or entities) whom that director is representing. With respect
to the representatives of holders of the Series C Preferred Stock, the
representatives shall be selected by a majority of the Series C Preferred Stock.
2.4 Effectiveness; Termination. This Section 2 shall become effective
--------------------------
on the date hereof. This Section 2 shall terminate upon the closing of the
Company's first offering of voting equity securities to the public pursuant to a
registration statement filed with the Securities and Exchange Commission. If
Sunset Partners holds less than 50% of the shares of Series C Preferred Stock it
holds on the effective date of this Shareholders' Agreement, then each
Shareholder agrees to vote its shares for the election of two (2)
representatives of Sunset Partners. If Sunset Partners holds less than 25% of
the shares of Series C Preferred Stock it holds on the effective date of this
Shareholders' Agreement, then each Shareholder agrees to vote its shares for the
election of one (1) representative of Sunset Partners. With respect to Sunset
Partners, the provisions of this Section 2 shall terminate when Sunset Partners
holds less than 10% of the shares of Series C Preferred Stock it holds on the
effective date of this Shareholders' Agreement. With respect to Pomona Capital,
the provisions of this Section 2 shall terminate when Pomona Capital and its
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<PAGE>
affiliated partnerships hold less than 50% of the shares of Series C Preferred
Stock such entities hold on the effective date of this Shareholders' Agreement.
2.5 Representations. Each Shareholder represents and warrants to the
---------------
other Shareholders that (a) it now owns (or, upon the distribution thereof, will
own) the Shares, free and clear of liens or encumbrances, and has not, prior to
the date of this Agreement, executed or delivered any proxy or entered into any
other voting agreement or similar arrangement with respect to the Shares other
than one which has expired or terminated prior to the date hereof, and (b) such
Shareholder has full power and capacity to execute, deliver and perform this
Agreement, which has been duly executed and delivered by, and evidences the
valid and binding obligation of, such Shareholder enforceable in accordance with
its terms.
SECTION 3
RIGHT OF FIRST REFUSAL
----------------------
3.1 The Right. The Company hereby grants to ((a) each holder of
---------
Series C Preferred Stock of the Company and (b) holders of more than five
percent (5%) of the voting capital of the Company prior to the issuance of the
Series C Preferred Stock (collectively the Right Holders and each a "Right
Holder"), the right to purchase such Right Holder's Pro Rata Share (as defined
below) of any New Securities (as defined below) which the Company may, from time
to time, proposed to sell and issue, on the same terms and conditions and for
the same price as set forth in the notice described in Subsection 3.2 hereof.
Each Right Holder's "Pro Rata Share" for purposes of this right of first refusal
is the ratio of (i) the total number of shares of Common Stock held by
Shareholder as of the date of the notice, assuming the conversion of all
Preferred Stock, to (ii) the total aggregate shares of Common Stock outstanding
assuming the conversion of all Preferred Stock.
3.2 Notice. The Company shall give to such Right Holder written notice
------
of the proposed offer to sell and issue any of the new Securities, which written
notice shall contain the terms of such proposed sale in reasonable detail and
shall be delivered to such Right Holder not less than twenty (20) days prior to
the date such securities are proposed to be sold and issued. Such Right Holder
shall have the right to exercise the option granted pursuant to Subsection 3.1
above by giving written notice thereof to the Company prior to the expiration of
such twenty (20) day period, specifying the amount of securities which such
Right Holder desires to purchase. In the event such Right Holder does not give
such notice, then the Company shall be free to sell and issue such New
Securities to other parties, but only on the same terms as set forth in said
written notice. If the Company does not sell and issue such New Securities on
such terms within 180 days of the expiration of the Right Holder's right of
first refusal hereunder, then such New Securities shall once again be subject to
the right of first refusal set forth in this Section 3.
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<PAGE>
3.3 New Securities. The term "New Securities" as used in this Section 3
--------------
shall mean any shares of the Company's Common Stock or Preferred Stock, rights,
options or warrants to purchase such shares of Common Stock or Preferred Stock,
Convertible Securities, and securities of any type whatsoever that are, or may
become, convertible into such shares of Common Stock or Preferred Stock;
provided that "New Securities" does not include:
(a) Common Stock issuable upon conversion of the Preferred Stock or
exercise of the Common Warrants or upon conversion of the Series C Preferred
Stock issuable upon exercise of the Series C Warrants;
(b) securities issued in an underwritten public offering, pursuant
to an effective registration statement under the Securities Act of 1933, as
amended;
(c) securities issued pursuant to the acquisition of another
corporation by merger, purchase of all or substantially all of the assets, or
other reorganization;
(d) securities issued to employees, officers, or directors of, or
consultants to, the corporation, pursuant to stock option, purchase or bonus
plans or agreements on terms approved by the Board of Directors;
(e) securities issued to dealers, trade vendors, sales
representatives, equipment lessors, commercial lenders (or their guarantors) or
joint venturers of the Company on terms approved by the Board of Directors; and
(f) securities issued to effect any stock split or stock dividend
by the Company.
3.4 Termination. The rights granted by this Section 3 shall terminate
-----------
immediately prior to the closing of a public offering of the Company's equity
securities pursuant to registration statement filed under the Securities Act of
1933, as amended.
SECTION 4
TRANSFER RESTRICTIONS; RIGHTS OF FIRST OFFER
--------------------------------------------
4.1 Restrictions on Transfer. The Shareholders agree not to sell,
------------------------
assign, pledge, or in any other manner transfer any of the Company's securities
held by them, or any right or interest therein, whether voluntarily or by
operation of law, or otherwise, except (a) sales made in a registered public
offering or in an open market transaction, or (b) private sales for cash
consideration made subject to the rights of first offer specified in this
Section 4. The foregoing notwithstanding, no sale, assignment, pledge, or
transfer, of any of the Company's securities, or any right or interest therein,
whether voluntarily or by operation of law, or otherwise, may be
-17-
<PAGE>
made by any Shareholder (i) to an Adverse Person, as defined below, or (ii) that
would result in such transferee holding in excess of ten percent (10%) of voting
capital stock of the Company registered in their respective names or
beneficially owned by them or any of their respective affiliates as of the date
thereof.
4.2 Adverse Person. The term "Adverse Person" as used in this Section 4
--------------
shall mean any corporation or entity which at such time is a competitor of the
Company or any affiliate of such corporation or entity.
4.3 Right of First Offer. Pursuant to the restrictions set forth in
--------------------
Section 4.1 above:
(a) Prior to any transfer of the Company's securities, the
Transferring Shareholder (the "Transferring Shareholder") shall promptly notify
the Company and all holders of Series C Preferred Stock (not including the
Transferring Shareholder) (the "Remaining Series C Holders") of the terms and
conditions of such purchase offer (the "Purchase Offer"). Such notice shall set
forth (a) the Transferring Shareholder's bona fide intention to transfer such
securities; (b) the securities to be transferred; and (c) the cash price or, in
reasonable detail, other consideration, per share for which the Transferring
Shareholder proposes to transfer such securities.
(b) For twenty (20) days following receipt of such notice, the
Company shall have the option to purchase all or any portion of the securities
specified in the notice upon the terms specified in the Purchase Offer. If the
Company elects to purchase any of the securities specified in the notice, the
Company will deliver written notice to the Transferring Shareholder. Settlement
for the purchase of the securities shall be made as provided below.
(c) In the event the Company does not elect to acquire all of the
securities specified in the Purchase Offer, the Company shall so notify the
Remaining Series C Holders who at such time shall have the option to purchase
such securities on a pro rata basis determined by applying (i) the ratio of the
number of shares of Common Stock held by the Series C Holder as of the date of
the notice to the number of shares of Common Stock held by the Remaining Series
C Holders in aggregate, assuming the conversion of all Preferred Stock in both
cases, to (ii) the number of securities available through the Purchase Offer,
provided that the securities allocated to any remaining Series C Holder that
does not elect to acquire the securities shall be allocated pro rata to those
that do elect. If any Remaining Series C Holder elects to purchase any of the
remaining securities specified in the notice, such Remaining Series C Holder
shall deliver written notice to the Transferring Shareholder and the Company.
Settlement for the purchase of the securities shall be made as provided below.
(d) In the event the Remaining Series C Holders elect not to
purchase all of the remaining securities specified in the Transferring
Shareholder's notice, the Transferring Shareholder may sell to any transferee
(subject to Sections 4.1 and 4.2 above) on the terms of the
-18-
<PAGE>
Purchase Offer the remainder of the securities specified in the notice provided
that such sale closes within sixty (60) days of the expiration of the Remaining
Series C Holder's twenty (20) day notice period and that the sale is on terms
substantially similar to those specified in the Transferring Shareholder's
notice.
(e) Settlement for any or all of the securities elected to purchase
under this Section 4 shall be made in cash within five (5) business days after
the Transferring Shareholder receives the notice from the Company or the
Remaining Series C Holders that it is electing to purchase some or all of the
securities; provided, however, that if the terms of the Purchase Offer called
for payment other than in cash, the Company or the Remaining Series C Holders
shall pay for such securities on the same terms and conditions set forth in the
Transferring Shareholders' notice.
(f) Any sale or transfer, or purported sale or transfer, of the
Company's securities shall be null and void unless the terms, conditions and
provisions of this Section 4 are strictly observed and followed. The Company
will not be required (i) to transfer on its books any shares that have been
sold, gifted or otherwise transferred in violation of this Shareholders'
Agreement, or (ii) to treat as owner of such shares, or to accord the right to
vote or pay dividends to any purchaser, donee or other transferee to whom such
shares may have been so transferred.
(g) Each certificate representing securities now or hereafter owned
by the Shareholders or issued to any permitted transferee shall be endorsed with
the following legend or its substantial equivalent:
"THE SALE OR TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS
SUBJECT TO THE TERMS AND CONDITIONS OF A CERTAIN RIGHT OF FIRST OFFER
COPIES OF WHICH MAY BE OBTAINED WITHOUT CHARGE UPON WRITTEN REQUEST TO THE
SECRETARY OF THE CORPORATION."
(h) The legend shall be removed and the right of first offer shall
terminate immediately prior to the closing of the sale of the Company's Common
Stock in a bona fide underwritten public offering registered under the Act.
4.4 Permitted Transfers. The transfer restrictions and rights of first
-------------------
offer of the Company and of the Series C Preferred Stock shall not pertain or
apply to (i) any transfer to the spouse or to a trust for the benefit of the
Transferring Shareholder or his or her spouse, brother(s), sister(s), ancestors,
descendants, in any combination, (ii) any sale of securities pursuant to any
exercise of registration rights as set forth in Section 1 of this Shareholders'
Agreement, (iii) any affiliates of the Transferring Shareholder, or (iv) any
distribution to the partners of a Transferring Shareholder which is a limited
partnership, which distribution is consistent with the terms of such limited
partnership agreement; provided that (A) the Transferring Shareholder shall
inform the
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<PAGE>
Company and Remaining Series C Holders of such transfer prior to effecting it
and (B) except for Section 4.4(ii), the transferee (the "Permitted Transferee")
shall furnish the Company with a written agreement to be bound by and comply
with all provisions of this Shareholders' Agreement applicable to the
shareholder.
SECTION 5
COORDINATION OF PRIOR RIGHTS OF FIRST REFUSAL
---------------------------------------------
5.1 Second Series B Agreement Rights of First Refusal. Pursuant to
-------------------------------------------------
Section 10.4 ("Entire Agreement; Amendment and Waiver") of the Second Series B
Agreement, as amended, certain of the undersigned Shareholders, constituting a
majority in interest of the persons entitled to the right of first refusal set
forth in Section 9 ("Right of First Refusal") therein, hereby agree that the
execution and delivery of this Shareholders' Agreement is an amendment of the
Second Series B Agreement, as amended, and that the rights of first refusal
contained therein shall be null and void as of the execution hereof and shall be
superseded in their entirety by the terms of this Shareholders' Agreement.
5.2 Series A Agreement Rights of First Refusal. Pursuant to Section
------------------------------------------
10.4 ("Entire Agreement; Amendment and Waiver") of the Series A Agreement,
certain of the undersigned Shareholders, constituting a majority in interest of
the holders of Securities (as defined therein) and the Company hereby agree that
the execution and delivery of this Shareholders' Agreement is an amendment of
the Series A Agreement and that the rights of first refusal contained in Section
9 ("Right of First Refusal of Company and Purchasers") therein shall be null and
void as of the execution hereof and shall be superseded in their entirety by the
terms of this Shareholders' Agreement.
SECTION 6
COORDINATION OF PRIOR COVENANTS RIGHTS
--------------------------------------
6.1 Series B Agreement Covenants. Pursuant to Section 9.4 ("Entire
----------------------------
Agreement; Amendment and Waiver") of the Series B Agreement certain of the
undersigned Shareholders, constituting a majority in interest of the holders of
Securities (as defined therein) and the Company hereby agree that the execution
and delivery of this Shareholders' Agreement is an amendment of the Series B
Agreement, and that the covenant rights set forth in Section 7 ("Covenants of
the Company and the Purchaser") of the Series B Agreement shall be null and void
as of the execution hereof and shall be superseded in their entirety by the
terms of this Shareholders' Agreement.
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<PAGE>
6.2 Series A Agreement Covenants. Pursuant to Section 10.4 ("Entire
----------------------------
Agreement; Amendment and Waiver") of the Series A Agreement, certain of the
undersigned Shareholders, constituting a majority in interest of the holders of
Securities (as defined in the Series A Agreement) and the Company hereby agree
that the execution and delivery of this Shareholders' Agreement is an amendment
of the Series A Agreement and that the covenant rights set forth in Section 7
("Covenants of the Company and the Purchaser") shall be null and void as of the
execution hereof and shall be superseded in their entirety by the terms of this
Shareholders' Agreement.
6.3 Second Series B Agreement Covenants. Pursuant to Section 10.4
-----------------------------------
("Entire Agreement; Amendment and Waiver") of the Second Series B Agreement, as
amended, certain of the undersigned Shareholders constituting a majority in
interest of the holders of Securities (as defined therein) and the Company
hereby agree that the execution and delivery of this Shareholders' Agreement is
an amendment of the Second Series B Agreement, as amended, and that the covenant
rights set forth in Section 7 ("Covenants of the Company and Purchaser") shall
be null and void as of the execution hereof and shall be superseded in their
entirety by the terms of this Shareholders' Agreement.
SECTION 7
COORDINATION OF PRIOR CO-SALE AGREEMENT
---------------------------------------
Pursuant to Section 5.5 of the Amended and Restated Co-Sale Agreement dated
March 17, 1993, by and between Robert R. Creager, the Company, and certain
Securityholders of the Company (the "Restated Co-Sale Agreement'), certain of
the undersigned Shareholders, constituting the Major Shareholder and the
Preferred Shareholders holding a majority of the Preferred Shares (as those
terms are defined therein) and the Company hereby agree that the Restated Co-
Sale Agreement is null and void as of the execution hereof and that this
Shareholders' Agreement supersedes any and all rights contained therein.
SECTION 8
COORDINATION OF PRIOR VOTING AGREEMENT
--------------------------------------
Pursuant to Section 3.3 of the Voting Agreement (the "Voting Agreement")
dated as of October 15, 1992, by and among the Company and certain
Securityholders of the Company as amended by the Amendment and Agreement to be
Bound dated March 17, 1993, the undersigned Shareholder, constituting holders of
more than 50% of the Shares (as defined therein) subject to the Voting
Agreement, hereby agree that the execution and delivery of this Shareholders'
Agreement is an amendment of the Voting Agreement, and that the Voting
Agreement, as
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<PAGE>
amended, is null and void as of the execution hereof and that this Shareholders'
Agreement supersedes any and all rights contained therein.
SECTION 9
COORDINATION OF PRIOR RIGHT OF FIRST OFFER AGREEMENT
----------------------------------------------------
The Company and COMSAT Video Enterprises, Inc. hereby agree to renegotiate
the Right of First Offer Agreement dated as of March 15, 1993 in good faith
subsequent to the execution of this Shareholders' Agreement.
SECTION 10
GENERAL PROVISIONS
------------------
10.1 Necessary Actions. If and whenever the Shares are sold by a
-----------------
Shareholder or its representative, the Shareholder or its representative shall
do all things and execute and deliver all documents and make all transfers, and
cause any transferee of the Shares to do all things and execute and deliver all
documents, as may be necessary to consummate such sale consistent with this
Agreement.
10.2 Equitable Relief. The parties hereto declare that it is impossible
----------------
to measure in money the damages which will accrue to a party hereto or to their
heirs, personal representatives, or assigns by reason of a failure to perform
any of the obligations under this Agreement and agree that the terms of this
Agreement shall be specifically enforceable. If any party hereto or his heirs,
personal represen tatives, or assigns institutes any action or proceeding to
specifically enforce the provisions hereof, any person against whom such action
or proceeding is brought hereby waives the claim or defense therein that such
party or such personal representative has an adequate remedy at law, and such
person shall not offer in any such action or proceeding the claim or defense
that such remedy at law exists.
10.3 Reclassifications, etc. In the event that subsequent to the date of
----------------------
this Agreement any shares or other securities are issued on, or in exchange for,
any of the Shares held by the Shareholders by reason of any stock dividend,
stock split, consolidation of shares, reclassification, merger or consolidation
involving the Company, such shares or securities shall be deemed to be Shares
for purposes of this Agreement.
10.4 Further Assurances. Each Shareholder agrees to execute and deliver
------------------
such additional documents and take such additional actions as may be necessary
or reasonably desirable to carry out the intent of this Agreement.
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<PAGE>
10.5 Governing Law. This Shareholders' Agreement shall be governed by
-------------
and construed according to the laws of the State of California.
10.6 Survival. The representations, warranties, and covenants of the
--------
parties made herein shall survive the Closing.
10.7 Successors and Assigns. Except as otherwise expressly limited
----------------------
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors, and administrators of the
parties hereto.
10.8 Entire Agreement; Amendment and Waiver. This Shareholders'
--------------------------------------
Agreement and the other documents delivered pursuant hereto constitute the full
and entire understanding and agreement between the parties with regard to the
subject matters hereof and thereof. Except as provided in Section 1.15, any term
of this Shareholders' Agreement may be amended and the observance of any term
hereof may be waived (either prospectively or retroactively and either generally
or in a particular instance) only with the written consent of a majority in
interest of the Holders and the written consent of the Company. Any amendment or
waiver effected in accordance with this Section 10.8 shall be binding upon each
Holder and the Company. In addition, the Company may waive performance of any
obligation owing to it, as to some or all of the Holders, or agree to accept
alternatives to such performance, without obtaining the consent of any Holder.
10.9 Rights of Holders. Each Holder shall have the absolute right to
-----------------
exercise or refrain from exercising any right or rights that such Holder may
have by reason of this Shareholders' Agree ment, including without limitation
the right to consent to the waiver of any obligation of the Company under this
Shareholders' Agreement and to enter into an agreement with the Company for the
purpose of modifying this Shareholders' Agreement or any agreement affecting any
such modification, and such Holder shall not incur any liability to any other
Holder or Holders with respect to exercising or refraining from exercising any
such right or rights.
10.10 Notices, etc. All notices and other communications required or
-------------
permitted hereunder shall be in writing and shall be mailed by registered or
certified mail, postage prepaid, or otherwise delivered by hand or by messenger,
addressed (i) if to a Holder, at the address such Holder shall have furnished to
the Company in writing, or (ii) if to the Company, one copy to its principal
executive offices addressed to the attention of the Corporate Secretary, or at
such other address as the Company shall have furnished to the Holders, and
another copy to the Company's legal counsel, Wilson, Sonsini, Goodrich & Rosati,
650 Page Mill Road, Palo Alto, California 94304-1050, to the attention of Thomas
C. DeFilipps, Esq.
10.11 Delays or Omissions. No delay or omission to exercise any right,
-------------------
power, or remedy accruing to any party upon any breach or default under this
Shareholders' Agreement, shall be deemed a waiver of any other breach or default
theretofore or thereafter occurring. Any
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<PAGE>
waiver, permit, consent, or approval of any kind or character on the part of any
party of any breach or default under this Shareholders' Agreement, or any waiver
on the part of any party of any provisions or conditions of this Shareholders'
Agreement, must be in writing and shall be effective only to the extent
specifically set forth in such writing. All remedies, either under this
Shareholders' Agreement or by law or otherwise afforded to any of the parties,
shall be cumulative and not alternative.
10.12 References. Unless context otherwise requires, any reference to a
----------
"Section" refers to a section of this Shareholders' Agreement. Any reference to
"this Section" refers to the whole numbered section in which such reference is
contained.
10.13 Severability. If any provision of this Shareholders' Agreement is
------------
held to be unenforceable under applicable law, then such provision shall be
excluded from this Shareholders' Agreement and the balance of this Shareholders
Agreement shall be interpreted as if such provision were so excluded and shall
be enforceable in accordance with its terms. The court in its discretion may
substitute for the excluded provision an enforceable provision which in economic
substance reasonably approximates the excluded provision.
10.14 Counterparts. This Shareholders' Agreement may be executed in any
------------
number of counterparts, each of which shall be deemed an original and
enforceable against the parties actually executing such counterpart, and all of
which together shall constitute one instrument.
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<PAGE>
[Signature Page to Pacific Pay Video Limited Shareholders' Agreement]
IN WITNESS WHEREOF, this Shareholders' Agreement is executed effective as
of the date first set forth above.
THE COMPANY: PACIFIC PAY VIDEO LIMITED
By:_____________________________________
Title:__________________________________
SHAREHOLDERS:
________________________________________
ALLAN ASHMEAD
ASIA PACIFIC GROWTH FUND, L.P.
By: ASIA PACIFIC GROWTH
FUND, L.P.
By: H & Q ASIA PACIFIC, G.P.
GENERAL PARTNER OF ASIA
PACIFIC GROWTH FUND, L.P.
By: H & Q ASIA PACIFIC, LTD.
GENERAL PARTNER OF
H & Q ASIA PACIFIC, G.P.
By:_____________________________________
DANIEL A. CARROLL
SENIOR VICE PRESIDENT
H & Q ASIA PACIFIC, LTD.
-25-
<PAGE>
[Signature Page to Pacific Pay Video Limited Shareholders' Agreement]
BANCORP HAWAII SMALL BUSINESS
INVESTMENT COMPANY, INC.
By:_____________________________________
Title:__________________________________
________________________________________
CORNELIUS BOND
CLARION CAPITAL CORPORATION
By:_____________________________________
Title:__________________________________
COMSAT VIDEO ENTERPRISES, INC.
By:_____________________________________
Title:__________________________________
________________________________________
ROBERT CREAGER
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<PAGE>
[Signature Page to Pacific Pay Video Limited Shareholders' Agreement]
CSK VENTURE CAPITAL CO., LTD.
AS INVESTMENT MANAGER FOR
CSK-1(A) INVESTMENT FUND
By:_____________________________________
Title:__________________________________
CSK VENTURE CAPITAL CO., LTD. AS
INVESTMENT MANAGER FOR CSK-1(B)
INVESTMENT FUND
By:_____________________________________
Title:__________________________________
DUNWOODIE FAMILY TRUST
By:_____________________________________
Title:__________________________________
REVOCABLE TRUST OF JAROLD A.
EVANS U/T/D APRIL 19, 1994
By:_____________________________________
Title:__________________________________
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<PAGE>
[Signature Page to Pacific Pay Video Limited Shareholders' Agreement]
FREIDENRICH FAMILY TRUST
By:_____________________________________
Title:__________________________________
HAKMAN CAPITAL CORPORATION
By:_____________________________________
Title:__________________________________
H & Q PPV INVESTORS, L.P.
By:_____________________________________
Title:__________________________________
________________________________________
ERIC HASS
________________________________________
JOSEPH S. HROUDA
J.F. SHEA CO., INC.
By:_____________________________________
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<PAGE>
[Signature Page to Pacific Pay Video Limited Shareholders' Agreement]
Title:__________________________________
________________________________________
WILLARD L. KAUFFMAN
THE WALTER LOEWENSTERN, JR.
SEPARATE PROPERTY TRUST U/D/T
DATED 2/12/90
By:_____________________________________
Title:__________________________________
________________________________________
W. PATRICK MCDOWELL
NIKKO CAPITAL CO., LTD
By:_____________________________________
Title:__________________________________
N.C. NO. 2, INVESTMENT PARTNERSHIP
By:_____________________________________
Title:__________________________________
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<PAGE>
[Signature Page to Pacific Pay Video Limited Shareholders' Agreement]
-30-
<PAGE>
[Signature Page to Pacific Pay Video Limited Shareholders' Agreement]
O'ROURKE INVESTMENT CORPORATION
By:_____________________________________
Title:__________________________________
OSCCO III, L.P.
By:_____________________________________
Title:__________________________________
PARTECH INTERNATIONAL
By:_____________________________________
Title:__________________________________
POMONA CAPITAL, L.P.
By:_____________________________________
Title:__________________________________
ROGERS FAMILY TRUST
By:_____________________________________
Title:__________________________________
-31-
<PAGE>
[Signature Page to Pacific Pay Video Limited Shareholders' Agreement]
R & W VENTURES II
By:_____________________________________
Title:__________________________________
SOF VENTURE CAPITAL, L.P.
By:_____________________________________
Title:__________________________________
SP VENTURE CAPITAL
By:_____________________________________
Title:__________________________________
SP OFFSHORE VENTURE CAPITAL, L.P.
By:_____________________________________
Title:__________________________________
SUNSET PARTNERS, L.P.
By:_____________________________________
Title:__________________________________
-32-
<PAGE>
[Signature Page to Pacific Pay Video Limited Shareholders' Agreement]
-33-
<PAGE>
[Signature Page to Pacific Pay Video Limited Shareholders' Agreement]
SUNSET PARTNERS II, L.P.
By:_____________________________________
Title:__________________________________
SUNSET PARTNERS III, L.P.
By:_____________________________________
Title:__________________________________
UNTERBERG HARRIS INTERACTIVE
MEDIA LIMITED PARTNERSHIP C.V.
By:_____________________________________
Title:__________________________________
________________________________________
GUNNAR WETLESEN
________________________________________
MICHAEL W. WILSEY
WS INVESTMENTS 94A
By:_____________________________________
-34-
<PAGE>
Title:__________________________________
Exhibit A
---------
Allan Ashmead
Asia Pacific Growth Fund, L.P.
Bancorp Hawaii Small Business Investment Company, Inc.
Cornelius Bond
Clarion Capital Corporation
Comsat Video Enterprises, Inc.
Robert Creager
CSK Venture Capital Co., Ltd. As Investment Manager For CSK-1(a) Investment Fund
CSK Venture Capital Co., Ltd. As Investment Manager for CSK-1(b) Investment Fund
Dunwoodie Family Trust
Revocable Trust of Jarold A. Evans U/T/D April 19, 1994
Freidenrich Family Trust
Hakman Capital Corporation
H & Q PPV Investors, L.P.
Eric Hass
Joseph S. Hrouda
J.F. Shea Co., Inc.
Willard L. Kauffman
The Walter Loewenstern, Jr. Separate Property Trust U/D/T dated 2/12/90
W. Patrick McDowell
Nikko Capital Co., Ltd
N.C. No. 2, Investment Partnership
O'Rourke Investment Corporation
OSCCO III, L.P.
Partech International
Pomona Capital, L.P.
Rogers Family Trust
R & W Ventures II
SOF Venture Capital, L.P.
SP Venture Capital
SP Offshore Venture Capital, L.P.
Sunset Partners, L.P.
Sunset Partners II, L.P.
Sunset Partners III, L.P.
Unterberg Harris Interactive Media Limited Partnership C.V.
Gunnar Wetlesen
Michael W. Wilsey
WS Investments 94A
-35-
<PAGE>
EXHIBIT H TO
NOTE AGREEMENT
PACIFIC PAY VIDEO LIMITED
GROSS REVENUE ANALYSIS
JUN-95
<TABLE>
<CAPTION>
---------------------
CALCULATED
--------------------------------------------------------------------------------------------------
ROOM ON-LINE GROSS $ GROSS HOTEL BUY ROOM REV
COUNT DATE BUYS PRICE REVENUES OCCUPANCY RATE PER MO
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Australia
Sheraton on the Park 560 2/18/94 1,705 $9.90 $16,888 61% 17% $30.16
TowmaUille TLodge 186 5/3/96 570 $9.19 $5,241 85% 16% $28.18
Melbourne Aiport T L 202 6/7/94 660 $8.48 $5,600 70% 16% $27.72
St Ki/ds Rd TLodge 225 6/16/94 829 $8.48 $7,034 80% 15% $31.26
Park Royal 220 7/27/94 910 $8.48 $7,721 87% 21% $35.10
Beaufort Darwom 196 12/13/94 667 $8.48 $5,659 82% 14% $28.87
Bartswood Resort 414 4/08/95 2,830 $9.90 $28,031 88% 26% $67.71
Intercontinental Sydney 504 5/22/95 1,146 $8.90 $11,351 86% 13% $22.52
--- ----- ---- ------ --- --- -----
Total 2,507 9,317 $8.39 $87,525 70% 18% $34.91
1995 Plan 4,320 13,382 $3.95 $133,152 88% 18% $32.72
- -------------------------------------------------------------------------------------------------------------------------------
Guam
- -------------------------------------------------------------------------------------------------------------------------------
Hilton Hotel Intntl. 591 3/3/94 2,235 $12.95 $28,943 84% 13% $41.89
Palace 413 8/31/93 1,477 15.00 22,155 96% 12% $53.84
Pacific Star 421 4/12/93 1,724 12.95 22,326 80% 17% $53.03
Pacific Islands Club 520 10/14/93 1,587 12.95 20,293 93% 11% $38.02
Alupang Beach 104 4/28/93 473 12.95 5,125 82% 18% $58.90
Guam Dai Ichi 333 1/31/94 1,234 12.95 15,980 75% 18% $47.99
Fujiti Turrom Beach 217 12/18/93 570 9.95 5,872 70% 13% $28.14
Hafa Adai 280 12/10/93 805 12.95 10,425 96% 11% $37.23
Hafa Adai 132 12/30/93 380 12.95 4,921 87% 11% $37.28
Sotetsu Tropicana 200 1/31/94 721 12.95 9,337 91% 13% $48.88
Guam Reef 458 7/25/94 1,580 12.95 20,591 94% 12% $44.96
Guam Okura 336 11/8/94 1,591 18.00 23,865 80% 20% $71.03
Plumeria 114 1/31/95 180 12.95 2,072 83% 8% $18.18
--- ------ ------ ------- ------ --- ------
Total 4219 14,557 $13.27 191,905 88% 13% $45.88
1995 Plan 4080 12,157 170,332 71% 14% $41.78
- -------------------------------------------------------------------------------------------------------------------------------
Hong Kong
- -------------------------------------------------------------------------------------------------------------------------------
Mandarin Oriental 541 4/11/94 2,300 $10.34 $23,780 55% 28% $43.96
City Garden 615 3/17/95 2,555 $9.55 $25,426 81% 15% 41.34
J.W. Marriott 604 3/12/95 2,878 $10.34 $29,755 83% 19% 48.27
The Wharney 335 4/13/95 1,011 $11.26 $11,384 72% 14% 33.99
Kowleon Shangri-La 717 5/13/95 2,890 $10.34 $29,880 83% 16% 41.67
----- ----- ------ ------- --- --- ------
Total 2812 11,634 $10.33 $120,227 78% 18% $42.75
1995 Plan 6048 23,872 $10.50 $256,568 71% 21% $48.87
- -------------------------------------------------------------------------------------------------------------------------------
Israel
- -------------------------------------------------------------------------------------------------------------------------------
Hilton Tel Aviv 599 4/12/95 1,539 $10.00 $15,390 88% 10% $26.89
Shalem Plaza Eilot 153 5/22/95 203 $10.00 $ 2,030 83% 8% $13.27
----- ----- ------ ------- --- --- ------
Total 752 1,742 $10.00 $17,420 78% 10% $23.18
1995 Plan 850 2,870 $10.00 $28,201 88% 18% $30.83
</TABLE>
7/27/95
<PAGE>
<TABLE>
<CAPTION>
------------------------
CALCULATED
-----------------------------------------------------------------------------------------------------
ROOM ON-LINE GROSS $ GROSS HOTEL BUY ROOM
COUNT DATE BUYS PRICE REVENUES OCCUPANCY RATE REV
PER MO
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Isreal
Japan
Okuru Harramatsu 324 10/9/94 581 $13.74 $9,082 48% 14% $28.03
Okuru Tokyo 883 12/30/94 1,802 $16.03 $28,882 82% 11% $32.71
Pacific Meridian Tokyo 954 2/15/95 2,288 $15.33 $34,773 6% 12% $36.45
Mana Beach 401 4/7/95 834 $14.15 $11,803 66% 10% $29.43
--- ----- ------ ------- ---- --- ------
Total 2562 5,505 $15.19 $84,540 62% 12% $33.00
1995 Plan 6492 12,447 $13.50 $168,032 58% 14% $31.75
New Zealand
Regent Aukland 332 5/2/94 538 $10.42 $5,605 67% 8% $16.88
Plaza Wellington 84 5/17/94 428 $10.42 $4,470 73% 11% $24.29
Centra 252 8/22/94 800 $10.42 $8,335 78% 14% $33.08
Auckland Airport 243 12/1/94 517 $10.42 $5,388 70% 10% $22.17
Noah's Christhcurch 203 3/27/95 355 $10.42 $3,699 70% 8% $18.22
--- --- ------ ------ --- --- ------
Total 1214 2,638 $10.42 $27,497 71% 10% $22.65
1995 Plan 1719 4,239 $9.95 $42,179 59% 12% $24.54
Singapore
Marina Mandarin 575 10/19/94 484 $9.52 $4,587 79% 4% $8.07
Orchard Hotel 677 3/31/95 740 $9.55 $7,087 85% 4% $10.44
Traders Hotel 539 6/29/95 66 $9.50 $627 66% 8% $17.45
--- ----- ----- --- -- ------
Total 1791 1,290 $9.54 $12,301 77% 5% $11.79
1995 Plan 2543 4,059 $9.00 $36,526 78% 7% $14.36
South Korea
Intercontinental 583 4/26/95 1,846 $11.21 $20,698 91% 12% $35.50
Westin Chesun 480 6/25/95 311 $11.21 $3,487 95% 11% $36.32
--- ------ ------ --- --- -------
Total 1063 2,157 $11.21 $24,185 93% 11% $35.87
1995 Plan 2683 31 $10.00 $66,183 89% 12% $24.86
Taiwan
Grand Formoss Regent 570 10/29/94 1,665 $9.54 $16,043 37% 11% $28.14
Lai Lai Sheraton 705 12/27/94 2,861 $9.44 $25,108 84% 13% $35.81
Far Eastern Plaza 422 1/14/95 1,130 $10.33 $11,675 58% 15% $27.87
Ritz Taipei 209 5/22/95 606 $9.80 $7,902 65% 18% $37.81
--- --- ----- ------ --- --- ------
Total 1906 6,262 $9.70 $60,728 77% 14% $31.86
1995 Plan 3482 10,103 $10.00 $101,028 71% 15% $31.85
</TABLE>
<PAGE>
[PACIFIC PAY VIDEO LIMITED]
[GROSS REVENUE ANALYSIS]
[Jun-95]
<TABLE>
<CAPTION>
Calculated
Room On-Line Gross $ Gross Motel Buy Room Rev
Count Date Days Price Revenue Occupancy Rate per Mo
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Thailand
Royal Orchid 773 4/28/94 1,034 $10.22 $10,588 47% 9% $13.87
Royal Garden Riverside 426 8/1/94 627 $10.22 $6,408 58% 8% $14.97
Royal Garden Hus Hin 221 8/1/94 78 $10.22 $777 48% 2% $3.51
Montian 396 8/23/94 925 $10.22 $9,453 51% 15% $23.87
Royal Garden Village
Hus Hin 162 10/5/94 100 $10.22 $1,022 37% 6% $8.31
Royal Garden Pattaya 300 10/19/94 458 $10.22 $4,681 63% 8% $15.60
Le Meridian Phu? 470 11/8/94 1,267 $10.22 $12,940 58% 16% $27.55
Siam City Motel 507 12/31/94 525 $10.22 $5,385 36% 10% $10.58
Holiday Inn Crown Plaza 728 1/17/95 1,016 $10.22 $10,383 51% 9% $14.26
Central Plaza Bangkok 807 1/27/95 1,235 $10.22 $12,822 72% 9% $20.79
Novatal Siam Square 421 4/25/95 818 $10.22 $8,338 69% 9% $19.81
Novatal Sangna 300 4/28/95 501 $10.22 $5,120 38% 15% $17.07
Shangri-La Bangkok 882 6/19/95 123 $10.22 $1,257 66% 2% 43.65
--- --- ------ ------ --- --- ------
Total 6,393 8,707 $10.22 $89,174 56% 9% $14.71
1995 Plan 6,754 15,335 $9.50 $145,588 68% 12% $22.57
Grand Total 25,001 53,836 $11.22 716,069 71% 12.4% $29.70
1995 Plan 39,149 104,839 $10.95 1,139,953 68% 14.3% $31.50
</TABLE>
[_]. Estimate Occupancy
[_]. Prior Month Occupancy
The following went on-line on 6/30 with no revenue
OZ Sheraton Wentworth 423
HK Island Shangri-La 585
TW Ambassador 446
TW Imperial 338
TL Laguna Beach 252
TL Phu? Arcadia 475
KR Seoul Plaza 470
Total 2,989
<PAGE>
EXHIBIT 10.15
MAGINET CORPORATION
405 Tasman Drive, Sunnyvale, CA 94089 USA
Tel (408) 752-1000 Fax (408) 734-1687
September 15, 1995
Hyatt International-Asia Pacific Limited
3rd Floor, Hyatt Regency Hong Kong
67 Nathan Road
Kowloon
Hong Kong
Hyatt Chain Services Limited
Suite 31 A, New Henry House
10 Ice House Street
Central Hong Kong
RE: GUEST VIDEO SERVICES AGREEMENT
Gentlemen:
This is written in reference to that certain Master Guest Video Services
Agreement (the "Master Agreement") dated August 11 1995, by and among Hyatt
International-Asia Pacific Limited ("Hi"), Hyatt Chain Services Limited ("Hyatt
Services"; collectively, with HI, being herein "Hyatt"), MagiNet International
Corporation ("MagiNet") and Guest Serve Development Group (GDG).
In order to induce HI and Hyatt Services to enter into the Master Agreement, we
hereby represent and warrant that our wholly-owned subsidiary, MagiNet, in its
exclusive license agreement with GDG for the GDG Technology, as defined in the
Master Agreement, will have both an escrow arrangement for GDG Technology source
code as well as rights to access GDG Technology source code without triggering
the escrow, as may be needed in order to insure that MagiNet will meet its
commitments to Hyatt under the Master Agreement should GDG fail to perform under
the Master Agreement. Accordingly, MagiNet will be in a position to ensure
Hyatt's use of GDG Technology as contemplated in the Master Agreement in the
event GDG should fail to perform thereunder prior to its expiration.
[***] 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>
September 15, 1995
Page Two
We acknowledge that, in the event that at any time in the future any of the
representations and warranties and statements above made should no longer be of
full force and effect, this would constitute an event of default pursuant to
Section 26.1 of the Master Agreement.
MagiNet Corporation
By: /s/ R.R. Creager
Name: R. R. Creager
Title: President
Acknowledgment:
We hereby confirm that the representations and warranties and statements
made by MagiNet Corporation in the foregoing letter are true and valid in all
respects, and that to the best of our knowledge, there are no facts or
circumstances likely to prevent or interfere with their continuing veracity
during the term of the Master Agreement.
Guest Serve Development Group
By: /s/ Philip S. Knudsen
Name: Philip S. Knudsen
Title: CFO/DIRECTOR
Date: 9/15/95
<PAGE>
MAGINET CORPORATION
405 Tasman Drive, Sunnyvale, CA 94089 USA
Tel (408) 752-1000 Fax (408) 734-1687
PERFORMANCE GUARANTEE
---------------------
By this Guarantee MagiNet Corporation (hereinafter the "Guarantor"), a
California corporation, the sole shareholder of MagiNet International
Corporation (hereinafter "MagiNet"), is held and firmly bound unto Hyatt
International-Asia Pacific Limited and Hyatt Chain Services Limited:
(hereinafter jointly called "Hyatt"), to guarantee unconditionally on written
notice as provided below, the full performance by MagiNet of its obligations
pursuant to that certain Master Guest Video Services Agreement dated August 11,
1995 (the "Contract") between and among Hyatt, MagiNet and Guest Serve
Development Group respecting the provision of guest video services and systems
to Hyatt hotels.
The condition of the above written guarantee is such that if MagiNet should,
duly perform and observe all terms, provisions, conditions and stipulations of
the said Contract according to the true purport, intent and meaning thereof, or
if on default by MagiNet the Guarantor shall satisfy and discharge the
obligations of MagiNet thereunder, then this obligation shall be null and void
but otherwise shall remain in full force and effect, but no alteration of the
terms of the said Contract or in the extent or nature of obligations of MagiNet
thereunder, and no allowance of time by Hyatt nor any forbearance or forgiveness
of or in respect of any matter or thing concerning the said Contract on the part
of Hyatt shall in any way release the Guarantor from any liability under the
above-written Guarantee, except insofar as MagiNet itself is released. Provided
always that the above obligation of Guarantor to satisfy and discharge the
obligations of MagiNet to Hyatt shall arise only on written notice from Hyatt
that MagiNet has failed fully to satisfy and comply with any obligations of the
said contract.
MagiNet Corporation
By: R. R. Creager
Title:. President
Date: 9/15/95
<PAGE>
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 August, 1995
("Effective Date") by and among Hyatt International-Asia Pacific Limited, a Hong
Kong corporation ("Hyatt AP"), 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 AP
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 warranted 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
<PAGE>
August 22, 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>
August 22, 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 agreed to enter into agreements containing the same terms
as herein with respect to Hyatt International properties in Europe, Africa,
the Middle East 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
-3-
<PAGE>
August 22, 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 par,
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
-4-
<PAGE>
August 22, 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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August 22, 1995
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 preliminary 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 Hotels 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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August 22, 1995
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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August 22, 1995
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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August 22, 1995
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 MM 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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August 22, 1995
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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August 22, 1995
transmission of Hotel Services shall be borne by Hyatt AP 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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August 22, 1995
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 AP, 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 Or 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 the 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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August 22, 1995
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 - Asia Pacific 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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August 22, 1995
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 badger 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 $5,000 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 five percent [***] 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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August 22, 1995
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 Ws 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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August 22, 1995
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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August 22, 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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or features (and associated technologies) not provided by MagiNet or GDG,
not withstanding 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
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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 will generate an accurate record (the "Access Record") of
the access to the System by any guess, 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 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.
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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 usage 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.
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
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August 22, 1995
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 shah 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 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
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treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the Commission.
<PAGE>
August 22, 1995
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.
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
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August 22, 1995
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 its 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.
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:
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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 licensers 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.
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,
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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 Parties 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 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
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August 22, 1995
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 Panics' 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 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
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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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August 22, 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.
2 3.3 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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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
-29-
<PAGE>
August 22, 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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<PAGE>
August 22, 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 Packs 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 Packs 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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<PAGE>
August 22, 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 MagiNet's 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 condition:; 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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<PAGE>
August 22, 1995
Hotels. For purposes of this paragraph "value" shall mean the value of (i)
all fees, allowances and commissions, (ii) A equipment, OH) 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
15th day of September 1995.
MAGINET INTERNATIONAL CORP. HYATT INTERNATIONAL-ASIA
PACIFIC LIMITED
By: /s/ R. R. Craeger By: /s/ Authorized signature
Title: President Director
GUESTSERVE DEVELOPMENT HYATT CHAIN SERVICES LIMITED
GROUP
By: /s/ Philip S. Knudsen By: /s/ unreadable
Title: CFO/Director Title: DIRECTOR
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<PAGE>
August 22, 1995
EXHIBIT A
TECHNICAL REQUIREMENT
---------------------
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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, WTV 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 as good 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 noticeable degradation in
resolution, discoloration, focus, or brightness, nor multiple Wages (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 I Khz SP mode), 100 Hz - 15000 Hz (10 dB 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 I 00 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 10
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
<PAGE>
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 Tool 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 I 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 modern 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
Paged 3 of 25
<PAGE>
Exhibit "A" Technical Requirements
b. Chrominance Level: 0.63 +/- 30% Vp-p for machine to machine operation
at 75ohm terminated composite video of 1.40 IRE units source
c. Horizontal resolution: More than 360 lines, or as required for
prevailing TV standards
d. Frequency Response 2 Mhz - 10 dB;
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 interactive 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 her revenue generating services defined within the
exhibit.
3. Appropriate communications software to support item 1.6.3.
Page 4 of 25
<PAGE>
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
<PAGE>
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 SubSplit 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 converters 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 2OdB 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 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 minimum of 100
percent 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 (+/-2Bb)
Page 7 of 25
<PAGE>
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 Or 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 EEC 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.
l. 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
line.
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 RG-6 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 fewer than 400 scan lines of resolution.
l. 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 button
2. Pay TV button
3. Free TV button
4. Hotel Services & Information button
5. Interactive services button
6. Channel up and channel down buttons
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 fines (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 DG 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 fisted
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
<PAGE>
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 arc available in every hotel. A blockbuster title is
considered to be a movie that is released within the same theatrical
release window or that immediately 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 titles 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
<PAGE>
Exhibit "A" Technical Requirements
2.4 HOTEL AND HYATT INTERACTIVE CONTENT
MagiNet and GDG shall develop and produce a standard if 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 Maginet
and GDG will be responsible Or 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
<PAGE>
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
<PAGE>
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 he 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
<PAGE>
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 UPGRADE 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 comprehensively 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. AU 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 upgradeIt 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 ReplacementContent 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
<PAGE>
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 offering 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 for 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 manufacturers 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 standards.
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 for replacement 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 as 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 basic components by the hotel engineering staff, which includes in
room devices (begin with 5% stock) and other site replaceable items Computer
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 are 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
<PAGE>
Exhibit "A" Technical Requirements
d. Hotel information channels which can be set up for arid 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 retrofitted 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 head end
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 & Reactive
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 MTV
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 the features and functionality built 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 observably better video quality than VHS,
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 new twenty-five inch (25") television set must be observed to be
as good 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 AV connectors.
When compared to the same movie provided as part of the Content across the
System, MATV, and television set, there shall be no noticeable degradation in
resolution, discoloration, focus, or brightness, nor multiple 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 advantage,
then Maginet and GDG shall implement equivalent or alternative technology to
ensure 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 take whatever steps necessary,
including employing new or alternative technologies to lower operating costs
such that Hyatt Parties can match such rates, 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>
August 22, 1995
EXHIBIT B
FORM OF INDIVIDUAL AGREEMENT,
-----------------------------
-35-
<PAGE>
EXHIBIT B
---------
Additional System Equipment:
- ----------------------------
Provider will provide the hotel with a number of spare remote control units
equal to five percent (5%) of the total number of TVs in the Hotel linked to the
System. These units will remain the property of Provider and will be included
within the definition of "System."
Remote Control Replacement Cost:
- --------------------------------
The fee for remote control replacement units shall be U.S. $20 for each
replacement unit, plus applicable duties or fees.
Movie Rental Fee:
- -----------------
The Movie Rental Fee shall be for each access of a Program, subject to
adjustment as provided in Section 6.
Game Fee:
- ---------
The Came Fee shall be for each access of a Program; subject to adjustment
as provided in Section 6.
Hotel Commission:
- -----------------
[***], subject to increase as provided in Section 4 (i), on
Net Rental Fees from Movies and other pay video services, excepting Hyatt
Content, Interactive Services and Third Party Content, for which commission
rates shall be subsequently established by the Advisory Committee established
pursuant to the Master Agreement.
-20- (02/15/95)
[***] 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>
August 22, 1995
EXHIBIT C
LIST OF CURRENT HOTELS
----------------------
-36-
<PAGE>
List of hotels and installation schedule
[***]
[***] 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>
Exhibit C
[***]
[***] Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commmission. Omitted
portions have been filed separately with the Commission.
<PAGE>
August 22, 1995
EXHIBIT D
HOTEL FEES, COMMISSION, AND COST
--------------------------------
Initial Rental Fee: (to be established in Individual Agreements in each
country).
Hotel Commission: [***] on Net Rental Fees from Movies and other pay video
services, excepting Hyatt Content, Interactive Services and
Third Party Content, for which commission rates shall be
subsequently established.
Remote Control Replacement Cost: US $20 for each replacement unit.
*Subject to increase as provided in Section 11.9 of the Master 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.
-37-
<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 on-demand 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-Asia Pacific 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
(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: (i) 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 interactive 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 MAIN' upgrades required for
the System to perform according to specification, and shall install, operate and
maintain the System
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<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
commando 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 mustmeet or
exceed all applicable Technical Requirements described in
-3- (02/l5/95)
<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 onverters 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 $5,000 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 undertakeroutine 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
I 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- (02/15/9S)
<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 handpost 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
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<PAGE>
paragraph (e) preceding. The payment transmission will also specify the
occupancy rate for the month.
(g) Hotel All 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 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
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 MATO) 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 (or 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 be 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
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<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
-14- (02/15/95)
<PAGE>
(a) Default. Either Hotel or Provider shall be in default under this
-------
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) ,
(A) obtain injunctive and other equitable relief, and (ii) 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 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.
-15- (02/15/95)
<PAGE>
(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
-16- (02/15/95)
<PAGE>
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 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 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
_________, 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.
-17- (02/15/95)
<PAGE>
(l) Subject to the provisions of this Agreement, all Intellectual
Property owned by, the Hotel and any related entities shall be and remain the
property of those entities. Provider, 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 under this
Agreement.
(m) Subject to the provisions of this Agreement, all Intellectual
Property of Provider, MagiNet and GDG and any related entities shall be and
remain the property of those entities. The Hotel 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.
IN WITNESS WHEREOF, this Hotel Agreement is entered into by the parties hereto
this.....day of......., 19...
[PROVIDER) [HOTEL]
By: By:
Title: Title:
-18- (02/15/95)
<PAGE>
EXHIBIT 10.16
PLEDGE AGREEMENT
between
MAGINET CORPORATION,
as Pledgor
and
THE CHASE MANHATTAN BANK, N.A.,
as Pledgee
Dated as of August 15, 1995
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Section Page
- ------- -----
<S> <C> <C>
SECTION 2. DEFINITIONS AND PRINCIPLES OF CONSTRUCTION..................2
SECTION 3. PLEDGE OF SECURITIES........................................3
SECTION 4. APPOINTMENT OF AGENTS; ENDORSEMENTS.........................6
SECTION 5. VOTING AND OTHER RIGHTS WHILE NO EVENT OF DEFAULT...........6
SECTION 6. DIVIDENDS AND OTHER DISTRIBUTIONS ..........................7
SECTION 7. REMEDIES IN CASE OF EVENT OF DEFAULT........................7
SECTION 8. APPLICATION OF PROCEEDS....................................10
SECTION 9. PURCHASERS OF PLEDGE COLLATERAL............................11
SECTION 10. FURTHER ASSURANCES.........................................11
SECTION 12. TRANSFER BY THE PLEDGOR....................................12
SECTION 13. REPRESENTATIONS, WARRANTIES AND
COVENANTS OF THE PLEDGOR...................................13
SECTION 14. PLEDGOR'S OBLIGATIONS ABSOLUTE.............................13
SECTION 15. REGISTRATION...............................................13
SECTION 16. INDEMNITY..................................................14
SECTION 17. TERMINATION; RELEASE.......................................15
SECTION 18. NOTICES....................................................15
SECTION 19. MISCELLANEOUS..............................................16
</TABLE>
*This Table of Contents is provided for convenience only and is not a part
of the attached Pledge Agreement.
<PAGE>
EXECUTION COPY
PLEDGE AGREEMENT
----------------
PLEDGE AGREEMENT, dated as of August 15, 1995, between MAGINET CORPORATION,
a corporation organized under the laws of the State of California, as pledgor
(the "Pledgor"), and The Chase Manhattan Bank, N.A., a national banking
--------
association, as collateral agent ("the Pledgee")for the benefit of the
-------
Noteholders pursuant to the Appointment Agreement. Capitalized terms used herein
shall have the meanings provided in Section 2.
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Pledgor and the Purchasers have entered into the Note
Agreement providing for the issuance and sale of the Notes and the issuance of
the Warrants as contemplated therein;
WHEREAS, The Chase Manhattan Bank, N.A., the Pledgor and the
Purchasers have entered into the Appointment Agreement providing for the
appointment of The Chase Manhattan Bank, N.A. to act as collateral agent for the
benefit of the Noteholders under the Security Documents (including this
Agreement);
WHEREAS, it is a condition precedent under the Note Agreement to each
Purchaser's obligation, to purchase and pay for the Notes and to accept the
Warrants to be issued under the Note Agreement that the Pledgor shall have
executed and delivered to the Pledgee this Agreement;
WHEREAS, the Pledgor desires to execute this Agreement to satisfy the
conditions described in the preceding paragraphs and to induce the Purchasers to
enter into the Note Agreement and to purchase and pay for the Notes and to
accept the Warrants (and to induce any future Noteholders so to do);
NOW, THEREFORE, in consideration of the benefits accruing to the
Pledgor, the receipt and sufficiency of which are hereby acknowledged, the
Pledgor hereby makes the following representations and warranties to the Pledgee
and hereby covenants and agrees with the Pledgee as follows:
SECTION 1. SECURITY. (a) This Agreement is for the benefit of the
--------
Pledgee as collateral agent for he Noteholders pursuant to the Appointment
Agreement (and,
1
<PAGE>
to the extent provided in Section 16 of this Agreement, for the benefit of the
Pledgee in its individual capacity) to secure: (i) the payment due of the
principal of and interest in respect of the Notes and payment of all other
obligations and liabilities (including without limitation indemnities, premium,
if any, fees and interest thereon) of the Pledgor, now existing or hereafter
incurred under, arising out of or in connection with the Note Agreement, each
Note or any other Note Document (other than the Warrants); and (ii) the due
performance and compliance with the terms of the Note Documents by the Pledgor
(all such principal, interest, obligations and liabilities, collectively, the
"Secured Obligations").
- ---------------------
SECTION 2. DEFINITIONS AND PRINCIPLES OF CONSTRUCTION. For all
------------------------------------------
purposes of this Agreement: (i) capitalized terms not otherwise defined herein
shall have the meanings set forth in the Note Agreement; (ii) the principles of
construction set forth in the Note Agreement shall apply; and (iii) as used
herein, references to "this Agreement", "hereunder" and words of like meaning
shall refer to this pledge agreement.
As used in this Agreement:
"Agreement" and "this Agreement" shall mean this pledge agreement,
--------- --------------
dated as of August 15, 1995, as the same may be modified, amended or
supplemented from time to time.
"Foreign Joint Venture Vehicle" shall mean a Joint Venture Vehicle
-----------------------------
that is incorporated or organized outside of the United States or any State or
territory thereof.
"Legal Mortgage Subsidiaries" shall mean each of Pacific Pay Video
---------------------------
(HK) Limited, PPV Singapore Pte Ltd, Pacific Pay Video Pty. Limited, Pacific Pay
Video New Zealand Limited and any other Subsidiary or Joint Venture Vehicle
incorporated or established under the laws of a jurisdiction which utilizes the
common law concepts of legal and equitable mortgages over shares of capital
stock or similar equity interests.
"Liquidating Dividend" shall have the meaning set forth in Section 6.
--------------------
"Maximum Foreign Pledge" shall mean, in respect of any Foreign
----------------------
Subsidiary or Foreign Joint Venture Vehicle: (i) prior to the occurrence of a
Change in Tax Law Event, the number of Securities representing 66% (or such
other threshold amount as may become relevant after the date hereof in
determining whether a pledge under a pledge agreement would result in the
undistributed earnings of such Foreign Subsidiary or Foreign Joint Venture
Vehicle, as relevant, as determined for Federal income tax purposes being
treated as a deemed dividend to the Pledgor) of the total combined voting power
of all classes of Securities of such Foreign Subsidiary or Foreign Joint Venture
Vehicle entitled to vote; and (ii) on and following the occurrence of a Change
in Tax Law Event, the number of Securities representing the maximum total
combined voting power of all classes of Securities of such Foreign Subsidiary or
Foreign Joint Venture Vehicle entitled to vote that may be pledged without
creating a deemed dividend to the Pledgor.
2
<PAGE>
"Pledge Documents" shall mean: (i) this Agreement (and any other
----------------
pledge agreement in form and substance satisfactory to the Pledgee entered into
as contemplated by this Agreement); (ii) the Note Agreement; and (iii) any other
Note Document to which the Pledgee is or will be a party.
"Secured Obligations" shall have the meaning set forth in Section 1.
-------------------
"Securities" shall mean, with respect to each Subsidiary or Joint
----------
Venture Vehicle, as relevant, all the issued and outstanding shares of capital
stock or similar equity interests of such Subsidiary or Joint Venture Vehicle
(and any options, warrants or other rights to purchase such capital stock or
similar equity interests at any time prior to the date on which the Secured
Obligations are discharged in full) owned by the Pledgor, including without
limitation all such shares of capital stock, similar equity interests, options,
warrants or other rights owned by the Pledgor on the date hereof and all such
capital stock, options, warrants or other rights acquired by the Pledgor in the
future. The Pledgor hereby represents and warrants that on the date hereof (i)
the information set forth in Annex A concerning the Securities and Pledged
Securities of each of its Subsidiaries and Joint Venture Vehicles set forth in
Annex A is true and correct and (ii) there are no options, warrants, or other
rights to purchase any such Securities outstanding.
All Securities described as "Pledged Securities" in Annex A and all
other Securities from time to time pledged, mortgaged or charged hereunder or
under another Pledge Document are hereinafter referred to as the "Pledged
-------
Securities," and the Pledged Securities, together the time held by the Pledgee
- ----------
hereunder, is hereinafter referred to as the "Pledge Collateral".
-----------------
SECTION 3. PLEDGE OF SECURITIES
---------------------
3.1 Pledge. To secure the Secured Obligations and for the
------
purposes set forth in Section 1, the Pledgor: (i) hereby grants to the Pledgee a
continuing security interest of first priority in all of the Pledge Collateral;
(ii) hereby pledges and deposits as security with the Pledgee (except as
otherwise permitted in this Section 3) the Pledged Securities owned by the
Pledgor on the date hereof and delivers to the Pledgee certificates therefor (to
the extent such Pledged Securities are certificated) accompanied by stock powers
for all such Pledged Securities duly executed in blank by the Pledgor (or such
other instruments of transfer as are acceptable to the Pledgee); and (iii)
hereby assigns, transfers, hypothecates, mortgages, charges and sets over to the
Pledgee (including by way of legal mortgage to the extent such Pledged
Securities are issued by a Legal Mortgage Subsidiary) all of the Pledgor's
right, title and interest in and to such Pledged Securities (and in and to the
certificates or instruments (if any) evidencing such Pledged Securities), to be
held by the Pledgee upon the terms and conditions set forth in this Agreement
and the other Pledge Documents.
3.2 Subsequently Acquired Securities. If the Pledgor shall acquire
--------------------------------
(by purchase, stock dividend or otherwise), at any time or from time to time
after the date hereof, any additional Securities:
3
<PAGE>
(i) issued by a Subsidiary or Joint Venture Vehicle, as relevant,
other than a Foreign Subsidiary or Foreign Joint Venture Vehicle, then the
Pledgor will forthwith pledge and deposit such Securities as security with the
Pledgee; or
(ii) issued by a Foreign Subsidiary or Foreign Joint Venture Vehicle,
as relevant, and, as a result of such acquisition, the Pledged Securities in
respect of such Foreign Subsidiary or Foreign Joint Venture Vehicle are less
than such Foreign Subsidiary's or Foreign Joint Venture Vehicle's then existing
Maximum Foreign Pledge, then the Pledgor will forthwith pledge, mortgage or
charge hereunder (or under another pledge agreement in form and substance
satisfactory to the Pledgee, if necessary under any applicable law or if
otherwise desirable to carry into effect the purposes of this Agreement) and
deposit (subject to the proviso below) as security with the Pledgee such
additional Securities as are necessary so that the Pledged Securities in respect
of such Foreign Subsidiary or Foreign Joint Venture Vehicle, as relevant, are
equal to such Foreign Subsidiary's or Foreign Joint Venture Vehicle's then
existing Maximum Foreign Pledge; provided, however, that the Pledgor shall not
-----------------
be required pursuant to this Section
3.2(ii) to deposit as security with the Pledgee Securities issued by a Foreign
Subsidiary or Foreign Joint Venture Vehicle, as relevant, organized and
established after the date hereof (other than a Subsidiary or Joint Venture
Vehicle organized under the laws of South Africa, the Securities of which shall
be pledged to and deposited with the Pledgee under this Agreement (or under
another pledge agreement in form and substance satisfactory to the Pledgee if
necessary or otherwise desirable to carry into effect the purposes of this
Agreement) so as to create a first priority Lien in favor of the Pledgee on such
Securities) so long as such Securities are subject to Liens permitted under
Section 8.1(e) of the Note Agreement and the Lien created by this Agreement (or
any other pledge agreement entered into as contemplated by this Agreement),
which Lien under this Agreement may be junior to the Lien permitted by Section
8.1(e) of the Note Agreement,, and such Securities when pledged, mortgaged or
charged hereunder shall thereafter constitute Pledged Securities, and the
Pledgor will promptly deliver to the Pledgee a certificate executed by a
Responsible Officer describing such Pledged Securities and certifying that the
same have been duly pledged, mortgaged or charged with the Pledgee hereunder-
(or under such other pledge agreement, as the case may be); provided, further,
-----------------
that the Pledgor will deposit such Securities with the Pledgee free and clear of
any Lien other than the Lien created by this Agreement (or any other pledge
agreement entered into as contemplated by this Agreement), which Lien shall then
be a first priority Lien, promptly upon such Securities' no longer being subject
to Liens permitted under Section 8.1(e) of the Note Agreement (whether because
of release or otherwise);
and in each case (except as provided in the first proviso to Section 3.2(ii) and
as provided in Section 3.5) deliver to the Pledgee certificates therefor
accompanied by stock powers duly executed in blank by the Pledgor (or such other
instruments of transfer as are acceptable to the Pledgee), Thereafter such
Securities will constitute Pledged Securities, and the Pledgor will promptly
deliver to the Pledgee a certificate executed by a Responsible Officer
describing such Pledged Securities and certifying that the same have been duly
pledged, mortgaged or charged with the Pledgee hereunder (or under such other
pledge agreement, as the case may be).
3.3 Uncertificated Securities. Notwithstanding anything to the
contrary contained in Sections 3.1 and 3.2, if any Pledged Securities (whether
now owned or hereafter
4
<PAGE>
acquired) are evidenced by an uncertificated security, the Pledgor shall
promptly: (i) notify the Pledgee of such uncertificated security; (ii) take all
actions required to perfect the security interest of the Pledgee therein under
applicable law; and (iii) notify the Pledgee of such actions taken. The Pledgor
further agrees: (i) to take such actions as the Pledgee deems necessary or
reasonably desirable to effect the foregoing and to permit the Pledgee to
exercise any of its rights and remedies hereunder; and (ii) to provide an
opinion of counsel satisfactory to the Pledgee with respect to any such pledge
of uncertificated Pledged Securities upon the pledge thereof and at any other
time promptly upon request of the Pledgee,
3.4 Change in Tax Law Event. If a Change in Tax Law Event occurs,
-----------------------
then the Pledgor shall forthwith pledge, mortgage or charge hereunder (or under
another pledge agreement in form and substance satisfactory to the Pledgee, if
required by applicable law or if otherwise desirable to carry into effect the
purposes of this Agreement), that portion of the Securities of each Foreign
Subsidiary or Foreign Joint Venture Vehicle, as relevant, held by the Pledgor
and not heretofore pledged, mortgaged or charged pursuant to this Agreement (or
another pledge agreement). Thereafter such Securities will constitute Pledged
Securities, and the Pledgor will promptly deliver to the Pledgee a certificate
executed by a Responsible Officer describing such Pledged Securities and
certifying that the same have been duly pledged, mortgaged or charged with the
Pledgee hereunder (or under such other pledge agreement, as the case may be).
3.5 Certain Pledged Securities.Notwithstanding anything to the
---------------------------
contrary contained in this Section 3, for the purpose of enabling the Pledgee to
exercise its rights under this Agreement, the Pledgor undertakes forthwith upon
the execution of this Agreement, if it has not already done so, at the cost of
the Pledgor, to procure the registration of the Pledged Securities issued by any
Legal Mortgage Subsidiary in the name of the Pledgee or its nominee and to
deposit or procure to be deposited with the Pledgee the certificates in respect
of such Pledged Securities together with signed and undated letters of
resignation in the form of Annex C from each director of each Legal Mortgage
Subsidiary appointed by the Pledgor. If the Pledgor shall acquire any additional
Securities issued by any Legal Mortgage Subsidiary, which Securities are
required to be pledged, mortgaged or charged hereunder pursuant to Sections 3.2
(ii) or 3.4, the Pledgor shall promptly upon receipt of such Securities (and at
its own expense) pledge, mortgage or charge such Securities hereunder (or under
another pledge agreement in form and substance satisfactory to the Pledgee, if
necessary under any applicable law or if otherwise desirable to carry into
effect the purposes of this Agreement) and register such Securities in the name
of the Pledgee or its nominee and deposit the certificates in respect of such
Securities with the Pledgee; provided, however, that so long as such
-----------------
Securities are not required to be deposited with the Pledgee pursuant to the
provisos to Section 3.2(ii), the Pledgor shall not be required to either
register such Securities in be name of the Pledgee or in nominee nor deposit
such Securities with the Pledgee. Thereafter such Securities will constitute
Pledged Securities, and the Pledgor will promptly deliver to the Pledgee a
certificate executed by a Responsible Officer describing such Pledged Securities
and certifying that the same have been duly pledged, mortgaged or charged with
the Pledgee hereunder (or under such other pledge agreement, as the case may
be).
5
<PAGE>
SECTION 4. APPOINTMENT OF AGENTS; ENDORSEMENTS. The Pledgee shall
-----------------------------------
have the right to appoint one or More agents for the purpose of retaining
physical possession of the Pledged Securities and other Pledge Collateral, which
may be held (in the discretion of the Pledgee) in the name of the Pledgor,
endorsed or assigned in blankor in favor of the Pledgee or any nominee or
nominees of the Pledgee or an agent appointed by the Pledgee.
SECTION 5. VOTING AND OTHER RIGHTS WHILE NO EVENT OF DEFAULT.
-------------------------------------------------
Unless and until an Event of Default shall have occurred and be continuing:
(a) the Pledgor shall be entitled to vote any and all Pledged
Securities other than those issued by Legal Mortgage Subsidiaries and to give
consents, waivers or ratifications in respect thereof;
(b) the Pledgee shall be entitled to vote any and all Pledged
Securities issued by Legal Mortgage Subsidiaries and to give consents, waivers
or ratifications in respect thereof and to otherwise exercise any and all rights
and powers attaching to such Pledged Securities, in each case as the Pledgor may
direct from time to time by notice in writing to the Pledgee; provided, however,
-----------------
that the Pledgee shall be under no obligation to so vote or give such consents,
waivers or modifications or otherwise act unless it shall have first received
from the Pledgor the amount of any payments required to be made in order for
such rights or powers to be validly exercised; and provided, further, that in
------------------
the absence of any such direction or receipt of such amounts from the Pledgor
the Pledgee shall abstain from exercising such voting or other rights or powers;
and
(c) The Pledgee shall not utilize any director's resignation letter
delivered in connection with Section 3.5 of this Agreement;
provided, that in no event shall the Pledgor cast any vote, or give any consent,
- --------
waiver or ratification or take any action or direct the Pledgee pursuant to
clause (b) above to take any such action which would violate or be inconsistent
with any of the terms of this Agreement, any other Note Document or any other
instrument or agreement referred to herein or therein or which would have the
effect of impairing the position or interests of the Pledgee or any Noteholder,
All such rights of the Pledgor to vote and to give consents, waivers and
ratifications or to direct the Pledgee pursuant to clause (b) above shall cease
upon the earlier to occur of: (i) delivery to the Pledgor of written notice from
any Noteholder pursuant to Section 9.1 of the Note Agreement or the Pledgee
stating that an Event of Default has occurred and is continuing; or (ii) a
Responsible Officer obtaining knowledge of any condition or event which
constitutes an Event of Default, when Section 7 shall become applicable;
provided, that the Pledgee shall be under no duty to deliver the written notice
- ---------
described in clause (i) of the foregoing unless and until it has received a
notice from any Noteholder stating that an Event of Default has occurred and is
continuing.
SECTION 6. DIVIDENDS AND OTHER DISTRIBUTIONS. Unless and until an
---------------------------------
Event of Default shall have occurred and be continuing:
6
<PAGE>
(a) all cash dividends payable in respect of the Pledged Securities
other than Pledged Securities issued by Legal Mortgage Subsidiaries shall be
paid directly to the Pledgor; and
(b) all cash dividends payable in respect of Pledged Securities issued
by Legal Mortgage Subsidiaries shall be paid directly to the Pledgee, which will
pay the amount of such dividends received by it (after taking into account
deductions for withholding or any similar tax) to the Pledgor as soon as
practicable after receipt;
provided, that, notwithstanding any of the foregoing, all cash dividends payable
- --------
in respect of the Pledged Securities which are determined by the Pledgee to
represent in whole or in part an extraordinary, liquidating or other
distribution in return of capital (each, a "Liquidating Dividend") shall be paid
directly to the Pledgee and retained by it as part of the Pledge Collateral
unless the event creating such Liquidating Dividend was permitted by, and did
not otherwise result in an Event of Default occurring under, the Note Agreement.
The Pledgee shall aho be entitled to receive directly, and to retain as part of
the Pledge Collateral:
(i) all other or additional stock or securities of a Subsidiary or
Joint Venture Vehicle, as relevant, paid or distributed by way of dividend in
respect of the Pledged Securities;
(ii) all other or additional stock or other securities or property
(including cash) paid or distributed in respect of the Pledged Securities by way
of stock-split, spin-off, split-up, reclassification, combination of shares or
similar rearrangement; and
(iii) all her or additional stock or other securities or property
which may be paid in respect of the Pledge Collateral by reason of any
consolidation, merger, exchange of stock, conveyance of assets, liquidation or
similar corporate reorganization or otherwise;
except, in each case, prior to the occurrence and continuance of an Event of
- ------
Default, to the extent the receipt of such stock dividends and other securities
distributions would cause the Pledged Securities in respect of any Foreign
Subsidiary or Foreign Joint Venture Vehicle, as relevant, to exceed such Foreign
Subsidiary's or Foreign Joint Venture Vehicle's Maximum Foreign Pledge, in which
case the Pledgee shall be entitled to receive directly and retain as part of the
Pledge Collateral such amount of stock dividends and securities distributions as
is equal, together with the Pledged Securities previously pledged, to such
Foreign Subsidiary's or Foreign Joint Venture Vehicle's then existing Maximum
Foreign Pledge.
SECTION 7. REMEDIES IN CASE OF EVENT Of DEFAULT. In case an Event of
------------------------------------
Default shall have occurred and be continuing, the Pledgee shall be entitled to
exercise all the rights, powers and remedies vested in it (whether vested in it
by this Agreement, by any other Note Document or by law) for the protection and
enforcement of its rights in respect of the Pledge Collateral, and the Pledgee
shall be entitled without limi-
7
<PAGE>
tation to exercise the following rights, which the Pledgor hereby agrees to be
commercially reasonable:
(a) to receive all amounts payable in respect of the Pledge
Collateral otherwise payable under Section 6 to the Pledgor;
(b) to the extent permitted by law and to the extent not previously
transferred, to transfer all or any part of the Pledged Securities into the
Pledgee's name or the name of its nominee or nominees;
(c) to vote all or any part of the Pledged Securities (whether or not
transferred into the name of the Pledgee) and give all consents, waivers and
ratifications in respect of the Pledge Collateral and otherwise act with respect
thereto as though it were the outright owner thereof (the Pledgor hereby
irrevocably constituting and appointing the Pledgee the proxy and attorney-in-
fact of the Pledgor, with full power of substitution to do so, as further
provided in paragraph (e) below);
(d) at any time or from time to time to sell, assign and deliver, or
grant options to purchase, all or any part of the Pledge Collateral, or any
interest therein, at any public or private sale, without demand of performance,
advertisement or notice of intention to sell or of the time or place of sale or
adjournment thereof or to redeem or otherwise (all of which are hereby waived by
the Pledgor), for cash, on credit or for other property, for immediate or future
delivery without any assumption of credit risk, and for such price or prices and
on such terms as the Pledgee may determine, provided that at least 10 days'
notice of the time and place of any such sale shall be given to the Pledgor.
The Pledgor hereby waives and releases to the fullest extent permitted by law
any right or equity of redemption with respect to the Pledge Collateral, whether
before or after sale hereunder, and all rights, if any, of marshalling the
Pledge Collateral and any other security for the Secured Obligations or
otherwise. At any such sale, unless prohibited by applicable law, the Pledgee
on behalf of the Noteholders may bid for and purchase all or any part of the
Pledge Collateral so sold free from any such right or equity of redemption.
None of the Pledgee or the Noteholders shall be liable for failure to collect or
realize upon any or all of the Pledge Collateral or for any delay in so doing
nor shall any of them be under any obligation to take any action whatsoever with
regard thereto; and
(e) (i) The Pledgor hereby irrevocably appoints the Pledgee as its
attorney-infact with right of substitution, so that the Pledgee or any other
Person empowered by the Pledgee shall be authorized, without need of further
authorization from the Pledgor, upon the occurrence and continuance of an Event
of Default and in preservation of the rights of the Pledgee and the Noteholders
hereunder:
(A) to effect the sale of any of the Pledge Collateral in one or
more transactions to the extent permitted by law and in such other
manner as may be determined by the attorney-in-fact, including the
direct sale without public auction of any such Pledge Collateral at
such price, and upon such terms as may be determined by such attorney-
in-fact;
8
<PAGE>
(B) to enter upon any premises where the Pledge Collateral or any
part thereof may be located Without the need for a court order or other
form of authority otherwise than upon the authority granted herein;
(C) to take and retain actual possession and control of any such
Pledge Collateral as receivers without bond or otherwise, and transport any
such Pledge Collateral to any location as determined by such attorney-in-
fact;
(D) to administer, manage and use any of the Pledge Collateral;
(E) to conclude any agreement and collect any moneys thereunder or
otherwise due to the Pledgor in respect of, or generated through the usage
of, any of the Pledge Collateral;
(F) to exercise any of the rights of the Pledgor arising under or in
connection with the Pledge Collateral or to delegate to another Person, in
substitution of such attorney-in-fact, the exercise of such rights of the
Pledgor, under such terms as such attomey-in-fact shall deem proper or
necessary;
(G) to collect, claim and receive all moneys and avail itself of all
benefits that accrue and that may become due and payable to the Pledgor
with respect to the Pledge Collateral and to hold the same as security for
the timely payment and discharge by the Pledgor of the Secured Obligations;
(H) to send written notice to any Subsidiary or Joint Venture Vehicle
of the Pledgor instructing such Subsidiary or Joint Venture Vehicle to pay
all moneys due and owing to the Pledgor from time to time (whether payable
in U.S. dollars, in another convertible foreign currency or otherwise),
with respect to the Pledge Collateral to such bank accounts as shall be
designated in the notice;
(I) to institute and maintain such suits and proceedings as such
attorney-in-fact shall deem expedient to prevent any impairment of the
Pledge Collateral or to preserve and protect such attorney-in-fact's
interest therein;
(J) to execute and deliver such deeds of conveyance or sale as may be
necessary or proper for the purpose of conveying full title and ownership,
free from any claims and rights of the Pledgor, to any of the Pledge
Collateral, after foreclosure thereof; and
(K) in general, to sign such agreements and documents and perform
such acts and things required, necessary or, in the opinion of such
attorney-in-fact, advisable, to fully accomplish the purpose hereof.
(ii) This special power of attorney shall be deemed coupled with an
interest, and cannot be revoked by the Pledgor until the discharge in full of
the Secured Obligations. Upon the earlier to occur of: (A) delivery to the
Pledgor of written notice from any Noteholder pursuant to a notice delivered
under Section 9.1 of the Note Agreement or
9
<PAGE>
the Pledgee stating that an Event of Default has occurred and is continuing; or
(B) a Responsible Officer obtaining knowledge of any condition or event which
constitutes an Event of Default, the Pledgor shall abstain from exercising any
rights with respect to the Pledge Collateral which shall be inconsistent with
the exercise of the rights and functions herein granted to the Pledgee as
attorney-in-fact, including abstaining from collecting, claiming and receiving
any moneys with respect to the Pledge Collateral; provided, that in the Pledgee
--------
shall be under no duty to deliver the written notice described in clause (A) of
the foregoing unless and until it has received a notice from any Noteholder
stating that an Event of Default has occurred and is continuing. To the extent
that the Pledgor shall receive any moneys in respect thereof notwithstanding the
provisions of this paragraph (ii), it shall be deemed to have received such
funds for the account of the Pledgee and shall hold the same in trust and
promptly pay the same to the Pledgee or as it may direct from time to time.
SECTION 8. APPLICATION OF PROCEEDS. All moneys collected by the
-----------------------
Pledgee upon any sale or other disposition of the Pledge Collateral, together
with all other moneys received by the Pledgee hereunder, shall be applied in the
following order of priority:
(a) FIRST, to the payment of such amounts as are due and payable to
the Pledgee or any of its agents (or any prior collateral agent) pursuant to
this Agreement or the Appointment Agreement, including the payment of all costs
and expenses incurred by the Pledgee in connection with such sale, the delivery
of the Pledge Collateral or the collection of any such moneys (including,
without limitation, attorneys' fees and expenses);
(b) SECOND, to the payment of the Secured Obligations in the
following order of priority to the extent such amounts are not sufficient to
repay the Secured Obligations in full and within each category on a pro rata
basis among the Noteholders:
(i) to the payment of charges, fees, indemnity obligations, costs
and expenses due under the Note Agreement or the other Note Documents to the
Noteholders;
(ii) to the payment of interest on interest which became overdue, if
any, with respect to the Notes;
(iii) to the payment of interest on principal with respect to the
Notes which became overdue;
(iv) to the payment of interest accrued with respect to the Notes;
(v) to the payment of principal with respect to the Notes; and
(vi) to the payment of premium, if any, with respect to the Notes.
(c) THIRD, any balance of such money as directed in writing by the
Pledgor.
10
<PAGE>
SECTION 9. PURCHASERS OF PLEDGE COLLATERAL. Upon any sale of the
-------------------------------
Pledge Collateral by the Pledgee hereunder (whether by virtue of the power of
sale herein granted, pursuant to judicial process or otherwise), the receipt of
the Pledgee or the officer making the sale shall be a sufficient discharge to
the purchaser or purchasers of the Pledge Collateral so sold; and such purchaser
or purchasers shall not be obligated to see to the application of any part of
the purchase money paid over to the Pledgee or such officer or be answerable in
any way for the misapplication or nonapplication thereof.
SECTION 10. FURTHER ASSURANCES. Without limitation to the provisions
------------------
of Section 7, the Pledgor agrees that it will (in each case at its own expense):
(a) prepare, execute, file and refile such financing statements,
continuation statements and other documents in such offices as may be necessary
or reasonably desirable and wherever required or permitted by law in order to
perfect and preserve the Pledgee's security interest in the Pledge Collateral,
and the Pledgee agrees to execute such financing statements and other documents
prepared by the Pledgor, and the Pledgor hereby irrevocably authorizes the
Pledgee following am Event of Default, as its attorney-in-fact, to file or cause
to be filed such financing statements and amendments thereto and other documents
relative to all or any part of the Pledge Collateral without the signature of
the Pledgor where permitted by law;
(b) comply with the requirements of Section 7.13 of the Note
Agreement (which provision is incorporated in full herein by reference);
(c) do such further acts and things (including, without limitation,
paying all required documentary and other stamp tax) and execute and deliver to
the Pledgee such additional conveyances, assignments, agreements and instruments
(including without limitation one or more pledge agreements in form and
substance satisfactory to the Pledgee) as may be reasonably required or deemed
advisable to carry into effect the purposes of this Agreement or to further
assure and confirm unto the Pledgee its rights, powers and remedies hereunder;
and
(d) cause its Legal Mortgage Subsidiaries and each director thereof
appointed at any time by the Pledgor or any Subsidiary of the Pledgor: (i) to
register immediately in the register of members or similar document of the Legal
Mortgage Subsidiary any transfer of Pledged Securities which the Pledgee may
request according to the terms of this Agreement; and (ii) to deliver to the
Pledgee a signed and undated letter of resignation from such director, in the
form of Annex C.
SECTION 11. THE PLEDGEE. (a) The Pledgee will hold in accordance with
------------
the terms and provisions of the Appointment Agreement (which terms and
provisions are incorporated in full herein by reference) all Pledge Collateral
at any time received by it under this Agreement. It is expressly understood and
agreed that the obligations of the Pledgee as holder of the Pledge Collateral
and interests therein and with respect to the disposition thereof, and otherwise
under this Agreement, are only those expressly set forth
11
<PAGE>
in this Agreement and in the Appointment Agreement, and no implied covenants or
obligations shall be read into this Agreement against the Pledgee.
(b) In case of any litigation under this Agreement, or in case of any
enforcement of remedies or exercise of rights upon the occurrence of an Event of
Default, or in case the Pledgee deems that, by reason of any present or future
law of any jurisdiction, it may not or may not effectively exercise any of the
powers, rights or remedies herein granted to it or hold title to the properties,
in trust, as herein granted, or take any other action which may be desirable or
necessary in connection therewith, the Pledgee shall be entitled to appoint, to
the extent consistent with applicable law, one or more separate or additional
co-agents.
In the event that the Pledgee appoints an individual or institution as
a separate or additional co-agent: (i) any appointment of any such co-agent by
the Pledgee shall be made only with the prior written consent of the Pledgor and
the Required Holder(s) (except that, if the Pledgee shall have received written
notice from any Holder of Secured Obligations that a Default or an Event of
Default has occurred and is continuing, such consent shall be required only of
the Required Holder(s)), which consent shall not be unreasonably withheld or
delayed; and (ii) each and every remedy, power, right, title, interest, trust,
duty and obligation expressed or intended by this Agreement to be exercised by
or vested in, conveyed to or imposed upon, the Pledgee with respect thereto
shall be exercisable by and vest in such separate or additional co-agent but
only to the extent necessary, appropriate or desirable to enable such separate
or additional co-agent to exercise or have vested in it such powers, rights,
trusts, titles, interests, duties and obligations and remedies, and every
covenant and obligation necessary, appropriate or desirable to the exercise
thereof by such separate or additional co-agent shall run to and be enforceable
by either or any of them.
The Pledgee shall have the right to terminate the appointment of any such
co-agent hereunder with the prior written consent of the Pledgor and the
Required Holder(s) (except that, if the Pledgee shall have received written
notice from any Holder that a Default or an Event of Default has occurred and is
continuing, such consent shall be required only of the Required Holder(s)),
which consent shall not be unreasonably withheld or delayed. Should any
instrument in writing from the Pledgor be required by the separate or additional
co-agent so appointed by the Pledgee to more fully and certainly vest in and
confirm to it such remedies, rights, powers, titles, interests, trusts, duties
and obligations, any and all such instruments in writing shall, on request, be
executed, acknowledged and delivered by the Pledgor. In case any separate or
additional co-agent, or a successor to either, shall become incapable of acting,
resign or be removed, all the remedies, rights, powers, titles, interests,
trusts, duties and obligations of such separate or additional co-agent; so far
as permitted by law, shall vest in and be exercised by the Pledgee until the
appointment of a new agent or successor to such separate or additional co-agent.
SECTION 12. TRANSFER BY THE PLEDGOR. The Pledgor will not assign,
------------------------
sell or otherwise dispose of grant any option with respect to, or create, incur,
assume or suffer to exist any Lien on any portion of the Pledge Collateral or
any other Securities, except: (i) liens in favor of Persons other than the
Noteholders permitted under
12
<PAGE>
Section 8.1 of the Note Agreement; and (ii) Liens created by this Agreement and
by any other Pledge Document.
SECTION 13. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE PLEDGOR.
---------------------------------------------------------
The Pledgor represents and warrants that: (i) it is the legal, record and
beneficial owner of, and has good and marketable title to, the Securities
described as owned by it on Annex A hereto in existence on the date hereof,
subject to no Lien (except the Lien created by this Agreement); (ii) it has full
power, authority and legal right to pledge all such Securities pursuant to this
Agreement; (iii) all the shares of such Securities have been duly and validly
issued, are fully paid and nonassessable; (iv) this Agreement (and any other
pledge agreement entered into as contemplated by this Agreement) creates, as
security for the Secured Obligations, a valid and enforceable first priority
perfected Lien on all of the Pledge Collateral in existence on the date hereof,
in favor of the Pledgee for the benefit of the Noteholders, subject to no Lien
in favor of any other Person; (v) other than registrations and filings described
on Annex B hereto (all of which have been made prior to the date hereof or will
be made within the relevant statutory period) no consent, filing, recording or
registration is required to perfect the Lien purported to be created by this
Agreement; and (vi) the stock powers are duly executed and delivered and give
the Pledgee the rights and authority they purport to give. The Pledgor covenants
and agrees that: (i) it will defend the Pledgee's right, tide and lien in and to
the Pledge Collateral against the claims and demands of all Persons; and (ii) it
will take all actions within its powers to ensure that it will have like title
to and right to pledge any other property at any time hereafter pledged to the
Pledgee as Pledge Collateral hereunder.
SECTION 14. PLEDGOR'S OBLIGATIONS ABSOLUTE. The obligations of the
------------------------------
Pledgor under this Agreement shall be absolute and unconditional and shall
remain in full force and effect without regard to, and shall not be released,
suspended, discharged, terminated or otherwise affected by, any circumstance or
occurrence whatsoever, including, without limitation: (i) any renewal,
extension, amendment or modification of, or addition or supplement to or
deletion from, the Note Agreement, any Note or any other instrument or agreement
referred to therein or any assignment or transfer of any thereof; (ii) any
waiver, consent, extension, indulgence or other action or inaction under or in
respect of the Note Agreement, any Note or any other such instrument or
agreement or any exercise or nonexercise of any right, remedy, power or
privilege under or in respect of the Note Agreement, any Note or any other such
instrument or agreement; (iii) any furnishing of any additional security to the
Pledgee or any acceptance thereof or any sale, exchange, release, surrender or
realization of or upon any security by the Pledgee; or (iv) any invalidity,
irregularity or unenforceability of all or part of the Secured Obligations or of
any security therefor or the termination or release of any security therefor.
SECTION 15. REGISTRATION. (a) If an Event of Default shall have
-------------
occurred and be continuing and the Pledgor shall have received from the Pledgee
a written request or requests that the Pledgor cause any registration,
qualification or compliance under any securities law or laws, or listing
requirements, to be effected with respect to all or any part of the Pledged
Securities, the Pledgor as soon as practicable and at its expense will use
13
<PAGE>
its best efforts to cause such registration to be effected (and be kept
effective) and will use its best efforts to cause such qualification and
compliance to be effected (and be kept effective) as may be so requested and as
would permit or facilitate the sale and distribution of such Pledged Securities,
including without limitation, registration under any applicable securities laws
(including the Securities Act) and appropriate compliance with any other
governmental and listing requirements, provided that the Pledgee shall furnish
to the Pledgor such information regarding the Pledgee as the Pledgor may request
in writing and as shall be required in connection with any such registration,
qualification or compliance. The Pledgor will cause the Pledgee to be kept
reasonably advised in writing as to the progress of each such registration,
qualification or compliance and as to the completion thereof, will furnish to
the Pledgee such number of prospectuses, offering circulars or other documents
incident thereto as the Pledgee from time to time may reasonably request, and
agrees to indemnify and hold harmless the Pledgee and all others participating
in such registration, qualification or compliance (or the distribution of such
Pledged Securities) against all losses, liabilities, claims or damages caused by
any untrue statement (or alleged untrue statement) of a material fact contained
therein (or in any related registration statement, notification or the like) or
by any omission (or alleged omission) to state therein (or in any related
registration statement, notification or the like) a material fact required to be
stated therein or necessary to make the statements therein not misleading,
except insofar as the same may have been caused by an untrue statement or
omission based upon information furnished in writing to the Pledgor by the
Pledgee expressly for use therein.
(b) If at any time when the Pledgee shall determine to exercise its
right to sell all or any part of the Pledged Securities pursuant to Section 7
such Pledged Securities or the part thereof to be sold shall not, for any reason
whatsoever, be effectively registered under any applicable securities law or
laws (including the Securities Act), the Pledgee may sell such Pledged
Securities or part thereof by private sale in such manner and under such
circumstances as the Pledgee may deem necessary or advisable in order that such
sale may legally be effected without such registration, provided that at least
10 days' notice of the time and place of any such sale shall be given to the
Pledgor. Without limiting the generality of the foregoing, in any such event
the Pledgee: (i) may proceed to make such private sale notwithstanding that a
registration statement for the purpose of registering such Pledged Securities or
part thereof shall have been filed under such securities laws; (ii) may approach
and negotiate with a single possible purchaser to effect such sale; and (iii)
may restrict such sale to a purchaser who will represent and agree that such
purchaser is purchasing for its own account, for investment, and not with a view
to the distribution or sale of such Pledged Securities or any part thereof. In
the event of any such sale, the Pledgee shall incur no responsibility or
liability for selling all or any part of the Pledged Securities at a price which
the Pledgee (acting in accordance with instructions from the Required Holder(s))
may in good faith deem reasonable under the circumstances, notwithstanding the
possibility that a substantially higher price might be realized if the sale were
deferred until after registration as aforesaid.
SECTION 16. INDEMNITY. (a) The Pledgor covenants and agrees to pay to
----------
the Pledgee from time to time, and the Pledgee shall be entitled to, reasonable
compensation for all services rendered by it, and the Pledgor will pay or
reimburse the Pledgee upon its request for all reasonable expenses,
disbursements and advances incurred
14
<PAGE>
or made by the Pledgee in accordance with any of the provisions of this
Agreement or any other Pledge Document (including the compensation and the
expenses and disbursements of its agents and counsel and of all Persons not
regularly in its employ).
(b) The Pledgor also covenants to indemnify the Pledgee (which, for
purposes of this Section 16, shall include in directors, officers, employees and
agents) for, and to hold it harmless from and against, any and all loss,
liability or expense reasonably incurred without gross negligence, wilful
misconduct or bad faith on the part of the Pledgee, arising out of or in
connection with the acceptance or administration of this trust, the exercise of
any rights and remedies arising out of this Agreement or any other Pledge
Document, or the performance of any of its duties, including the reasonable
costs and expenses of defending itself against any claim of liability and in
enforcing any provision of this Agreement or any other Pledge Document (except
any liability incurred with gross negligence, wilful misconduct or bad faith on
the part of the Pledgee), with interest thereon at a rate equal to that in the
Pledgee's customary banking practice with respect to overdrafts (including the
imposition of interest, fund, wage and administrative fees) from the date the
same shall have been paid until actually reimbursed.
(c) The obligations of the Pledgor under this Section 16 to
compensate and indemnify the Pledgee and to pay or reimburse the Pledgee for
reasonable expenses, disbursements and advances shall constitute additional
indebtedness hereunder and shall survive the satisfaction, discharge or other
termination of this Agreement and any other Pledge Document and the resignation
or removal of the Pledgee hereunder
(d) To secure payment of such compensation, reimbursement and
indemnification, the Pledgee shall have a claim and Lien prior to that of any
party, which claim and Lien shall constitute Secured Obligations secured by this
Agreement.
SECTION 17. TERMINATION: RELEASE, Upon:
--------------------
(a) the receipt by the Pledgee of a certificate executed by each
Purchaser certifying that the conditions set forth in Section 5.3 of the Note
Agreement to the release of the Pledge Collateral have been satisfied; or
(b) the date on which the Secured Obligations have been discharged in
full;
this Agreement shall terminate, and the Pledgee, at the written request and
expense of the Pledgor, will promptly execute and deliver to the Pledgor a
proper instrument or instruments acknowledging the satisfaction and termination
of this Agreement, and will duly assign, transfer and deliver to the Pledgor,
without recourse and without any representation or warranty, such of the Pledge
Collateral as may be in the possession of the Pledgee and has not theretofore
been sold or otherwise applied or released pursuant to this Agreement, together
with any moneys at the time held by the Pledgee hereunder,
SECTION 18. NOTICES. All notices and other communications hereunder
-------
shall be in the English language, in writing and made at the addresses, in the
manner and
15
<PAGE>
with the effect provided in Section 11.10 of the Note Agreement, provided that,
for this purpose, the address of the Pledgee shall be as follows:
The Chase Manhattan Bank, N.A.
Corporate Trust Administration
4 Chase MetroTech Center,
3rd Floor, Brooklyn,
New York 11245
Facsimile: (718) 242-5885 or
(718) 242-3529
or sent to the Pledgee at such other address as it may designate for itself by
notice given in accordance with this Section 18.
SECTION 19. MISCELLANEOUS.
-------------
19.1 Benefit of Agreement.
--------------------
This Agreement shall be binding upon and inure to the benefit of and be
enforceable by the respective successors and permitted assigns of the parties
hereto and shall inure to the benefit of the Noteholders; provided, however,
-----------------
that the Pledgor may not, without the prior written consent of the Pledgee
(acting on the instructions of all the Noteholders), assign or transfer any of
its rights or obligations hereunder. The Pledgee may transfer, assign or grant
its rights hereunder in connection with an assignment or transfer of all or any
part of its interest in and rights under this Agreement pursuant to the
provisions of Sections 10 and 11 of the Appointment Agreement,
19.2 Amendment, Waiver.
-----------------
This Agreement may be changed, waived, discharged or terminated only with the
written consent of the Required Holder(s), the Pledgor and the Pledgee.
19.3 Governing Law.
-------------
This Agreement is a contract made under the laws of the State of New York of
the United States and shall for all purposes be construed and enforced in
accordance with, and the rights of parties shall be governed by, the laws of
such State.
19.4 Section Headings, Counterparts.
------------------------------
The headings of the several sections and subsections in this Agreement and the
title of this Agreement are inserted for convenience only and shall not any way
affect the meaning or construction of any provision of this Agreement. This
Agreement may be executed in any number of counterparts and by the different
parties hereto on separate counterparts, each of which when so executed and
delivered shall be an original, but all of which together shall constitute one
and the same instrument.
19.5 Severability.
------------
Any prov Any provision of this Agreement which is prohibited orunenforceable
in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent
of such
<PAGE>
prohibition orunenforceability without invalidating the remaining
provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
16
<PAGE>
19.6 Consent to Jurisdiction: Service of-Process.
-------------------------------------------
For the purposes of assuring that the Pledgee and the Noteholders may enforce
their respective rights under this Agreement, the Pledgor for itself and its
successors and assigns, hereby irrevocably: (i) agrees that any legal or
equitable action, suit or proceeding against the, Pledgor arising out of or
relating to this Agreement or the other Note Documents (including, without
limitation, the Agreement of Assignment as Collateral, dated as of the date
hereof, among the Pledgor, the Pledgee and the Purchasers), or any transaction
contemplated hereby or the subject matter of any of the foregoing may be
instituted in any state or Federal court in the Borough of Manhattan in the
State of New York; (ii) waives any objection which it may now or hereafter have
to the venue of any action, suit or proceeding in the State of New York or any
claim of forum non conveniens in the State of New York; and (iii) irrevocably
--------------------
submits itself to the non-exclusive jurisdiction of any state or Federal court
of competent jurisdiction in the Borough of Manhattan in the State of New York
for purposes of any such action, suit or proceeding. Without limiting the
foregoing, the Pledgor hereby appoints, in the case of any such action or
proceeding brought in the courts of or in the State of New York, CT Corporation
System, with offices on the date hereof at 1633 Broadway, New York, New York
10019, to receive, for it and on its behalf, service of process in the State of
New York with respect thereto, provided the Pledgor may appoint any other
person, reasonably acceptable to the Pledgee (acting on the instructions of the
Required Holder(s)), with offices in the State of New York to replace such agent
for service of process upon delivery to the Noteholders of a reasonably
acceptable agreement of such new agent agreeing so to act. The Pledgor agrees
that service of process by means of notice (as provided in Section 11.10 of the
Note Agreement) of any such action, suit or proceeding with respect to any
matter as to which it has submitted to jurisdiction as set forth in this Section
19.6 shall be taken and held to be valid personal service upon it.
19.7 No Waiver: Remedies Cumulative.
------------------------------
No failure or delay on the part of the Pledgee or any Noteholder in exercising
any right, power or privilege hereunder or under any other Pledge Document, as
the case may be, and no course of dealing between the' Pledgor and the Pledgee
or any Noteholder shall operate as a waiver thereof; nor shall any single or
partial exercise of any right, power or privilege hereunder or under any other
Pledge Document preclude any other or further exercise thereof or the exercise
of any other right, power or privilege hereunder or thereunder. The rights,
powers and remedies herein or in any other Pledge Document expressly provided
are cumulative and not exclusive of any rights, powers or remedies which the
Pledgee or any Noteholder, as the case may be, would otherwise have. No notice
to or demand on the Pledgor in any case shall entitle the Pledgor to any other
or further notice or demand in similar or other circumstances or constitute a
waiver of the rights of the Pledgee or any Noteholder to any other or further
action in any circumstances without notice or demand.
19.8 New Secured Lenders.
-------------------
The parties acknowledge that Section 8.1 of the Note Agreement contemplates that
the Noteholders may enter into an intercreditor agreement for the purpose of
sharing the Pledge Collateral with the other parties to such agreement in
accordance with the terms thereof. It is understood that at the time of such
event, the Pledgor, the Pledgee and the Noteholders will investigate whether and
how this Agreement may be amended to accommodate and give effect to such an
intercreditor agreement.
17
<PAGE>
IN WITNESS WHEREOF, The Pledgor and the Pledgee have caused this
Agreement to be executed by their duly elected officers duly authorized as of
the date first above written.
MAGINET CORPORATION
By : /s/ James A. Barth
Name : James A. Barth
Title : Chief Financial Officer
THE CHASE MANHATTAN BANK, N.A., as
Collateral Agent
By: /s/
Name :
Title :
IN WITNESS WHEREOF, the Pledgor and the Pledgee have caused this
Agreement to be executed by their duly elected officers duly authorized as of
the date first above written.
MAGINET CORPORATION,
THE CHASE MANHATTAN BANK, N.A.
By: /s/ Rosama E. Abueva
Name: ROSANNA E. ABUEVA
Title: SECOND VICE PRESIDENT
<PAGE>
ANNEX A to
PLEDGE AGREEMENT
LIST OF SECURITIES AND PLEDGED SECURITIES
-----------------------------------------
<TABLE>
<CAPTION>
Number of Number of
Name of Subsidiary or Securities Pledged Securities Percentage of Outstanding
Joint Venture Vehicle (ordinary shares) (ordinary shares) Shares of Capital Stock
<S> <C> <C> <C> <C>
Owned by Pledged by
Pledgor Pledgor Pledgor
Pacific Pay Video (HK) Limited 10,000 6,600 100% 66%
PPV Signapore Pte Ltd. 100,000 66,000 100% 66%
PPV Signapore Pte Limited (ACN) 100 66 100% 66%
059 748 588)
Pacific Pay Video New Zealand 100 66 100% 66%
Limited
Pacific Pay Video (Korea) Ltd. 266,667 176,000 85% 66%
Pacific Pay Video International 1,000 1,000 100% 100P%
Pacific Pay Video Limited 100 100 100% 100%
</TABLE>
<PAGE>
ANNEX B to
PLEDGE AGREEMENT
Registrations and Filings
-------------------------
1. Hong Kong
---------
Registration of the name of the Pledgee in the register of members or
shareholders of the Subsidiary.
2. Singapore
---------
Registration of the name of the Pledgee in the register of members or
shareholders of the Subsidiary.
3. Australia
---------
Registration of the name of the Pledgee in the register of members or
shareholders of the Subsidiary.
4. New Zealand
-----------
Registration of the name of the Pledgee in the register of members or
shareholders of the Subsidiary.
5. Korea
-----
None.
6. California
----------
UCC-1 Financing Statement filed with the California Secretary of State.
7. Japan
-----
None.
<PAGE>
ANNEX C to
PLEDGE AGREEMENT
Form of Director's Resignation Letter
--------------------------------------
To: The Board of Directors of
[name of Subsidiary/Joint Venture Vehicle] (the "Company")
I, [name], hereby resign my position as a director of the Company with effect
from the date set forth below and waive all claims to fees or compensation in
connection with my resignation.
Dated this____ date of____.[signature]
[name]
<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 two (2) years from
the date hereof and shall automatically renew for successive one (1) year
terms unless either party notifies the other in writing of its intention
not to renew no less than sixty (60) days before the expiration of the Term
or any renewal term.
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 10.28
SECOND AMENDMENT TO NOTE AGREEMENT DATED AUGUST 15, 1995
SUMMARY OF TERMS
EFFECTIVE DATE: NOVEMBER 21, 1996
MagiNet Corporation, a California corporation (the "Company"), and each of
the institutions (collectively, the "Noteholders") which is a signatory to this
Summary of Terms amend the Note Agreement dated August 15, 1995, as amended by
the First Amendment Agreement dated May 15, 1996 (the "Note Agreement"), and the
outstanding warrants, as amended, issued to the Noteholders pursuant to the Note
Agreement (the "Warrants"). The following summarizes the principal terms of
such amendment to the Note Agreement.
Amendment to Note Agreement
- ---------------------------
. Section 8.3 of the Note Agreement concerning Adjusted Consolidated Net
Worth will be amended as set forth in Exhibit A.
---------
. Section 8.4 of the Note Agreement concerning Total Debt to Total
Adjusted Capitalization will be amended as set forth in Exhibit A.
---------
. Section 8.5 of the Note Agreement concerning Total Debt to Historical
EBITDA will be amended as set forth in Exhibit A.
---------
. Section 8.6 of Note Agreement concerning Historical EBITDA will
be amended as set forth in Exhibit A.
---------
. Section 8.9 of the Note Agreement concerning Cumulative Installed
Rooms will be amended as set forth in Exhibit A.
---------
. The Company will covenant to use its best efforts to effectuate an
initial public offering with gross proceeds to the Company of at least
$40,000,000 prior to December 31, 1996.
. The Noteholders agree that the Note Agreement, and all agreements
thereunder, may be assigned by the Company to its successor
corporation in connection with its redomiciliation in Delaware by
appropriate legal instruments, including amendments to the Note
Agreement. Any such assignment shall not relieve the Company of its
obligations under the Note Agreement and related agreements.
. Section 1 of the Warrants will be amended to eliminate the claw-back
provision of the Warrants.
If and when the Company obtains new equity financing in excess of $40,000,000:
- ------------------------------------------------------------------------------
. Sections 8.4 and 8.9 of the Note Agreement concerning Total Debt to
Total Adjusted Capitalization and Cumulative Installed Rooms,
respectively, will be amended to the original covenant levels provided
for in the Note Agreement.
. Section 8.1(d)(y) of the Note Agreement will be amended to read in its
entirety as follows: "(y) a security interest granted in connection
with a financing, the proceeds of which were used to pay for the
purchase, construction or improvement of such After-Acquired Property
or to reimburse the Company for the purchase price of such After-
Acquired Property
1
<PAGE>
(including a Lien incurred in connection with a sale-leaseback
transaction or the subsequent financing of equipment purchased with
cash); provided that such Liens shall only be permitted (pursuant to
--------
this clause (d)) to the extent to which they shall attach to the
assets acquired, constructed or improved;"
. Section 8.3 of Note Agreement concerning Adjusted Consolidated Net
Worth will be amended as set forth in Exhibit B.
---------
. Section 8.5 of Note Agreement concerning Total Debt to Historical
EBITDA will be amended as set forth in Exhibit B.
---------
. Section 8.6 of Note Agreement concerning Historical EBITDA will be
amended as set forth in Exhibit B.
---------
. Section 8.10 of the Note Agreement will be amended so that the
Company's negative covenant to not have, at any one time, Adult Titles
represent more than 30% of all video entertainment offered by the
Group and its Joint Venture Vehicles shall exclude from its
calculation all video entertainment offered by the Group and its Joint
Venture Vehicles in Europe for a period of two years from the
effective date of this Agreement. During the two-year period, Adult
Titles will not represent more than 50% of all video entertainment
offered by the Group and its Joint Venture Vehicles in Europe.
. Section 10.1 of the Note Agreement will be amended as follows
(a) "CUMULATIVE INSTALLED ROOMS" shall mean the aggregate
number of rooms the Company, its Subsidiaries and Joint
Venture Vehicles have under contract to provide an in-
room, on-demand or scheduled broadcast, pay-per-view
entertainment and information system in hotels and in
which rooms such a system has been installed, is fully
operational and is capable of generating income; provided
--------
however, that "Cumulative Installed Rooms" shall not
-------
include rooms installed with systems acquired as a result
of a merger or consolidation with, or acquisition of, any
single competitor of the Company if the number of rooms
installed with systems so acquired in any such
transaction exceeds 10,000, except "Cumulative Installed
------
Rooms" shall include all rooms in which systems were
installed, became operational or became capable of
generating income subsequent to the effectiveness of such
merger, consolidation or acquisition.
(b) "HISTORICAL EBITDA" shall mean as of the date of
determination the sum of all earnings before interest,
taxes, depreciation and amortization of the Company on a
consolidated basis during the immediately preceding four
consecutive fiscal quarters, as set forth in the books
and financial records of the Company; provided, that for
purposes of Sections 8.5 only, to the extent any
Person has become a Subsidiary of the Company (a "New
Subsidiary") at any time during such four consecutive
fiscal quarters, each such New Subsidiary shall be
included on a pro forma basis as a member of the Group
for the entire four consecutive fiscal quarters for
purposes of determining Historical EBITDA, and historical
EBITDA shall exclude amortization of all intangible
assets and additional consideration paid in connection
with the acquisition of Prodac GmbH ("Prodac"); and
further provided, that for purposes of Section 8.6 only,
to the extent that Prodac has become a Subsidiary of the
Company prior to April 1, 1997, Prodac shall be included
on a pro forma basis as a member of the Group for the
entire four consecutive fiscal quarters for purposes of
determining Historical EBITDA, and Historical EBITDA
shall exclude amortization of all intangible assets and
additional consideration paid in connection with the
acquisition of Prodac.
2
<PAGE>
If the Company fails to obtain new equity financing in excess of $40,000,000
- ----------------------------------------------------------------------------
through a public offering or other means prior to March 31, 1997:
- -----------------------------------------------------------------
. On April 1, 1997, the Company will grant the Noteholders warrants to
purchase up to 1,000,000 additional shares of Common Stock of the
Company at an exercise price of $7.00 per share (the "New Warrants")
on substantially the same terms set forth in the Warrants issued in
connection with Note Agreement on August 15, 1995, as amended May 15,
1996.
This Summary of Terms is binding upon the parties to the Note Agreement and
the Warrants and will operate as an amendment thereto. The parties hereby agree
to undertake their best efforts to enter into a Second Amendment Agreement on
the terms hereof as soon as possible, which Second Amendment Agreement will
supersede this Summary of Terms. The foregoing is hereby accepted as of the
date first written above:
MAGINET CORPORATION
By: /s/ Authorized Signature
-------------------------------------------
Name:
Title:
NEW YORK LIFE INSURANCE COMPANY
By: /s/ Authorized Signature
-------------------------------------------
Name:
Title:
THE MUTUAL LIFE INSURANCE COMPANY
OF NEW YORK
By: /s/ Authorized Signature
-------------------------------------------
Name:
Title:
WASCIC COMPANY II
By: /s/ Authorized Signature
-------------------------------------------
Name:
Title:
NAMTOR BVC LP
By: /s/ Authorized Signature
-------------------------------------------
Name:
Title:
3
<PAGE>
EXHIBIT A
No IPO and No Prodac
--------------------
<TABLE>
<CAPTION>
SECTION 8.3 ADJUSTED CONSOLIDATED NET WORTH - Default Level
<S> <C>
------------------------
09/30/96 Waive
12/31/96 Waive
03/31/97 8,000,000
06/30/97 6,000,000
09/30/97 4,000,000
------------------------
SECTION 8.4 TOTAL DEBT TO TOTAL ADJUSTED CAPITAL - Default Level
09/30/97 85%
SECTION 8.5 DEBT TO HISTORICAL EBITDA - Default Level
03/31/97 Waive
06/30/97 Waive
09/30/97 Waive
12/31/97 6.5
SECTION 8.6 HISTORICAL EBITDA - Default Level
------------------------
03/31/97 Waive
06/30/97 Waive
09/30/97 1
12/31/97 5,675,000
03/31/98 15,907,000
06/30/98 22,093,000
09/30/98 28,085,000
12/31/98 28,445,000
03/31/99 30,333,000
06/30/99 32,097,000
09/30/99 33,738,000
12/31/99 35,223,000
03/31/00 36,507,000
06/30/00 37,700,000
------------------------
SECTION 8.9 CUMULATIVE INSTALLED ROOMS - 2x Default Level
06/30/97 138,284
09/30/97 138,284
</TABLE>
4
<PAGE>
EXHIBIT B
IPO + MagiNet and Prodac Consolidated
-------------------------------------
<TABLE>
<CAPTION>
SECTION 8.3 ADJUSTED CONSOLIDATED NET WORTH - Default level
<S> <C>
9/30/96 Waive
12/31/96 Waive
3/31/97 35,000,000
6/30/97 35,000,000
9/30/97 35,000,000
12/31/97 35,000,000
03/31/98 35,000,000
06/30/96 35,000,000
09/30/96 35,000,000
SECTION 8.5 DEBT TO HISTORICAL EBITDA - Default Level
03/31/97 Waive
06/30/97 Waive
09/30/97 6.5
12/31/97 4.5
SECTION 8.6 HISTORICAL EBITDA - Default Level
03/31/97 Waive
06/30/97 2,500,000
09/30/97 4,500,000
12/31/97 10,000,000
03/31/98 16,000,000
06/30/98 22,000,000
09/30/98 30,000,000
12/31/98 40,000,000
03/31/99 45,000,000
06/30/99 50,000,000
09/30/99 55,000,000
12/31/99 62,000,000
</TABLE>
5
<PAGE>
EXHIBIT 10.29
(Pledge Agreement (Jaspanese law))
<PAGE>
AGREEMENT OF ASSIGNMENT AS COLLATERAL
This AGREEMENT OF ASSIGNMENT AS COLLATERAL, dated as of August 15, 1995
among MAGINET CORPORATION, a corporation organized under the laws of the State
of California, as assignor (the "Assignor"), and The Chase Manhattan Bank, N.A.,
a national banking association, as collateral agent for the benefit of the
Noteholders (the "Agent") and the banks and financial institutions named in
Schedule A attached hereto (collectively the "Purchasers"). Capitalized terms
used herein shall have the meanings provided in Section
W I T N E S S E T H :
- - - - - - - - - - -
WHEREAS, the Assignor and the Purchasers have entered into the Note
Agreement providing for the issuance and sale of the Notes and the issuance of
the Warrants an contemplated therein;
WHEREAS, the Purchasers, the Assignor and the Agent have entered into the
Appointment Agreement providing for the appointment of the Agent to act as
collateral agent for the benefit of the Noteholders under the Security Documents
(including this Agreement);
WHEREAS, it is at condition precedent under the Note Agreement to each
Purchaser's obligation to purchase and pay for the Notes and to accept the
Warrants to be issued under the Note Agreement that the Assignor shall have
executed and delivered to the Purchasers this Agreement;
WHEREAS, the Assignor acknowledges and confirms that this is one of the
Pledge Agreements (as such term is defined in the Note Agreement);
WHEREAS, the Assignor desires to execute this Agreement to satisfy the
conditions described in the preceding paragraphs and to induce the Purchasers to
enter into the Note Agreement and to purchase and pay for the Notes and to
accept the Warrants (and to induce any future Noteholders so to do);
NOW, THEREFORE, the Assignor hereby makes the following representations and
warranties to the Assignees and hereby covenants and agrees with the Assignees
as follows:
SECTION 1. DEFINITIONS AND PRINCIPLES OF CONSTRUCTION. For all purposes of
------------------------------------------
this Agreement, (i) capitalized terms not otherwise defined herein shall have
the meanings set forth in the Note Agreement and (ii) as used herein, references
to "this Agreement", "hereunder" and words of like meaning shall refer to this
Agreement of Assignment as Collateral.
As used in this Agreement:
"Agreement" and "this Agreement" shall mean this Agreement of Assignment as
--------- --------
Collateral dated as of August 15, 1995, as the same may be modified, amended or
supplemented from time to time.
<PAGE>
"Assignee" or "Assignees" shall mean at any time all or each of the Agent
-------- ---------
and the then Noteholders, which are initially the Purchasers.
"Liquidating Dividend" shall have the meaning set forth in Section 5.
--------------------
"Maximum Foreign Pledge" shall mean, in respect of PPV Japan, (i) prior to
-----------------------
the occurrence of a Change in Tax Law Event, the number of securities
representing 66% (or such other threshold amount as may become relevant after
the date hereof in determining whether a security interest under this Agreement
would result in the undistributed earnings of PPV Japan as determined for
Federal income tax purposes being treated as a deemed dividend to the Assignor)
of the total combined voting power of all classes of securities of PPV Japan
entitled to vote and (ii) on and following the occurrence of a Change in Tax Law
Event, the number of securities representing the maximum total combined voting
power of all classes of securities of PPV Japan entitled to vote that may be
pledged or assigned as collateral without creating a deemed dividend to the
Assignor.
"Noteholder" shall mean from time to time a registered holder of the Notes.
----------
"Pledge Documents" shall mean (i) this Agreement (and any other pledge or
----------------
assignment as collateral agreement in form and substance satisfactory to the
Assignee entered into as contemplated by this Agreement), (ii) the Note
Agreement and (iii) any other Note Document to which any Assignee is or will be
a party.
"PPV Japan" shall mean PPV Japan, Inc, a Japanese corporation.
---------
"Secured ObligAtions" shall mean (i) the payment due of the principal of
------------------
and interest in respect of the Notes and payment of all other obligations and
liabilities (including without limitation indemnities premium, if any, fees and
interest thereon) of the Assignor owed to the Assignees (including the Agent in
its individual capacity), now existing or hereafter incurred under the Note
Agreement, each Note, the Appointment Agreement, any Pledge Document and this
Agreement and (ii) the due performance and compliance with the terms of the Note
Documents by the Assignor.
"Securities" shall mean all the issued and outstanding shares of capital
----------
stock of PPV Japan (and any options, warrants or other rights to purchase such
capital stock at any time prior to the date on which the Secured Obligations are
discharged in full) owned by the Assignor, including without limitation all such
shares of capital stock, options, warrants or other rights owned by the Assignor
on the date hereof and all such capital stock, options, warrants or other rights
acquired by the Assignor in the future. The Assignor hereby represents and
warrants that on the date hereof (i) the Assignor owns 360
- 2 -
<PAGE>
shares of common stock of PPV Japan, which constitutes 90% of the issued and
outstanding shares of capital stock of PPV Japan and (ii) there are no options,
warrants, or other rights to purchase any Securities outstanding.
"Subject Securities" shall mean 264 shares of capital stock of PPV Japan
------------------
owned by the Assignor and all other Securities from time to time assigned as
collateral hereunder. The Subject Securities, together with all proceeds thereof
(including any securities, property and moneys) received and at the time held by
any of the Assignees hereunder, is hereinafter referred to as the "Subject
Collateral."
SECTION 2. ASSIGNMENT OF SECURITIES AS COLLATERAL.
--------------------------------------
2.1 Assignment. To secure the Secured Obligations, the Assignor hereby (i)
----------
assigns the Subject Securities to the Assignees as collateral (Jototanpo) and
---------
delivers to the Agent the share certificates representing the Subject Securities
to be held by the Agent on behalf of all the Assignees upon the terms and
conditions set forth in this Agreement and (ii) assigns the Subject Collateral
to the Assignees as collateral (Jototano). Each Assignee shall have an undivided
--------
interest in the Subject Collateral so assigned, each such interest determined
pro rata in accordance with the amount of the Secured Obligations from time to
time owed to such Assignee.
2.2 Subsequently Acquired Securities. If the Assignor shall acquire (by
--------------------------------
purchase stock dividend or otherwise), at any time or from time to time after
the date hereof, any additional shares or other securities in the capital stock
of PPV Japan and, as a result of such acquisition, the number of the Subject
Securities in respect of PPV Japan is less than PPV Japan's then existing
Maximum Foreign Pledge, then the Assignor will forthwith assign as collateral
hereunder (or under another agreement of assignment as collateral in form and
substance satisfactory to the Agent, if necessary under applicable law or if
otherwise desirable to carry into effect the purposes of this Agreement), and
deliver to the Agent the share certificates representing, such additional
Securities as is necessary so that the number of the Subject Securities is equal
to PPV Japan's then existing Maximum Foreign Pledge. Thereafter such Securities
shall constitute Subject Securities, and the Assignor shall promptly deliver to
the Agent a certificate executed by a Responsible officer describing such
Subject Securities and certifying that the same have been duly assigned as
collateral to the Assignees hereunder or under such other agreement of
assignment as collateral, as the case may be.
2.3 Change In Tax Law Event. If a Change in Tax Law Event occurs, then
------------------------
the Assignor shall forthwith assign as collateral hereunder (or under another
agreement of assignment as collateral in form and substance satisfactory to the
Agent, if necessary under applicable law or if otherwise desirable to carry into
effect the purposes of this Agreement) that portion of the securities of PPV
Japan hold by the Assignor and not heretofore assigned as collateral pursuant to
this Agreement (or
- 3 -
<PAGE>
another agreement of assignment as collateral) and deliver the share
certificates representing such Securities to the Agent. Thereafter such
Securities shall constitute Subject Securities, and the Assignor shall promptly
deliver to the Agent a certificate executed by a Responsible Officer describing
such Subject Securities and certifying that the same have been duly assigned as
collateral to the Assignee hereunder (or under another agreement of assignment
as collateral, as the case may be).
2.4 Non-registration of Subject Securities in Shareholders' Register. The
----------------------------------------------------------------
Assignees shall not have the Subject Securities registered in the shareholders'
register of PPV Japan in any names other than that of the Assignor unless and
until the Subject Securities have been acquired by the Assignee or any other
Person through the enforcement of the security interest in the Subject
Securities created herein or until an Event of Default shall have occurred and
be continuing.
SECTION 3. APPOINTMENT OF AGENTS. The Agent shall receive and continue to
---------------------
retain possession of the Subject Collateral on behalf of the Assignees pursuant
to the terms and conditions of this Agreement and the Appointment Agreement. The
Agent shall have the right to appoint one or more agents (other than the
Assignor) for the purpose of retaining physical possession of the share
certificates representing the Subject Securities and other Subject Collateral on
behalf of the Agent.
SECTION 4. VOTING AND OTHER RIGHTS WHILE NO EVENT OF DEFAULT. Unless and
-------------------------------------------------
until an Event of Default shall have occurred and be continuing, the Assignor
shall be entitled to vote any and all Subject Securities and to give consents,
waivers or ratification in respect thereof; provided, that the Assignor shall
cast no vote, or give any consent, waiver or ratification or take any action
which would violate or be inconsistent with any of the terms of this Agreement,
any other Note Document or any other instrument or agreement referred to herein
or therein or which would have the effect of impairing the position or interests
of the Assignees. All such rights of the Assignor to vote and to give consents,
waivers and ratifications shall cease upon the earlier to occur of (i) delivery
to the Assignor of written notice from any Noteholder or pursuant to a notice
delivered under Section 9.1 of the Note Agreement or the Agent stating that an
Event of Default has occurred and is continuing or (ii) a Responsible Officer
obtaining knowledge of any condition or event which constitutes an Event of
Default, when Sections 2.4 and 6 shall become applicable; provided, that the
Agent shall be under no duty to deliver the written notice described in clause
(i) of the foregoing unless and until it has received a notice from any
Noteholder stating that an Event of Default has occurred and is continuing.
SECTION 5. DIVIDENDS AND OTHER DISTRIBUTIONS. Unless and until an Event of
---------------------------------
Default shall have occurred and be continuing, all cash dividends payable in
respect of the Subject Securities shall be paid directly to the Assignor;
provided, that the
- 4 -
<PAGE>
Assignor shall cause to be paid to the Agent, and the Agent shall have the right
to receive and retain as part of the Subject Collateral, all cash dividends
payable in respect of the Subject Securities which are determined by the Agent
to represent in whole or in part an extraordinary, liquidating or other
distribution in return of capital (each a "Liquidating Dividend"), unless the
event creating such Liquidating Dividend was permitted by, and did not otherwise
result in an Event of Default occurring under, the Note Agreement. In case an
Event of Default shall have occurred and be continuing, the Assignor shall cause
to be paid to the Agent, and the Agent shall have the right to receive and
retain as part of the Subject Collateral, all cash dividends payable in respect
of the Subject Securities. The Assignor shall also cause to be delivered or
paid, as relevant, to the Agent, and the Agent shall have the right to receive
and retain as part of the Subject Collateral:
(a) all other or additional stock or securities of PPV Japan paid or
distributed by way of dividend in respect of the Subject Securities;
(b) all other or additional stock or other securities or property
(including cash) paid or distributed in respect of the Subject Securities by way
of stock-split, spin-off, split-up, reclassification, combination of shares or
similar rearrangement; and
(c) all other or additional stock or other securities or property
(including cash) which may be paid in respect of the Subject Securities by
reason of any consolidation, merger, exchange of stock, conveyance of assets,
liquidation or similar corporate reorganization or otherwise;
except, in each case, prior to the occurrence and continuance of an Event of
- ------
Default, to the extent the receipt of such stock dividends and other securities
distributions would cause the Subject securities of PPV Japan to exceed PPV
Japan's Maximum Foreign Pledge, in which case the Assignor shall cause to be
delivered to the Agent, and the Agent shall have the right to receive and retain
as part of the Subject Collateral, such amount of stock dividends and securities
distributions as is equal, together with the Subject Securities previously
assigned as collateral, to PPV Japan's then existing Maximum Foreign Pledge.
SECTION 6. REMEDIES IN CASE OF EVENT OF DEFAULT. In case an Event of
------------------------------------
Default shall have occurred and be continuing, the Noteholders (as Assignees)
directly or through the Agent shall be entitled to exercise all the rights,
powers and remedies vested in them or it as relevant (whether vested in them or
it by this Agreement, by any other Note Document or by law) for the protection
and enforcement of their or its rights, as relevant in respect of the Subject
Collateral, and the Noteholders (as Assignees) directly or through the Agent
shall be entitled without limitation to exercise the following rights, which the
Assignor hereby agrees to be commercially reasonable:
- 5 -
<PAGE>
(a) to, upon giving written notice to the Assignor, dispose of the
Subject Collateral by such method, at such time and for such price as are
generally considered reasonable by the Agent (acting in accordance with the
instructions from the Required Holder(s)), and apply the proceeds toward the
payment of the Secured obligations in accordance with Section 7 below; and
(b) to, upon giving written notice to the Assignor, acquire the Subject
Collateral as payment of the whole or a part of the Secured Obligations, as
relevant, in the order set forth in Section 7 below at such time and for such
price as are generally (considered reasonable by the Agent (acting in accordance
with the instructions from the Required Holder(s)).
None of the Agent or the other Assignees shall be liable for failure to collect
or realize upon any or all of the Subject Collateral or for any delay in so
doing nor shall any of them be under any obligation to take any action
whatsoever with regard thereto.
SECTION 7. APPLICATION OF PROCEEDS. All moneys collected by the Agent or
-----------------------
the other Assignees upon any sale or other disposition of the Subject Collateral
(including, without limitation, the amount of the price at which the Noteholders
(as Assignees) may acquire the Subject Securities in accordance with Section
6(b), together with all other moneys received by the Agent or the other
Assignees hereunder, shall be applied in the following order of priority:
(a) FIRST, to the payment of such amounts an are due and payable to the
Agent (including in respect of its agents) or to any prior Agent hereunder
pursuant to the Appointment Agreement and this Agreement, including the payment
of all costs and expenses incurred by the Agent in connection with such sale,
the delivery of the Subject Collateral or the collection of any such moneys
(including without limitation reasonable attorneys' fees and expenses); and
(b) SECOND, to the payment of the other Secured Obligations in the
following order of priority to the extent such amounts are not sufficient to
repay such other Secured Obligations in full and within each category on a pro
rata basis among the Noteholders:
(i) to the payment of charges, fees, indemnity obligations, costs and
expenses due under the Note Agreement, each Note, the Appointment Agreement,
this Agreement or the other Pledge Documents to the Noteholders;
(ii) to the payment of interest on interest which became overdue, if any,
with respect to the Notes;
(iii) to the payment of interest on principal with respect to the Notes
which became overdue;
(iv) to the payment of interest accrued with respect
- 6 -
<PAGE>
to the Notes;
(v) to the payment of principal with respect to the Notes;
(vi) to the payment of premium, if any, with respect to the Notes; and
(vii) to the payment of the remaining Secured Obligations, if any.
Following the foregoing applications, any balance of such moneys shall be
returned to the Assignor or otherwise disposed of as directed in writing by the
Assignor.
SECTION 8. PURCHASERS OF COLLATERAL. Upon any sale of the Subject
------------------------
Collateral by the Noteholders (as Assignees) or the Agent hereunder, the receipt
of the Noteholders (as Assignees), the Agent or the officer making the sale
shall be a sufficient discharge to the purchaser or purchasers of the Subject
Collateral so sold, and such purchaser or purchasers shall not be obligated to
see to the application of any part of the purchase money paid over to the
Noteholders (as Assignees), the Agent or such officer or be answerable in any
way for the misapplication or non-application thereof.
SECTION 9. FURTHER ASSURANCES. Without limitation to the provisions of
------------------
Section 6 the Assignor agrees that it shall at its own expense:
(a) do such further acts and things and execute and deliver to the Agent
and the other Assignees such additional conveyances, assignments agreements and
instruments (including, without limitation, one or more pledge or assignment as
collateral agreements in form and substance satisfactory to the Agent) as may be
reasonably required or deemed advisable to carry into effect the purposes of
this Agreement or to further assure and confirm unto the Agent and the other
Assignees its and their rights, powers and remedies hereunder; and
(b) comply with the requirements of Section 7.13 of the Note Agreement
(which provision is incorporated in full herein by reference).
SECTION 10. TRANSFER BY THE ASSIGNOR. The Assignor shall not assign, sell
------------------------
or otherwise dispose of, grant any option with respect to, or create, incur,
assume or suffer to exist any Lien on any portion of the Subject Collateral or
any other Securities, except (i) Liens in favor of Persons other than the
Noteholders permitted under Section 8.1 of the Note Agreement and (ii) Liens
created by this Agreement and by any other Pledge Document.
SECTION 11. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE ASSIGNOR. The
---------------------------------------------------------
Assignor represents and warrants that: (i) it is the owner of, and has good and
marketable title to, 360 shares of the capital stock of PPV Japan in existence
on the
- 7 -
<PAGE>
date hereof, subject to no Lien (except the Lien created by this Agreement);
(ii) it has full corporate power, authority and legal right to assign as
collateral all such Securities pursuant to this Agreement; (iii) all such
Securities have been duly and validly issued, are fully paid and nonassessable;
(iv) this Agreement creates, as security for the Secured Obligations, a valid
and enforceable first priority security interest on all of the Subject
Securities in existence on the date hereof, in favor of the Noteholders (as
Assignees) and the Agent acting on behalf of such Assignees, subject to no Lien
in favor of any other Person; and (v) no consent, filing, recording or
registration is required to perfect the security interest in the Subject
Securities purported to be created by this Agreement. The Assignor covenants and
agrees that: (i) it shall not cause the article on the share transfer
restrictions to be incorporated in the Articles of Incorporation of PPV Japan;
(ii) it will defend the Assignees' right, title and Lien in and to the Subject
Collateral against the claims and demands of all Persons; and (iii) it will take
all actions within its powers to ensure that it will have like title to and
right to assign an collateral any other securities or property at any time
hereafter assigned as collateral to the Assignees as Subject Collateral
hereunder.
SECTION 12. THE AGENT. (a) The Agent will hold in accordance with the
---------
terms and provisions of the Appointment Agreement and this Agreement all Subject
Collateral at any time received by it under this Agreement. It is expressly
understood and agreed that the obligations of the Agent as holder of the Subject
Collateral and with respect to the disposition thereof are only those expressly
set forth in this Agreement and in the Appointment Agreement, and no implied
covenants or obligations shall be read into this Agreement against the Agent.
(b) In case of any litigation under this Agreement, or in case of any
enforcement of remedies or exercise of rights upon the occurrence of an Event of
Default, or in case the Agent deems that, by reason of any present or future law
of any jurisdiction, it may not or may not effectively exercise any of the
powers, rights or remedies herein granted to it or hold title to the properties
as herein granted, or take any other action which may be desirable or necessary
in connection therewith, the Agent shall be entitled to appoint, to the extent
consistent with any applicable law, one or more separate or additional
co-agents.
In the event that the Agent appoints an individual or institution as a
separate or additional co-agent (i) any appointment of any such co-agent by the
Agent shall be made only with the prior written consent of the Assignor and the
Required Holder(s) (except that, if the Agent shall have received written notice
from any Holder of Secured Obligations that a Default or an Event of Default has
occurred and is continuing, such consent shall be required only of the Required
Holder(s)), which consent shall not be unreasonably withheld or delayed and (ii)
each and every remedy, power, right, title, interest, duty and obligation
expressed or intended by this Agreement to be exercised by or vested in,
conveyed to or imposed upon, the Agent with respect
- 8 -
<PAGE>
thereto shall be exercisable by and vest in such separate or additional co-agent
but only to the extent necessary, appropriate or desirable to enable such
separate or additional co-agent to exercise or have vested in it such powers,
rights, trusts, titles, interests, duties and obligations and remedies, and
every covenant and obligation necessary, appropriate or desirable to the
exercise thereof by such separate or additional co-agent shall run to and be
enforceable by either or any of them.
The Agent shall have the right to terminate the appointment of any such
co-agent hereunder with the prior written consent of the Assignor and the
Required Holder(s) (except that, if the Agent shall have received written notice
from any Holder that a Default or an Event of Default has occurred and is
continuing, such consent shall be required only of the Required Holder(s)),
which consent shall not be unreasonably withheld or delayed. Should any
instrument in writing from the Assignor be required by the separate or
additional co-agent so appointed by the Agent to more fully and certainly vest
in and confirm to it such remedies, rights, powers, titles, interest, duties and
obligations, any and all such instruments in writing shall, on request, be
executed, acknowledged and delivered by the Assignor. In case any separate or
additional co-agent, or a successor to either, shall become incapable of acting,
resign or be removed all the remedies, rights, powers, titles, interests,
trusts, duties and obligations of such separate or additional coagent, so far as
permitted by law, shall vest in and be exercised by the Agent until the
appointment of a new agent or successor to such separate or additional co-agent.
SECTION 13. ASSIGNOR'S OBLIGATIONS. The obligations of the Assignor under
----------------------
this Agreement shall be absolute and unconditional and shall remain in full
force and effect without regard to, and shall not be released, suspended,
discharged or terminated or otherwise affected by, any circumstance or
occurrence whatsoever, including without limitation; (i) any renewal, extension,
amendment or modification of, or addition or supplement to or deletion from, the
Note Agreement, any Note or any other instrument or agreement referred to
therein or any assignment or transfer of any thereof; (ii) any waiver, consent,
extension, indulgence or other action or inaction under or in respect of the
Note Agreement, any Note or any other such instrument or agreement or any
exercise or non-exercise of any right, remedy, power or privilege under or in
respect of the Note Agreement, any Note or any other such instrument or
agreement; (iii) any furnishing of any additional security to the Assignees or
any acceptance thereof or any sale, exchange, release, surrender or realization
of or upon any security by the Assignees; or (iv) any invalidity, irregularity
or unenforceability of all or part of the Secured Obligations or of any security
therefor or the termination or release of any security therefor.
SECTION 14. REGISTRATION. If an Event of Default shall have occurred and
------------
be continuing and any registration, qualification or compliance under any
securities law or laws is
- 9 -
<PAGE>
required to be effected by any applicable law with respect to the enforcement of
the security interest in all or any part of the Subject Securities; the
Assignor, at the Agent's written request, as soon as practicable and at its
expense will use its best efforts to cause such registration to be effected (and
be kept effective) and will use its best efforts to cause such qualification and
compliance to be effected (and be kept effective) as may be so requested and as
would permit the enforcement of the security interest in such Subject
Securities, including without limitation, registration under any applicable
securities laws (including the Securities Act) and appropriate compliance with
any other governmental requirements, provided that the Agent shall furnish to
the Assignor such information regarding the Assignees as the Assignor may
request in writing and as shall be required in connection with any such
registration, qualification or compliance. The Assignor will cause the Agent to
be kept reasonably advised in writing as to the progress of each such
registration, qualification or compliance and as to the completion thereof, will
furnish to the Assignees such number of prospectuses, offering circulars or
other documents incident thereto as the Agent from time to time may reasonably
request, and agrees to indemnify the Agent and the other Assignees against all
losses, liabilities, claims or damages caused by any untrue statement (or
alleged untrue statement) of a material fact contained therein (or in any
related registration statement, notification or the like) or by any omission (or
alleged omission) to state therein (or in any related registration statement,
notification or the like) a material fact required to be stated therein or
necessary to make the statements therein not misleading, except insofar as the
same may have been caused by an untrue statement or omission based upon
information furnished in writing to the Assignor by the Agent expressly for use
therein.
SECTION 15. INDEMNITY. (a) The Assignor will pay or reimburse the Agent
---------
upon its request for all reasonable expenses, disbursements and advances
incurred or made by the Agent in accordance with any of the provisions of this
Agreement or any other Pledge Document (including the compensation and the
expenses and disbursements of its agents and counsel and of all Persons not
regularly in its employ).
(b) The Assignor also covenants to indemnify the Agent and the other
Assignees for any and all loss liability or expense reasonably incurred without
gross negligence, wilful misconduct or bad faith on the part of the Agent or the
other Assignees, arising out of or in connection with the acceptance or
administration of the Subject Collateral, the exercise of any rights and
remedies arising out of this Agreement, or the performance of any of its duties,
including the reasonable costs and expenses of defending itself against any
claim of liability and in enforcing any provision of this Agreement or any other
Pledge Document (except any liability incurred with gross negligence, wilful
misconduct or bad faith on the part of the Agent or the other Assignees), with
interest thereon (i) at the rate of 10.5% per annum with respect to amounts
owing to the Noteholders (as Assignees) and (ii) at a rate equal to the
- 10 -
<PAGE>
Agent's customary banking practices with respect to overdrafts (including the
imposition of interest, funds, wage charges and administrative fees), with
respect to amounts owing to the Agent, in each case from the date the same shall
have been paid until actually reimbursed.
(c) The obligations of the Assignor under this Section 15 to indemnify the
Agent and the other Assignees and to pay or reimburse the Agent and the other
Assignees for reasonable expenses, disbursements and advances shall for
avoidance of doubt be a Secured Obligation secured by this Agreement and shall
survive the satisfaction, discharge or other termination of this Agreement and
the resignation or removal of the Agent hereunder.
SECTION 16. TERMINATION; RELEASE. Upon:
--------------------
(a) the receipt by the Agent of a certificate executed by each Noteholder
certifying that the conditions set forth in Section 5.3 of the Note Agreement to
the release of the Subject Collateral have been satisfied; or
(b) the date on which the Secured Obligations have been discharged in
full;
this Agreement shall terminate, and the Agent, at the written request and
expense of the Assignor, shall promptly execute and deliver to the Assignor a
proper instrument or instruments acknowledging the satisfaction and termination
of this Agreement, and shall release, reassign and deliver to the Assignor,
without any representation or warranty, such of the Subject Collateral as maybe
in the possession of the Agent and has not theretofore been sold or otherwise
applied, released or reassigned pursuant to this Agreement, together with any
moneys at the time held by the Agent hereunder.
SECTION 17. NOTICES. All notices and other communications hereunder shall
be in the English language in writing and made at the addresses, in the manner
and with the effect provided in Section 11.10 of the Note Agreement, provided
that, for this purpose, the address of the Agent shall be as follows:
The Chase Manhattan Bank, N.A.
Corporate Trust Administration
4 Chase MetroTech Center
3rd Floor
Brooklyn, New York 11245
Facsimile: (718) 242-5885 or (718) 242-3529
or such other address as the Agent may designate for itself by notice given in
accordance with this Section 17.
SECTION 18. Change of the Assignees. Each of the Assignor, the Agent and
-----------------------
each of the other Assignees hereby (a) acknowledges that the Noteholders (and,
accordingly, the Assignees) may be changed and/or new Noteholders (and
accordingly, new Assignees) may be added from time to time in accordance
with the Note Agreement and the other Note Documents and agrees that, without
taking any action, the security interest created or to be created hereunder
shall automatically be effective for the benefit of the Agent and the then
current Noteholders who shall automatically be deemed to be Assignees hereunder.
The Agent further agrees that the Agent shall maintain possession of the Subject
Collateral in accordance with the terms of this Agreement on behalf of the
Assignees who may be changed or added to from time to time. The Assignor
further agrees that upon the Agent's request the Assignor shall execute and
deliver to the Agent a letter of confirmation in substantially the form attached
hereto as Appendix A, which letter shall be deemed upon delivery to the Agent to
have become an integral part of this Agreement,.
<PAGE>
SECTION 19. MISCELLANEOUS.
-------------
19.1 Benefit of Agreement. This Agreement shall be binding upon and inure
--------------------
to the benefit of and be enforceable by the Assignor, the Agent and the other
Assignees and their respective successors and permitted assigns; provided,
however, that the Assignor may not, without the prior written consent of the
Agent (acting on the instructions of all the other Assignees), assign or
transfer any of its rights or obligations hereunder. Each of the Assignees
(other than the Agent) may assign or transfer its rights hereunder in connection
with an assignment or transfer of all or any part of its interest in and rights
under its Notes and the Note Agreement pursuant to the provisions of the Note
Agreement. The Agent may be replaced by another entity pursuant to the
provisions of Sections 10 and 11 of the Appointment Agreement, in which case the
Subject Collateral shall be transferred, delivered and possessed by the
substituting agent in accordance with the Appointment Agreement and this
Agreement.
19.2 Amendment, Waiver. This Agreement may be changed, waived, discharged
-----------------
or terminated only with the written consent of the Required Holder(s), the Agent
and the Assignor.
19.3 Governing Law. This Agreement is a contract made under the laws of
-------------
Japan and shall for all purposes be construed and enforced in accordance with,
and the rights of parties shall be governed by the laws of Japan; provided,
however, that with respect to the Agent under Section 12 of this Agreement, the
laws of the State of New York shall apply.
19.4 Section Heading, Counterparts. The headings of the several sections
-----------------------------
and subsections in this Agreement are inserted for convenience only and shall
not in any way affect the meaning or construction of any provision of this
Agreement This Agreement may be executed in any number of counterparts and by
the different parties hereto on separate counterparts, each of which when so
executed and delivered shall be an original, but all of which together shall
constitute one and the same instrument.
19.5 Remedies Cumulative. The rights, powers and remedies herein or in
-------------------
any other Pledge Document expressly
- 12 -
<PAGE>
provided are cumulative and not exclusive of any rights, powers or remedies
which the Assignees would otherwise have.
19.6 Severability. Any provision of this Agreement which is prohibited or
------------
unenforceable in Japan shall be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof.
19.7 Consent to Jurisdiction; Service of Process. The Assignor for itself
-------------------------------------------
and its successors, hereby irrevocably; (i) agrees that any action, suit or
proceeding against the Assignor arising out of or relating to this Agreement or
the other Note Documents or any transaction contemplated hereby or the subject
matter of any of the foregoing may be instituted in the Tokyo District Court;
(ii) waives any objection which it may now or hereafter have to the venue of any
action, suit or proceeding in Tokyo or any claim of forum non conveniens in
Tokyo; and (iii) submits itself to the non-exclusive jurisdiction of the Tokyo
District Court or any court competent to hear any appeal from a decision of the
Tokyo District Court for purposes of any such action, suit or proceeding.
19.8 No Waiver. No failure or delay on the part of the Agent or any other
---------
Assignee in exercising any right, power of privilege hereunder and no course of
dealing between the Assignor and the Agent or any other Assignee shall operate
as a waiver thereof; nor shall any single or partial exercise of any right,
power or privilege hereunder preclude any other or further exercise thereof or
the exercise of any other right, power or privilege hereunder.
19.9 New Secured Lenders. The parties acknowledge that Section 8(i) of
-------------------
the Note Agreement contemplates that the Noteholders may enter into an
intercreditor agreement for the purpose of sharing the Subject Collateral with
the other parties to such agreement in accordance with the terms thereof. It is
understood that at the time of such event, the Assignor, the Agent and the other
Assignees will investigate whether and how this Agreement may be amended to
accommodate and give affect to such an intercreditor agreement.
- 13 -
<PAGE>
IN WITNESS WHEREOF, the Assignor, the Agent and the Purchasers have cause
this Agreement to be executed by their duly elected officers duly authorized as
of the date first above
written.
MAGINET CORPORATION, as Assignor
By /s/ J.A. Barth
Name: James A. Barth
Title: Chief Financial Officer
The Chase Manhattan Bank, N.A., as Agent
and an Assignee
By /s/ R.E. Abueva
Name: Rossana E. Abueva
Title: Second Vice President
New York Life Insurance Company, as an
Assignee
By /s/ Himi L. Kitner
Name: Himi L. Kittner
Title: Vice President
The Mutual Life Insurance Company of New
York, as an Assignee
By /s/ Diane Hom
Name: Diane Hom
Title: Managing Director
Namtor BVC LP, as an Assignee
By /s/ Michael Rothman
Name: Michael C. Rothman
Title: Partner
Waslic Company II, as an Assignee
By /s/ Daniel F. Lindley
Name: Daniel F. Lindley
Title: President & Secretary
- - 14 -
<PAGE>
Schedule A
to
Agreement of Assignment as Collateral
New York Life Insurance Company
51 Madison Avenue
New York, NY 10010
The Mutual Life Insurance Company of New York
1740 Broadway, 11th Floor
New York, NY 10019
Namtor BVC LP
311 South Wacker Drive,
Suite 4190
Chicago, IL 60606
Waslic Company II
c/o Ft. Washington Investment Advisors
400 Broadway
Cincinnati, OH 45202
- 15 -
<PAGE>
APPENDIX A
to Agreement of Assignment as Collateral
Form of a Letter of Confirmation under Section 18
--------------------------------------------------
Date: , 19__
The Chase Manhattan Bank, N.A.
as the Agent for the Noteholders (as Assignees)
Re: Noteholders of the Notes issued by MagiNet Corporation pursuant to the Note
Agreement dated August 15, 1995 and Assignees of the Agreement of
Assignment as Collateral referred to below
Dear Sirs:
We refer to the Agreement of Assignment as Collateral dated August 15, 1995 (as
amended to date, "Assignment as Collateral") made between you as the Agent and
an Assignee, the Purchasers and us. All capitalized terms defined or used
herein and not otherwise defined herein shall have the same meanings specified
in the Assignment as Collateral.
We understand that the current Noteholders, and accordingly the current
Assignees (excluding you), are those listed below and confirm that all security
interests created or to be created under the Assignment as Collateral are
effective for the benefit of you and such other Assignees as if they all were
Assignees on the date the Assignment as Collateral was first executed.
Very truly yours,
MagiNet Corporation
(Authorized Signatory)
(List of Assignees):
<PAGE>
EXHIBIT 10.46
COLLATERAL ASSIGNMENT AGREEMENT
-------------------------------
THIS COLLATERAL ASSIGNMENT AGREEMENT (this "Agreement") dated as of
August 15, 1995, between PACIFIC PAY VIDEO LIMITED, a corporation organized
under the laws of the State of California, as assignor (the "Assignor"), and THE
--------
CHASE MANHATTAN BANK, N.A., as collateral agent (the "Assignee") for the benefit
--------
of the Noteholders. Unless otherwise defined herein, capitalized terms used
herein shall have the meanings provided in the Note Agreement, as defined below.
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, MagiNet Corporation (the "Company") has entered into the Note
Agreement dated as of August 15, 1995 with certain U.S. financial institutions,
providing for the issuance and sale of up to $30,000,000 aggregate principal
amount of its 10.5% Senior Secured Notes and the issuance of warrants (the "Note
Agreement");
WHEREAS, the Company, the Assignee and the Purchasers have entered
into the Appointment Agreement dated as of August 15, 1995 (the "Appointment
Agreement") providing for the appointment of The Chase Manhattan Bank, N.A. to
act as collateral agent for the benefit of the Noteholders under the Security
Documents (including this Agreement);
WHEREAS, it is a condition precedent under the Note Agreement to each
Purchaser's obligation to purchase and pay for the Notes and to accept the
Warrants to be issued under the Note Agreement that the Assignor shall have
executed and delivered to the Assignee this Agreement;
WHEREAS, the Assignor desires to execute this Agreement to satisfy the
conditions described in the preceding paragraphs and to induce the Purchasers to
enter into the Note Agreement and to purchase and pay for the Notes and the
Warrants (and to induce any future Noteholders so to do);
NOW, THEREFORE, in consideration of the benefits accruing to the
Assignor and the Company, the receipt and sufficiency of which are hereby
acknowledged, the Assignor hereby makes the following representations and
warranties to the Assignee and hereby covenants and agrees with the Assignee as
follows:
1. Grant of Security Interest. Assignor hereby grants to Assignee a
--------------------------
security interest in the contract and related items described in Paragraph 2
below (the "Collateral") for the benefit of the Assignee as collateral trustee
for the Noteholders to secure (i) the payment due of the principal of and
interest in respect of the Notes and payment of all other obligations and
liabilities
<PAGE>
EXHIBIT E
TO NOTE AGREEMENT
Collateral Assignment Agreement
also appears as Exhibit 10.46
to this Registration Statement
COLLATERAL ASSIGNMENT AGREEMENT
-------------------------------
THIS COLLATERAL ASSIGNMENT AGREEMENT (this "Agreement") dated as of
August 15, 1995, between PACIFIC PAY VIDEO LIMITED, a corporation organized
under the laws of the State of California, as assignor (the "Assignor"), and THE
--------
CHASE MANHATTAN BANK, N.A., as collateral agent (the "Assignee") for the benefit
--------
of the Noteholders. Unless otherwise defined herein, capitalized terms used
herein shall have the meanings provided in the Note Agreement, as defined below.
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, MagiNet Corporation (the "Company") has entered into the Note
Agreement dated as of August 15, 1995 with certain U.S. financial institutions,
providing for the issuance and sale of up to $30,000,000 aggregate principal
amount of its 10.5% Senior Secured Notes and the issuance of warrants (the "Note
Agreement");
WHEREAS, the Company, the Assignee and the Purchasers have entered
into the Appointment Agreement dated as of August 15, 1995 (the "Appointment
Agreement") providing for the appointment of The Chase Manhattan Bank, N.A. to
act as collateral agent for the benefit of the Noteholders under the Security
Documents (including this Agreement);
WHEREAS, it is a condition precedent under the Note Agreement to each
Purchaser's obligation to purchase and pay for the Notes and to accept the
Warrants to be issued under the Note Agreement that the Assignor shall have
executed and delivered to the Assignee this Agreement;
WHEREAS, the Assignor desires to execute this Agreement to satisfy the
conditions described in the preceding paragraphs and to induce the Purchasers to
enter into the Note Agreement and to purchase and pay for the Notes and the
Warrants (and to induce any future Noteholders so to do);
NOW, THEREFORE, in consideration of the benefits accruing to the
Assignor and the Company, the receipt and sufficiency of which are hereby
acknowledged, the Assignor hereby makes the following representations and
warranties to the Assignee and hereby covenants and agrees with the Assignee as
follows:
1. Grant of Security Interest. Assignor hereby grants to Assignee a
--------------------------
security interest in the contract and related items described in Paragraph 2
below (the "Collateral") for the benefit of the Assignee as collateral trustee
for the Noteholders to secure (i) the payment due of the principal of and
interest in respect of the Notes and payment of all other obligations and
liabilities
<PAGE>
(including without limitation indemnities, premium, if any, fees and interest
thereon) of the Company, now existing or hereafter incurred under, arising out
of or in connection with the Note Agreement, each Note or any other Note
Document (other than the Warrants) and (ii) the due performance and compliance
with the terms of the Note Documents (other than the Warrant) by the Company
(all such principal, interest, obligations and liabilities, collectively, the
"Secured Obligations"). In no event solely as a consequence of the grant of
-------------------
this security interest shall the Assignee be liable for any obligations and/or
amounts owing to On Command Video Corporation pursuant to the terms of the
Technology License Agreement; provided that nothing in this sentence shall
diminish the obligation of a transferee of the rights under the Technology
License Agreement pursuant to Section 6 of this Agreement to pay royalties
thereunder.
2. Collateral. The Collateral shall consist of all right and interest of
----------
Assignor in and to (A) all of Assignor's right and interest in the Technology
License Agreement as now or hereafter amended, modified or supplemented, in
accordance with the terms hereof and the Note Agreement and (B) all proceeds of
the foregoing collateral, including whatever is receivable or received when the
foregoing collateral is sold, collected, assigned, exchanged or otherwise
disposed of, whether such disposition is voluntary or involuntary.
3. Representations and Warranties. Assignor hereby represents and warrants
------------------------------
that: (i) except as disclosed in Annex A, Assignor has a valid interest in the
Collateral and that no other person has any right, title, claim or interest (by
way of security interest or other lien or charge or otherwise) in, against or to
the Collateral, (ii) it has full power, authority and legal right to assign its
right and interest in the Collateral pursuant to this Agreement; and (iii) other
than registrations or filings described in Annex B hereto (all of which have
been made prior to the date hereof or will be made within the relevant statutory
period) no consent, filing, recording or registration is required to perfect the
Lien purported to be created by this Agreement.
4. Covenants of the Assignor. The Assignor covenants and agrees that (i)
-------------------------
it will defend the Assignee's right, title and Lien in and to the Collateral
against the claims and demands of all Persons, (ii) it will procure, execute and
deliver from time to time any endorsements, assignments, financing statements
and other writings deemed reasonably necessary or appropriate to perfect,
maintain and protect the Assignee's security interest hereunder and the priority
thereof (iii) except as otherwise permitted by Sections 8.1 and 8.8 of the Note
Agreement, it will not sell, encumber, or otherwise dispose of or transfer the
Collateral or right or interest therein except as hereinafter provided, and to
keep the Collateral free of all levies and security interests or other liens or
charges except those approved in writing by the Required Holders and Permitted
Liens, (iv) except as otherwise permitted by Section 8.11 of the Note Agreement,
it will not amend, modify or supplement the Technology License Agreement and (v)
it will duly fulfill all obligations on its part to be fulfilled under or in
connection with the Technology License Agreement and will do nothing to impair
the rights of the Assignor in respect of the Collateral.
5. Authorized Action by Assignee. Effective upon and during the
-----------------------------
continuance of an Event of Default, Assignor hereby irrevocably appoints
Assignee as its attorney-in-fact to do (but Assignee shall not be obligated to
and shall incur no liability to Assignor or any third party for failure so to
do) any act which Assignor is obligated by this Agreement to do, and to cure a
failure by Assignor to perform its obligations under the Technology License
Agreement and, after an Event of Default and upon acceleration of the Notes in
accordance with the terms of the Note
<PAGE>
Agreement, to exercise such rights and powers as Assignor might exercise with
respect to the Collateral, including, without limitation, to the extent
permitted by law and the terms of the Technology License Agreement, the right to
(i) collect by legal proceedings or otherwise and endorse, receive and receipt
for proceeds and other sums and property now or hereafter payable on or on
account of the Collateral, (ii) enter into any extension or other agreement
pertaining to, or deposit, surrender, accept, hold or apply other property in
exchange for the Collateral, (iii) transfer the Collateral to its own or its
nominee's name, and (iv) make any compromise or settlement, and take any action
it deems advisable, with respect to the Collateral. Assignor agrees to reimburse
Assignee upon demand for any costs and expenses, including, without limitation,
attorneys' fees, Assignee may incur while acting as Assignor's attorney-in-fact
hereunder, all of which costs and expenses are included in the Secured
Obligations secured hereby. Assignee shall not be required to make any
presentment, demand or protest, or give any notice and need not take any action
to preserve any rights against any prior party or any other person in connection
with the Secured Obligations or with respect to the Collateral.
6. Default and Remedies. Assignor shall be deemed in default under this
--------------------
Agreement upon the occurrence of an Event of Default. Upon the occurrence and
continuance of an Event of Default, Assignee may, at its option, and without
notice to or demand on Assignor and in addition to all rights and remedies
available to Assignee under any guaranty, this Agreement or any agreement with
Assignor, or by law, do any one or more of the following: (i) enforce Assignee's
security interest in any manner permitted by law, or provided for in this
Agreement, (ii) sell, transfer, assign or otherwise dispose of any Collateral,
for cash or credit or future delivery, on such terms and in such manner as
Assignee may determine; and (iii) recover from Assignor all costs and expenses,
including, without limitation, reasonable attorneys' fees, incurred or paid by
Assignee in exercising any right, power or remedy provided by any guaranty, this
Agreement, any agreement with Assignor, or by law.
7. Termination; Release. Upon:
--------------------
(a) the receipt by the Assignee of a certificate, satisfactory to the
Assignee executed by each Noteholder certifying that the conditions set forth
in Section 5.3 of the Note Agreement to the release of the Collateral have been
satisfied; or
(b) the date on which the Secured Obligations have been discharged in
full;
this Agreement shall terminate, and the Assignee, at the written request and
expense of the Assignor, will promptly execute and deliver to the Assignor a
proper instrument or instruments acknowledging the satisfaction and termination
of this Agreement, and will duly assign, transfer and deliver to the Assignor,
without recourse and without any representation or warranty, such of the
Collateral as may be in the possession of the Assignee and has not theretofore
been sold or otherwise applied or released pursuant to this Agreement, together
with any moneys at the time held by the Assignee hereunder.
8. Cumulative Rights. The rights, powers and remedies of Assignee under
-----------------
this Agreement shall be in addition to all rights, powers and remedies given to
Assignee by virtue of any statute or rules of law, or any agreement, all of
which rights, powers and remedies shall be
<PAGE>
cumulative and may be exercised successively or concurrently without impairing
Assignee's security interest in the Collateral.
9. Amendment; Waiver. Any forbearance or failure or delay by Assignee in
-----------------
exercising any right, power or remedy shall not preclude the further exercise
thereof, and every right, power or remedy of Assignee shall continue in full
force and effect until such right, power or remedy is specifically waived in a
writing executed by Assignee. Assignor waives any right to require Assignee to
proceed against any person or to pursue any remedy in Assignee's power. This
Agreement may be changed, waived, discharged or terminated only by an instrument
in writing in accordance with Section 11.3 of the Note Agreement.
10. Binding Upon Successors. All rights of Assignee under this Agreement
-----------------------
shall inure to the benefit of its successors and (subject to the prior written
consent of On Command Video Corporation) assigns, and the Secured Obligations of
Assignor shall bind its heirs, executors, administrators, successors and
assigns; provided, however, that the Assignor may not, without the prior written
-------- -------
consent of the Assignee (acting on the instructions of all the Noteholders),
assign or transfer any of its rights or obligations under this Agreement. The
Assignee may transfer, assign or grant its rights hereunder in connection with
an assignment or transfer of all or any part of its interest in and rights under
this Agreement pursuant to the provisions of Section 11 of the Appointment
Agreement.
11. Severability. If any of the provisions of this Agreement shall be held
------------
invalid or unenforceable, this Agreement shall be construed as if not containing
those provisions and the rights and obligations of the parties hereto shall be
construed and enforced accordingly. If any agreement or obligation contained in
this Agreement shall be held to be in violation of law, then such agreement or
obligation shall be deemed to be the agreement or obligation of the party hereto
to the full extent permitted by law.
12. Choice of Law. This Agreement is a contract made under the laws of the
-------------
State of New York of the United States and shall for all purposes be construed
and enforced in accordance with, and the rights of parties shall be governed by,
the laws of such State and except as otherwise defined herein, terms used herein
shall have the meanings given them in the New York Uniform Commercial Code.
13. Notice. Any written notice, consent or other communication provided for
------
in this Agreement shall be delivered or sent in accordance with Section 11.10 of
the Note Agreement, provided that, for this purpose, the address of the Assignor
and the Assignee shall be as follows:
If to the Assignor:
405 Tasman Drive
Sunnyvale, California 94089
Attention: Chief Financial Officer
Facsimile: 408 734 1687
<PAGE>
With a copy to:
On Command Video Corporation
3301 Olcott
Santa Clara, California 95054
Facsimile: 408 496 0668
If to the Assignee:
The Chase Manhattan Bank, N.A.
Corporate Trust Administration
4 Chase Metro Tech Center
Third Floor
Brooklyn, New York 11245
Facsimile: 718 292 5885
or sent to the Assignee at such other address as it may designate for itself by
notice given in accordance with this Section 13.
14. Consent to Jurisdiction; Service of Process. For the purposes of
-------------------------------------------
assuring that the Assignee and the Noteholders may enforce their respective
rights under this Agreement, the Assignor for itself and its successors and
assigns, hereby irrevocably (i) agrees that any legal or equitable action, suit
or proceeding against the Assignor arising out of or relating to this Agreement
or the Note Documents or any transaction contemplated hereby or the subject
matter of any of the foregoing may be instituted in any state or Federal court
in the Borough of Manhattan in the State of New York, (ii) waives any objection
which it may now or hereafter have to the venue of any action, suit or
proceeding in the State of New York or any claim of forum non conveniens in the
--------------------
State of New York, and (iii) irrevocably submits itself to the non-exclusive
jurisdiction of any state or Federal court of competent jurisdiction in the
Borough of Manhattan in the State of New York for purposes of any such action,
suit or proceeding. Without limiting the foregoing, the Assignor hereby
appoints, in the case of any such action or proceeding brought in the courts of
or in the State of New York, CT Corporation System, with offices on the date
hereof at 1633 Broadway, New York, New York 10019, to receive, for it and on its
behalf, service of process in the State of New York with respect thereto,
provided the Assignor may appoint any other person, reasonably acceptable to the
Assignee (acting on the instructions of the Required Holder(s)), with offices in
the State of New York to replace such agent for service of process upon delivery
to the Noteholders of a reasonably acceptable agreement of such new agent
agreeing so to act. The Assignor agrees that service of process by means of
notice (as provided in Section 11.10 of the Note Agreement) of any such action,
suit or proceeding with respect to any matter as to which it has submitted to
jurisdiction as set forth in this Section 14 shall be taken and held to be valid
personal service upon it.
<PAGE>
15. Counterparts. This Agreement may be executed in one or more
------------
counterparts, and each of which when so executed and delivered shall be deemed
an original for all purposes but all of which together shall constitute but one
and the same instrument.
<PAGE>
IN WITNESS WHEREOF, the Assignor and the Assignee have caused this
Collateral Assignment Agreement to be executed by their duly elected officers
duly authorized as of the date first above written.
PACIFIC PAY VIDEO LIMITED,
as Assignor
By /s/ James A. Barth
-------------------------
Name: James A. Barth
Title: Chief Financial Officer
THE CHASE MANHATTAN BANK, N.A.,
as Assignee
By /s/ Rossana E. Abueua
-------------------------
Name: Rossana E. Abueua
Title: Second Vice President
APPROVAL AND AGREEMENT
The undersigned, being the licensor under the Technology License Agreement
referred to in the foregoing Collateral Assignment Agreement, hereby approves
said Collateral Assignment Agreement and the assignment of the Technology
License Agreement thereunder for all purposes of said Collateral Assignment
Agreement subject to the terms and conditions of the Technology License
Agreement.
ON COMMAND VIDEO CORPORATION
By /s/ Robert Snyder
-------------------------
Name: Robert Snyder
Title: President
Schedule A
to
Agreement of Assignment as Collateral
New York Life Insurance Company
51 Madison Avenue
New York, NY 10010
The Mutual Life Insurance Company of New York
1740 Broadway, 11th Floor
New York, NY 10019
Namtor BVC LP
311 South Wacker Drive,
Suite 4190
Chicago, IL 60606
Waslic Company II
c/o Ft. Washington Investment Advisors
400 Broadway
Cincinnati, OH 45202
APPENDIX A
to Agreement of Assignment as Collateral
Form of a Letter of Confirmation under Section 18
-------------------------------------------------
Date: ,19__
The Chase Manhattan Bank, N.A.
as the Agent for the Noteholders (as Assignees)
Re: Noteholders of the Notes issues by MagiNet Corporation
pursuant to the Note Agreement dated August 15, 1995 and
Assignees of the Agreement of Assignment as Collateral
referred to below
--------------------------------------------------------
Dear Sirs:
We refer to the Agreement of Assignment as Collateral dated August 15, 1995 (as
amended to date, "Assignment as Collateral") made between you as the Agent and
an Assignee, the Purchasers and us. All Capitalized terms defined or used
herein and not otherwise defined herein shall have the same meanings specified
in the Assignment as Collateral.
We understand that the current Noteholders, and accordingly the current
Assignees (excluding you), are those listed below and confirm that all security
interests created or to be created under the Assignment as Collateral are
effective for the benefit of you and such other Assignees as if they all were
Assignees on the date the Assignment as Collateral was first executed.
Very truly yours,
MagiNet Corporation
______________________
(Authorized Signatory)
(List of Assignees):
<PAGE>
Exhibit 10.47
[COMMITMENT LETTER]
CIBC WG ARGOSY MERCHANT FUND 2, L.L.C.
425 Lexington Avenue
3rd Floor
New York, New York 10017
December 11, 1996
MagiNet Corporation
405 Tasman Drive
Sunnyvale, California 94089
Attention: Kenneth R. Hamlet
Gentlemen:
You have requested that CIBC WG ARGOSY MERCHANT FUND 2, L.L.C. ("CIBC"),
an indirect majority-owned subsidiary of Canadian Imperial Bank of Commerce and
each party to which CIBC may syndicate a portion of the commitment made hereby
pursuant to Section 7 hereof (the "Syndication Parties") commit to provide to
MagiNet Corporation (the "Company") funds in the amount of up to $10 million in
the form of senior subordinated notes to be made available as described in
Section 1 hereof (the "Senior Subordinated Notes"). Concurrently with the
issuance of any Senior Subordinated Notes, and in consideration therefor, the
Company will issue to CIBC up to 1,333,333 Warrants to purchase Company Common
Stock, par value $.0001 per share (the "Financing Warrants") on a pro rata basis
equal to the principal amount of Senior Subordinated Notes issued. The
commitment to acquire the Senior Subordinated Notes has been requested to
provide the Company with assurances as to the general availability of funds to
the Company for its ongoing operations in the event the initial public offering
of the Company's common equity ("IPO") currently being pursued is not
consummated. The financing evidenced by the Senior Subordinated Notes and the
issuance of the Financing Warrants is referred to herein as the "Transaction".
Accordingly, subject to the terms and conditions set forth or
incorporated in this letter, CIBC (the "Lender") agrees with you as follows:
Section 1. Senior Subordinated Notes. The Lender hereby commits, subject
to the terms and conditions hereof and
<PAGE>
-2-
in the Summary Term Sheet attached hereto as Exhibit A (the "Term Sheet"), to
provide to the Company at its request, subject to the conditions set forth
herein and the issuance of the pro rata portion of the Financing Warrants, up to
$10 million through the issuance of Senior Subordinated Notes. The commitment
contemplated hereby shall expire at 5:00 p.m. New York time on January 15, 1997
(the "Closing Date," which may be extended by the Extended Commitment Option (as
defined in Section 6 hereof)). The proportion of each of CIBC's and each
Syndication Party's commitment to provide the financing evidenced by the Senior
Subordinated Notes is set forth in their respective commitment letters, if any,
delivered to the Company. The Lender shall be obligated to provide the entire
amount of such funds in the event that no other person elects to become a
Syndication Party. In addition to the Senior Subordinated Notes and the
Financing Warrants, the Company will issue to the Lender (A) upon delivery and
acceptance of this commitment letter, 40,000 warrants to purchase fully diluted
common stock of the Company at a nominal exercise price ($.01 per warrant (the
"Initial Warrants") and (B) for so long as any Senior Subordinated Notes are
outstanding, upon each annual anniversary of the issuance of the Senior
Subordinated Notes, 200,000 warrants (subject to adjustment as set forth in the
Term Sheet) to purchase fully diluted common stock of the Company at a nominal
exercise price ($.01 per warrant) (the "Annual Warrants").
The proceeds of the Transaction shall be used for general corporate
purposes other than repayment of indebtedness or the purchase or redemption of,
or any payments on, equity securities of the Company. The principal terms of the
Senior Subordinated Notes and the Financing Warrants are summarized in the Term
Sheet.
This letter is not intended to be, nor shall it be construed as, an
attempt to define or set forth all of the terms and conditions of the
Transaction. Rather, it is intended only as a statement of the principal terms
of the basic business understanding, around which the legal documentation is to
be structured. Further negotiations within the general parameters of these
principal terms shall not be precluded by the issuance of this letter or its
acceptance by you, although in no event may Lender negotiate to (i) reduce the
maximum principal amount, (ii) shorten the final maturity date, (iii) increase
the annual interest rate, (iv) increase the amount of the redemption premium or
the change in control premium, (v) increase the amount of any fees, (vi)
increase the
<PAGE>
-3-
number of Financing Warrants or the Initial Warrants (including the rate at
which Additional Warrants are to be granted), or decrease the exercise price
thereof, other than, as may be adjusted pursuant to the Term Sheet or (vii)
shorten the commitment expiry date. This letter agreement is a binding
agreement between the parties with respect to such principal terms.
Unless the Lender's commitment hereunder shall have been terminated
pursuant to Section 6 and subject to participations which may be made available
pursuant to Section 7, the Lender shall have the exclusive right to provide the
financing evidenced by the Senior Subordinated Notes.
The Lender has reviewed certain historical and pro forma financial
statements of the Company and has met with you and with the management of the
Company and is pleased to advise you that the results of the Lender's
investigations to date are satisfactory.
You hereby represent and covenant that based on your review and
analysis, to the best of your knowledge (a) all information , including the
Projections (as defined below), which has been or is hereafter made available to
the Lender by you or your representatives, advisors or affiliates in connection
with the transactions contemplated hereby (the "Information") has been reviewed
and analyzed by you in connection with the performance of your own due diligence
and is, or in the case of Information made available after the date hereof will
be, complete and correct in all material respects and does not and will not
contain any untrue statement of a material fact or omit to state a material fact
known to you and necessary to make the statements contained therein, in the
light of the circumstances under which such statements were or are made, not
misleading and (b) all financial projections (after giving pro forma effect to
the Transaction and all other transactions referred to in the IPO other than the
consummation of the IPO) that have been or are hereafter made available to the
Lender by you or your representatives, advisors or affiliates in connection with
the transactions contemplated hereby (the "Projections") have been or, in the
case of Projections made available after the date hereof, will be prepared in
good faith based upon reasonable assumptions (it being understood that the
Projections are subject to significant uncertainties and contingencies, many of
which are beyond your control and that no assurance can be given that such
Projections will be realized). You agree to supplement the Information and the
Projections from time to time until the Closing Date so that the
<PAGE>
-4-
representation and warranty made in the preceding sentence is correct on the
Closing Date. In making the commitment contemplated hereby and syndicating such
commitment, CIBC will be using and relying on the Information and the
Projections without independent verification thereof. In addition, the Lender
does not intend to conduct any appraisal of the current or prospective assets of
the Company. Prior to the execution of the Financing Documentation you shall
provide the Lender and its counsel access to such documents agreements and
persons as is reasonably requested to confirm the Information and as requested
in connection with Lender's counsel's legal due diligence. the representations
and covenants contained in this paragraph shall remain effective until a
definitive financing agreement is executed and thereafter the disclosure
representations contained herein shall be terminated and be of no further force
and effect.
Section 2. Financing Documentation. The issuance of the Senior
Subordinated Notes and the Financing Warrants (together, the "Financing
Documentation") and the Initial Warrants, Additional Warrants and Annual
Warrants (collectively the "Fee Warrants") required hereby will be governed by
definitive loan and related agreements and documentation in form and substance
reasonably satisfactory to the Lender and you. This commitment letter, the Fee
Warrants and the Financing Documentation shall be prepared by Cahill Gordon &
Reindel, special counsel to the Lender. The Fee Warrants and Financing
Documentation shall contain such covenants, terms and conditions as are
consistent with this letter and the Term Sheet and such other covenants, terms,
conditions, representations, warranties, indemnities, events of default and
remedies provisions as shall be reasonably satisfactory to the Lender and you.
At the request of the Company, but subject to the receipt by the Lender of
reasonable assurances from the Company as to the reimbursement of its expenses
as set forth in Section 5 hereof, the Lender will make reasonable commercial
efforts to execute Financing Documentation as soon as reasonably practicable.
Section 3. Conditions. The obligation of the Lender under Section 1 of
this letter to provide the financing evidenced by the Senior Subordinated Notes
is subject to fulfillment of conditions precedent typical in the context of a
borrowing such as that evidenced by the Senior Subordinated Notes, including the
following:
(a) Financing Documentation. The Company and the Lender shall have
entered into the financing Documentation
<PAGE>
-5-
relating to the Transaction, on terms and in form and substance reasonably
satisfactory to the Lender.
(b) No Adverse Change or Development, Etc. (i) Since the date hereof,
nothing shall have occurred which could reasonably be likely to have a
material adverse effect on the rights or remedies of the Lender, or on the
ability of the Company and its subsidiaries to perform their respective
obligations to the Lender under the Financing Documentation and the Fee
Warrants; (ii) there shall not have been, in the sole judgment of the
Lender, any material adverse change in the business, prospects, condition
(financial or other), results of operations, operations, property, assets
or liabilities of the Company and its subsidiaries, taken as a whole
(provided that the failure of the Company to consummate the IPO shall in no
event be deemed to be such a material adverse change) and there shall not
have come to the attention of the Lender any misstatements in, or omissions
from, the Information which, in the sole judgment of Lender, are material;
(iii) trading in securities generally on the Toronto, New York or American
Stock Exchange shall not have been suspended; minimum or maximum prices
shall not have been established on any such exchange; (iv) a banking
moratorium shall not have been declared by New York, United States or
Canadian authorities; and (v) there shall not have been (A) a material
outbreak or escalation of hostilities between the United States or Canada
and any foreign power, or (B) a material outbreak or escalation of any
other insurrection or armed conflict involving the United States, Canada or
any other national or international calamity or emergency, or (C) any fire,
flood, earthquake, strike, civil disturbance or act of God which, in each
case, in the reasonable judgment of the Lender, makes it impracticable or
inadvisable to proceed with the consummation of the Transaction or any
of the other transactions contemplated hereby or that would materially
effect the ability to sell the Senior Subordinated Notes or the Financing
Warrants, in each case, on the terms contemplated hereby.
(c) No Defaults. On the Closing Date, the Company and its
subsidiaries shall not be in default under any material agreement or
instrument. Consummation of the Transaction will not cause or result in any
breach or default (including any event, which, with notice or lapse of time
or both would be a breach or a default) or trigger
<PAGE>
-6-
any purchase requirements under any of the terms or provisions of any of
the instruments governing the existing indebtedness of the Company or any
of its subsidiaries to remain outstanding after the consummation of the
Transaction.
(d) Capital Structure. The consolidated capital structure of the
Company, after giving effect to the Transaction, shall be consistent with
the capital structure described in the Company's registration statement
with respect to the IPO as on file as of the date hereof (the "IPO
Registration Statement") under the caption "Capitalization" in the column
titled "actual".
(e) Solvency Certificate. As of the Closing Date, the Lender shall
have received a solvency certificate from the Company's chief financial
officer, and in form and substance, reasonably satisfactory to the Lender,
setting forth the conclusion that, after giving effect to the Transaction,
the Company and its subsidiaries taken as a whole are not insolvent and
will not be rendered insolvent by the Transaction and will not be left with
unreasonably small capital with which to engage in their business and will
not have incurred debts beyond its ability to pay such debts as they
mature.
(f) Applicable Law. The Lender and its counsel shall be reasonably
satisfied that the consummation of the Transaction shall be in compliance
with all applicable statutes, laws, rules and regulations of all applicable
governmental and regulatory agencies and authorities. There shall not have
occurred after the date hereof any change in law, rule or regulation which
would prohibit or impose conditions upon the Lender's ability to provide
the financing evidenced by the Senior Subordinated Notes or the commitment
hereunder which are materially adverse to the Lender or would result in or
require any material adverse change to the net capital of the Lender. There
shall not exist any judgement, order, injunction or other restraint
prohibiting or imposing conditions upon consummation of any portion of the
Transaction which are materially adverse to the Lender or the Company and
its subsidiaries taken as a whole.
(g) Financial Statements. The Lender shall be satisfied with the
audited, unaudited and pro forma financial statements meeting the
requirements of Regulation S-X
<PAGE>
-7-
under the Securities Act of 1933, as amended (the "Act"), of the Company
(in a form no more detailed or comprehensive than the financial statements
in the form included in the IPO Registration Statement.
(h) Financing Warrants and Fees. On the Closing Date, the Company
shall have issued a pro rata portion of the Financing Warrants and paid all
fees (including, without limitation, the Initial Warrants and any
Additional Warrants (as defined)) that are due to the Lender at or prior to
the funding of the Senior Subordinated Notes.
(i) Litigation. Except as disclosed in publicly available documents
filed by the Company with the Securities and Exchange Commission prior to
the date hereof under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, no litigation or similar
proceeding (governmental or other) shall exist or be threatened with
respect to or affecting (i) the Company, any of its subsidiaries, or the
Transaction, which is reasonably likely to have a material adverse effect
on the Company and its subsidiaries, taken as a whole, or (ii) the
Financing Documentation or the consummation of the Transaction.
(j) Notice. The Company shall have delivered written notice to the
Lender setting forth the anticipated funding date, which shall not be less
than two weeks from the date of such notice.
Section 4. Indemnification and Contribution. You agree to indemnify
CIBC and each of its affiliates, any Syndication Parties and each person in
control of CIBC or any of the Syndication Parties and each of its or their
affiliates and the respective officers, directors, employees, agents and
representatives of CIBC, its affiliates, the Syndication Parties and their
respective control persons, as provided in the Indemnity Letter dated the date
hereof (the "Indemnity Letter") and attached hereto; provided that upon
execution of the Financing Documentation, the Indemnity Letter shall be
terminated and of no further force and effect, it being understood that the
Financing Documentation will contain indemnification provisions relating to the
matters and periods of time covered in the Indemnity Letter.
Section 5. Structuring and Commitment Fees and Expenses. The Company
shall pay the Lender a cash commitment
<PAGE>
-8-
fee of 3.5% of the aggregate principal amount of the Senior Subordinated Notes
committed to be purchased (the "Original Cash Commitment Fee") by CIBC as set
forth on the signature page hereof. Such fee shall be due and owing from and
after the date hereof but shall be payable on the earliest to occur of (a) the
closing date of the IPO, (b) fifteen days following the expiration of this
commitment and (c) the date any of the Senior Subordinated Notes are issued. The
Company shall also pay Additional Commitment Fees (as defined in Section 6
below) and issue Additional Warrants (as defined in Section 6 below) in the
event the Company exercises the Extended Commitment Option (as defined in
Section 6 below). The Company shall also issue the Annual Warrants on the same
basis and terms as the Initial Warrants in accordance with Section 1 above. In
addition to any fees that may be payable to the Lender hereunder and regardless
of whether any of the transactions contemplated by this letter agreement are
consummated, this letter agreement is terminated, the financing evidenced by the
Senior Subordinated Notes is made available or the Financing Documentation is
executed and delivered, you hereby agree to reimburse the Lender for all
reasonable fees (not to exceed $100,000) and disbursements of legal counsel,
including but not limited to the reasonable fees and disbursements of Cahill
Gordon & Reindel, the Lender's special counsel, and all of the Lender's travel
and other reasonable out-of-pocket expenses incurred in connection with the
Transaction or otherwise arising out of the Lender's commitment hereunder.
Section 6. Termination. The Lender's commitment hereunder to provide
the financing evidenced by the Senior Subordinated Notes shall terminate, unless
expressly agreed to by the Lender in its sole discretion to be extended to
another date, on January 15, 1997 if the Senior Subordinated Notes have not been
issued. Notwithstanding the foregoing, the Lender agrees to extend its
commitment to provide the financing evidenced by the Senior Subordinated Notes,
upon notice from the Company (received on or prior to January 15, 1997) and in
the Company's sole discretion, until (a) February 15, 1997 or (b) March 15, 1997
(the "Extended Commitment Option"). Upon exercise of the Extended Commitment
Option, the Company shall immediately issue 50,000 warrants if the one month
Extended Commitment Option is selected and 75,000 warrants if the two month
Extended Commitment Option is selected (collectively, the "Additional Warrants")
on the same basis and with an identical exercise price as the Initial Warrants.
In addition, if the one month Extended Commitment Option is selected, the
Company shall pay the Lender an additional cash commitment fee of
<PAGE>
-9-
$250,000 and if the two month Extended Commitment Option is selected, an
additional cash commitment fee of $375,000 (the "Additional Commitment Fees").
In the event the Company elects to exercise the Extended Commitment Option, the
Original Cash Commitment Fee as well as any and all Additional Commitment Fees,
shall be payable on the earliest to occur of (a) 15 days following the final
expiration of the commitment made hereby, (b) the consummation of the IPO or (c)
the date any of the Senior Subordinated Notes are issued. No such termination
of any such commitment shall affect your obligations under Sections 4 and 5
hereof or this Section 6, which shall survive any such termination.
Section 7. Assignment; Qualified Institutional Buyers. This letter
shall not be assignable by any party hereto without the prior written consent of
the other parties (other than, in the case of the Lender, to an affiliate of the
Lender, it being understood that any such affiliate shall be subject to the
restrictions set forth in this Section 7); provided, however, that CIBC shall
have the right, in its sole discretion to sell portions of the Commitment
hereunder, the Senior Subordinated Notes and the Financing Warrants among banks
or other financial institutions pursuant to the Financing Documentation or
otherwise and to sell, transfer or assign all or any portion of, or interests or
participations in, the Senior Subordinated Notes, the Financing Warrants and the
Fee Warrants; provided that prior to the consummation of an initial public
offering CIBC shall not sell, transfer or assign all or any portion of the Fee
Warrants to any person who is not an affiliate without the consent of the
Company, which consent shall not be unreasonably withheld. CIBC agrees to act
as arranger, documentation agent and administrative agent for the Senior
Subordinated Notes, the Financing Warrants and the Fee Warrants unless removed
from such positions pursuant to the terms of the Financing Documentation or
unless prohibited from acting as such by any applicable statute, law, rule or
regulation. CIBC represents that it is a "Qualified Institutional Buyer" as
defined in Rule 144A of the Securities Act of 1933, as amended, and that any
Syndication Party described above will also be a "Qualified Institutional Buyer"
or an "institutional accredited investor".
Section 8. Miscellaneous. THIS LETTER SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD
TO THE PRINCIPLES GOVERNING CONFLICTS OF LAWS. This letter (including the
provisions of the Indemnity Letter specifically incorporated herein) embodies
<PAGE>
-10-
the entire agreement and understanding between you and the Lender supersedes all
prior agreements and understandings relating to the subject matter hereof. This
letter may be executed in any number of counterparts, each of which shall be an
original, but all of which shall constitute one instrument.
The Lender reserves the right to employ the services of its affiliates
(including CIBC Wood Gundy Securities Corp. ("WGSC")) in providing services
contemplated by this letter and to allocate, in whole or in part, to WGSC
certain fees payable to the Lender in such manner as the Lender and WGSC may
agree in their sole discretion. You acknowledge that the Lender may share
(without duplication) with any of its affiliates (including WGSC) and such
affiliates may share with the Lender (in each case, subject to any
confidentiality agreements applicable thereto), any information related to you
or your affiliates or their respective subsidiaries (including information
relating to creditworthiness) or the Transaction.
<PAGE>
-11-
If you are in agreement with the foregoing, please sign and return to
the Lender at 425 Lexington Avenue, New York, New York 10017, the enclosed copy
of this letter no later than 5:00 p.m., New York time, on December 11, 1996,
whereupon the undertakings of the parties shall become effective to the extent
and in the manner provided hereby. A telecopied signature on this letter shall
be acceptable to and binding on each of the Company and the Lender; provided
that each party hereto shall undertake to promptly deliver to the other a signed
original hereof. This offer shall terminate if not so accepted by you on or
prior to that time.
Very truly yours,
CIBC WG ARGOSY MERCHANT FUND 2, L.L.C.
By: /s/ authorized signature
------------------------------------
Name:
Title:
Principal Amount of Senior
Subordinated Notes committed
to be purchased: $10 Million
Accepted and Agreed to as of
the date first above written:
MAGINET CORPORATION
By: /s/ authorized signature
-----------------------------
Name:
Title:
<PAGE>
EXHIBIT A
SUMMARY OF TERMS AND CONDITIONS*
$10,000,000 SENIOR SUBORDINATED NOTES DUE 2003
AND RELATED WARRANTS TO PURCHASE COMMON STOCK
Issuer: MagiNet Corporation ("MagiNet" or
the "Company").
Issue: Senior Subordinated Notes (the
"Senior Subordinated Notes").
Principal Amount: Up to $10,000,000.
Final Maturity: 2004 (7 years).
Lender: CIBC WG Argosy Merchant Fund 2,
L.L.C.
Rate: 12% payable semi-annually.
Notes: Senior Subordinated Notes.
Financing Warrants: Up to 1,333,333 warrants to purchase
Company Common Stock, par value $.0001
per share, issuable on a pro rata basis
with the Senior Subordinated Notes. The
Financing Warrants shall expire seven
years from the date of issuance. The
Financing Warrants (and the Fee
Warrants) shall not be exercised by
Lender for greater than 5% of the voting
stock of the Company except in
compliance with the Bank Holding Company
Act.
Exercise Price of the Subject to the reset provisions
Financing Warrants: referred to below, the Financing
Warrants will be exercisable into
common stock of the Company at a
- ---------------------
* Capitalized terms not otherwise defined herein shall have the meanings
attributed to them in the Commitment Letter to which this term sheet is
attached.
<PAGE>
-2-
price of $7.50 per share at any
time after the issuance of the
Senior Subordinated Notes prior to
their expiration (the "Exercise
Price").
Reset Provisions: The Exercise Price of the Financing
Warrants is to be reset to 85% of
the price to the public in the Com-
pany's initial public offering of
Common Stock ("IPO") if such reset
results in a reduction of the Exer-
cise Price below $7.50 per share
(the "First Reset Price"). In
addition, at the first year anni-
versary of the IPO the Exercise
Price is to be reset to the lower
of the First Reset Price and the
price of the Common Stock at such
time (the "Second Reset Price").
Pre-issuance The number of Financing Warrants
Anti-Dilution Adjustment and the Exercise Price shall be
adjusted in respect of any event
that occurs after the date of the
Commitment Letter and prior to the
date the Financing Warrants are
issued which would have caused an
anti-dilution adjustment under the
Financing Warrants had they been
outstanding at the time.
Anti-Dilution Provisions: The Financing Warrants will be
subject to standard and customary
adjustment including for shares of
Common Stock or equivalents issued
at a price per share of less than
Fair Market Value (to be defined)
(regardless of whether prior to or
after the consummation of an IPO).
Redemption of the Notes The Senior Subordinated Notes are
at the Option of the redeemable at the option of the
Issuer: Issuer, in whole or in part (pro-
vided that no less than $5 million
of Senior Subordinate Notes remain
outstanding) from the date of issu-
ance at a redemption price equal to
100% of the principal amount of the
Senior Subordinated Notes plus
<PAGE>
-3-
accrued interest to the date of
redemption.
Redemption of the Notes In the event of a Change of Control
at the Option of the (to be defined) or other
Purchaser: Fundamental Change (to be defined)
the Senior Subordinated Notes will
be redeemable at the option of the
Purchaser at a purchase price equal
to 112% of principal amount.
In the event of the consummation of
an initial public offering of
equity or the issuance of any debt
securities or preferred stock the
Senior Subordinated Notes will be
redeemable at the option of the
Purchaser at a purchase price equal
to 100% of principal amount.
Registration Rights: The Purchaser will be entitled to
(i) unlimited piggy back registra-
tions subject to pro rata reduc-
tions, commencing on the issue
date, (ii) one demand registration
subject to pro rata reductions,
commencing on the issue date, and
(iii) certain rights to cause the
Company to effect and keep current
a shelf-registration on or after
the issue date. In each case, such
registration shall pertain to the
Common Stock underlying the Financ-
ing Warrants and the Fee Warrants.
Ranking: The Senior Subordinated Notes are
unconditional, unsecured and senior
subordinated obligations of the
Company and will rank senior to all
other unsecured and subordinated
obligations of the Company and jun-
ior to all other senior indebted-
ness of the Company.
Use of Proceeds: General corporate purposes other
than repayments of indebtedness or
<PAGE>
-4-
purchases or redemptions of or pay-
ments on equity securities.
Commitment Fees: As set forth in Commitment Letter.
Funding Fee: 2.0% of Gross Proceeds.
Legal Fees: The Company and/or its agents will
reimburse Purchaser for the fees
and expenses of legal counsel to be
selected by the Purchaser whether
or not the transaction closes.
Certain Covenants: The Financing Documentation will
contain customary affirmative and
negative covenants, including,
without limitation, prohibitions on
the ability of the Company and its
subsidiaries to incur additional
indebtedness (subject to limited
exceptions), prohibitions on the
ability of the Company and its sub-
sidiaries to issue subordinated
indebtedness senior to the Senior
Subordinated Notes, prohibitions on
the ability of the Company to pay
certain dividends and make certain
other restricted payments and
investments including, without
limitation, the repurchase of capi-
tal stock or subordinated indebted-
ness (subject to limited excep-
tions), restrictions on the ability
of the Company and the Company's
subsidiaries to enter into agree-
ments which restrict their ability
to pay dividends or make certain
payments to the Company, create
liens, enter into transactions with
affiliates, merge, consolidate or
transfer substantially all of their
respective assets and restrictions
on the ability of the Company and
its subsidiaries to utilize pro-
ceeds from asset sales for purposes
other than related business
investments.
<PAGE>
-5-
Participation/Assignment CIBC and each other Lender, if any, may, with the
or Syndication: consent of CIBC, participate out or sell or assign,
or syndicate to other lenders, the Senior
Subordinated Notes, in whole or in part, at any
time, subject to compliance with applicable
securities laws. Management of the Company will
cooperate to the fullest extent possible
(including, without limitation, participation in
road show presentations and investor meetings) in
any such syndication efforts.
Modifications and The consent of holders of a majority in outstanding
Amendments: aggregate principal amount of the Senior
Subordinated Notes will be required with respect to
amendments which do not affect the payments terms,
or relative ranking of the Senior Subordinated
Notes. The consent of holders of a majority of the
Financing Warrants will be required to amend any of
the principal terms thereof.
Representations and Customary for transactions of this type.
Warranties:
Conditions Precedent: As set forth in the Commitment Letter.
Events of Default: Customary for transactions of this type, including,
without limitation, payment defaults, covenant
defaults, bankruptcy and insolvency, judgments,
cross acceleration of and failure to pay at final
maturity other indebtedness aggregating $750,000 or
more.
Governing Law and Forum: The State of New York.
<PAGE>
-6-
Indemnification and
Expense Reimbursement: Customary for transactions of this type.
Fee Warrants:
Initial Warrants: As set forth in Commitment Letter.
Issuance of Additional
Warrants: As set forth in Commitment Letter.
Issuance of Annual Warrants: As set forth in Commitment Letter.
Exercise Price: $.01 per share of Common Stock.
Term of Fee Warrants: The Fee Warrants will be exercisable for common
stock of the Company for a period of 7 years and
will be immediately exercisable.
Pre-issuance Anti- The number of Annual Warrants to be issued shall
dilution Protection: be adjusted in respect of any event that occurs
after the date of the Commitment Letter and prior
to the issuance of such Annual Warrants which
would have caused an anti-dilution adjustment
under the Annual Warrants had they been
outstanding at the time.
Anti-dilution Protection: The Fee Warrants will be subject to standard and
customary anti-dilution protection (i.e., stock
dividends, splits and reclassifications and, only
prior to the consummation of an IPO, below market
issuances of securities and assets).
Registration Rights: As set forth in the definitive Initial Warrant
issued on the date of the Commitment Letter. To
the extent the Financing Warrants are issued, the
Fee Warrants shall have identical registration
rights as are granted to the holders of Financing
Warrants.
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and
"Selected Consolidated Financial and Other Data" and to the use of our report
dated February 16, 1996 in Amendment No. 4 to the Registration Statement (Form
S-1) and related Prospectus of MagiNet Corporation for the registration of
6,325,000 shares of its common stock.
ERNST & YOUNG LLP
Palo Alto, California
December 16, 1996
<PAGE>
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG GMBH, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated August 30, 1996 in Amendment No. 4 to the
Registration Statement (Form S-1) and related Prospectus of MagiNet
Corporation for the registration of 6,325,000 shares of its common stock.
ERNST & YOUNG GMBH
Dusseldorf, Germany
December 16, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEPTEMBER 30, 1996 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-START> JAN-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 SEP-30-1996
<CASH> 18,672 7,251
<SECURITIES> 151 0
<RECEIVABLES> 1,191 2,081
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 20,638 11,011
<PP&E> 2,035 2,906
<DEPRECIATION> 659 1,161
<TOTAL-ASSETS> 46,540 49,484
<CURRENT-LIABILITIES> 6,096 6,154
<BONDS> 24,900 25,829
0 0
40,231 53,241
<COMMON> 124 605
<OTHER-SE> (25,744) (37,877)
<TOTAL-LIABILITY-AND-EQUITY> 46,540 49,484
<SALES> 8,689 12,048
<TOTAL-REVENUES> 8,689 12,048
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 11,768 14,092
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,297 2,710
<INCOME-PRETAX> (12,490) (11,068)
<INCOME-TAX> 554 681
<INCOME-CONTINUING> (12,796) (11,534)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (12,796) (11,534)
<EPS-PRIMARY> (2.77) (2.49)
<EPS-DILUTED> (2.77) (2.49)
</TABLE>
