<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 9, 1996
REGISTRATION NO. 333-12185
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 3 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
MAGINET CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
CALIFORNIA (PRIOR TO 4841 77-0407677
REINCORPORATION) (PRIMARY STANDARD (I.R.S. EMPLOYER
DELAWARE (AFTER INDUSTRIAL IDENTIFICATION NUMBER)
REINCORPORATION) CLASSIFICATION CODE
NUMBER)
(STATE OR OTHER JURISDICTION
OF INCORPORATION OR
ORGANIZATION)
405 TASMAN DRIVE
SUNNYVALE, CALIFORNIA 94089
(408) 752-1000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
KENNETH B. HAMLET
PRESIDENT AND CHIEF EXECUTIVE OFFICER
MAGINET CORPORATION
405 TASMAN DRIVE
SUNNYVALE, CALIFORNIA 94089
(408) 752-1000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
----------------
COPIES TO:
THOMAS C. DEFILIPPS, ESQ. EDWARD M. LEONARD, ESQ.
WILSON SONSINI GOODRICH & ROSATI BROBECK, PHLEGER & HARRISON LLP
PROFESSIONAL CORPORATION TWO EMBARCADERO PLACE
650 PAGE MILL ROAD 2200 GENG ROAD
PALO ALTO, CA 94304 (415) 493-9300 PALO ALTO, CA 94303 (415) 424-0160
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration
Statement.
----------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
----------------
CALCULATION OF REGISTRATION FEE
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- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
PROPOSED MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(1)(2) FEE
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.001 par value... 6,325,000 $14.00 $88,550,000 $30,534.49(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 9, 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 $12.00 and $14.00 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.
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- --------------------------------------------------------------------------------
<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 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 will
reincorporate into Delaware prior to the completion of the Offerings. Unless
the text otherwise requires, references in this Prospectus to "MagiNet" and the
"Company" refer to MagiNet Corporation, a California corporation, and its
Delaware successor, together with their subsidiaries. The Company's principal
executive offices are located at 405 Tasman Drive, Sunnyvale, California 94089,
and its telephone number at that address is (408) 752-1000.
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 19,288,931 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) $ (1.50) $ (0.93) $ (1.16)
======== ======== ======== ========
Shares used in
computation of pro
forma net loss per
share(4).............. 12,392 12,672 12,407 12,687
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 $66,373
Working capital (deficit)............. 4,857 (15,879) 49,216
Total assets.......................... 49,484 74,424 139,519
Long-term debt........................ 25,829 40,142 40,142
Accumulated deficit................... (37,008) (49,208) (49,208)
Total stockholders' equity............ 15,969 7,069 72,164
</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 280,230 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.
(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
$13.00 per share and the application thereof. See "Use of Proceeds."
----------------
Except as set forth in the Consolidated Financial Statements or otherwise
indicated herein, all information in this Prospectus (i) reflects the
reincorporation of the Company into Delaware which will be effected prior to
the effectiveness of the registration statement covering the Offerings, (ii)
reflects the conversion of all the Company's outstanding shares of Preferred
Stock into 10,908,878 shares of Common Stock, which will occur automatically
upon the closing of the Offerings, (iii) reflects the filing, upon the closing
of the Offerings, of the Company's Restated Certificate of Incorporation
authorizing 5,000,000 shares of undesignated Preferred Stock, (iv) assumes the
net exercise of warrants to acquire up to an aggregate maximum of 3,704,840
shares of Common Stock and Preferred Stock for 2,091,951 shares of Common Stock
in connection with the Offerings at an assumed fair market value of $13.00 per
share, (v) assumes the approval by the Company's Board of Directors of the
acquisition of Prodac and the issuance of 280,230 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 $13.00 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. 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. 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
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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."
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
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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 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
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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 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
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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 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,
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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 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 and that it has obtained all
necessary environmental permits to conduct its business. 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 45.2% 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 9,409,000 additional shares subject to lock-up agreements will
become available for sale in the public market. Of the approximately 9,409,000
shares that will become available for sale in the public market beginning 180
days after the date of this Prospectus, approximately 7,411,000 shares will be
subject to certain volume limitations and other resale restrictions pursuant
to Rule 144. Thereafter, approximately 4,065,000 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 $65,095,000 (approximately
$75,069,250 if the U.S. Underwriters' and International Managers' over-
allotment options are exercised in full) assuming an initial public offering
price of $13.00 per share and after deducting the estimated underwriting
discounts and commissions and estimated offering expenses.
The Company currently anticipates that 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, which will be
effected prior to the effectiveness of the registration statement covering the
Offerings, (ii) the conversion of all the Company's outstanding shares of
Preferred Stock into 10,908,878 shares of Common Stock, which will occur
automatically upon the closing of the Offerings, (iii) the filing, upon the
closing of the Offerings, of the Company's Restated Certificate of
Incorporation authorizing 5,000,000 shares of undesignated Preferred Stock and
45,000,000 shares of Common Stock 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 2,091,951 shares of Common Stock in connection with the
Offerings, at an assumed fair market value of $13.00 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 $13.00 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 280,230
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, 13,508,701 and
19,288,931 shares issued and outstanding, pro
forma and pro forma as adjusted,
respectively(2).............................. 504 14 19
Additional paid in capital.................... -- 53,832 122,222
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 72,164
-------- -------- --------
Total capitalization......................... $ 41,798 $ 41,798 $112,306
======== ======== ========
</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.
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 $(0.24) 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 2,091,951 shares of Common Stock and Preferred Stock assuming, for
purposes of such net exercises, a fair market value of $13.00 per share of
Common Stock and (ii) the issuance of 280,230 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 $13.00 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 $61,790,000 or $3.20 per share of Common Stock. This
represents an immediate increase in pro forma net tangible book value of $3.44
per share to existing stockholders and an immediate dilution in pro forma net
tangible book value of $9.80 per share to new investors. The following table
illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................. $13.00
Pro forma net tangible book value (deficit) per share as of
September 30, 1996........................................... $(0.24)
Increase in pro forma net tangible book value per share
attributable to new investors................................ 3.44
------
Pro forma net tangible book value per share after offering...... 3.20
------
Dilution per share to new investors............................. $ 9.80
======
</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 $13.00 per share and before deducting
underwriting discounts and commissions and estimated offering expenses payable
by the Company).
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------ -------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders......... 13,788,931 71.5% $ 56,789,000 44.3% $4.12
New investors................. 5,500,000 28.5 71,500,000 55.7 13.00
---------- ----- ------------ -----
Total....................... 19,288,931 100.0% $128,289,000 100.0%
========== ===== ============ =====
</TABLE>
The foregoing computations assume no exercise of stock options after
September 30, 1996, the issuance of 280,230 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 2,091,951 shares of Common Stock,
assuming, for purposes of such net exercises, a fair market value of $13.00
per share of Common Stock. The foregoing net exercises are anticipated to
occur upon either the effectiveness of the registration statement covering the
Offerings, the closing of the Offerings, or the tenth business day following
such closing as set forth in the applicable warrant agreement. As of 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. 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) $ (1.50) $ (0.93) $ (1.16)
======== ======== ======== ========
Shares used in
computation of pro
forma net loss per
share(3).............. 12,392 12,672 12,407 12,687
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 $ 66,373
Working capital
(deficit)............. (24) (386) (1,652) 7,751 14,542 4,857 (15,879) 49,216
Total assets........... 2 1,458 4,711 23,999 46,540 49,484 74,424 139,519
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 72,164
</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
$13.00 per share and the application thereof.
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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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 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.
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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.
The Company believes that the net proceeds from the Offerings, together with
cash flow from operations, will be sufficient to support the Company's focused
expansion plans and capital expenditures as well as working capital
requirements until at least December 1997. Thereafter, if cash generated from
operations is insufficient to satisfy the Company's capital requirements, the
Company may be required to raise additional funds. No assurance can be given
that additional financing will be available or that, if available, such
financing could be obtained by the Company on terms favorable to the Company
and its stockholders. The Company is negotiating with private lenders to
borrow up to $11.5 million by issuing unsecured subordinated notes, which if
issued, may be repaid with the net proceeds of the Offerings. 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.
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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
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support travellers and travel service providers, and is projected to employ
280 million people and generate $2.1 trillion in 2006.
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.
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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
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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
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"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
39
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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
40
<PAGE>
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
41
<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. 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.
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
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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
$13.00 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 280,230 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
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."
47
<PAGE>
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.
MagiNet GmbH will assume Prodac's obligations 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
inflation adjustments, and terminates in December 2008. 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.
48
<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. ................... 54 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
49
<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,
50
<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").
51
<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.
52
<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.
53
<PAGE>
AGGREGATE OPTION EXERCISES
IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
No Named Executive Officer exercised a stock option during fiscal 1995. The
following table sets forth certain information regarding stock options held as
of December 31, 1995 by the Named Executive Officers.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1995 DECEMBER 31, 1995(1)
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Current Executive Officers
Kenneth B. Hamlet (2)................................ -- -- $ -- $ --
Robert R. Creager ................................... 135,917 213,583 1,631,004 2,562,996
James A. Barth....................................... 32,292 117,708 384,379 1,365,621
Gordon E. (Ned) Druehl, Jr.(3)....................... -- -- -- --
Pang T. Ho, Ph.D. ................................... 29,583 75,417 353,746 886,254
Former Executive Officers
Jeffrey A. Bixler(4)................................. -- -- -- --
Eric S. Hass(5)...................................... 73,000 146,000 876,000 1,752,000
</TABLE>
- --------
(1) Based on an initial public offering price of $13.00 per share minus the
exercise price of outstanding options.
(2) Mr. Hamlet became President and Chief Executive Officer of the Company in
January 1996 and, accordingly, held no outstanding options as of December
31, 1995. In January 1996, the Company granted Mr. Hamlet an option
expiring January 2001 to acquire 654,324 shares of the Company's Common
Stock at an exercise price per share of $2.00 with vesting to occur
ratably over 36 months.
(3) Mr. Druehl became Executive Vice President and Chief Operating Officer in
August 1996 and, accordingly, held no outstanding options as of December
31, 1995. In August 1996, the Company granted Mr. Druehl an option
expiring August 2001 to acquire 150,000 shares of the Company's Common
Stock at an exercise price per share of $5.25 with 25% of the shares
vesting in July 1997 and the remaining shares vesting ratably over the
succeeding 36 months of service.
(4) Mr. Bixler resigned from the Company effective in December 1995. No shares
subject to the option granted to Mr. Bixler had vested as of the date of
his resignation, and the option terminated as of such date. Accordingly,
Mr. Bixler held no outstanding options as of December 31, 1995.
(5) Mr. Hass resigned from the Company effective in March 1996. In connection
with his resignation, Mr. Hass exercised two outstanding options for
19,791 and 66,895 shares, respectively. All remaining shares subject to
options held by Mr. Hass were unvested and terminated on the effective
date of his resignation.
STOCK PLANS
1992 Key Personnel Stock Option Plan. The Company's Restated 1992 Key
Personnel Stock Option Plan (the "1992 Plan") was originally adopted by the
Board of Directors in December 1992 and approved by the Company's stockholders
in December 1993. The Board of Directors approved the amendment and
restatement of the 1992 Plan in September 1996. A total of 3,800,000 shares of
Common Stock, less the number of shares issued under and not returned to the
Company's now-terminated 1992 Stock Option Plan, has been reserved for
issuance under the 1992 Plan. The 1992 Plan provides for the grant to
employees of incentive stock options within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Internal Revenue Code"), and
for the grant to employees and consultants of nonstatutory stock options.
Unless terminated sooner, the 1992 Plan will terminate automatically in
December 2002.
The 1992 Plan may be administered by the Board of Directors or a committee
of the Board (the "Committee"), which Committee shall, in the case of options
intended to qualify as "performance-based compensation" within the meaning of
Section 162(m) of the Code, consist of two or more "outside directors" within
the meaning of Section 162(m) of the Code. The Committee has the power to
determine the terms of the
54
<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,
55
<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
56
<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 401k Savings Plan
(the "401(k) Plan") which covers all of the Company's U.S. employees who have
completed 1/12 of a year of service. Pursuant to the 401(k) Plan, eligible
employees may elect to defer their current compensation by up the statutorily
prescribed annual limit and have the amount of such reduction contributed to
the 401(k) Plan on their behalf as an elective deferral contribution. The
401(k) Plan is intended to qualify under Section 401 of the Internal Revenue
Code of 1986, as amended, so that contributions to the 401(k) Plan, and income
earned on such contributions, are not includible in the participant's gross
income until withdrawn from the 401(k) Plan. The trustee under the 401(k)
Plan, at the direction of each participant, invests the assets of the 401(k)
Plan in any of a number of investment options.
EMPLOYMENT AGREEMENTS AND CHANGE IN CONTROL ARRANGEMENTS
The Company currently has employment agreements in effect with Kenneth B.
Hamlet, the Company's Chairman of the Board, President and Chief Executive
Officer and Gordon E. (Ned) Druehl, Jr., the Company's Executive Vice
President and Chief Operating Officer. 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.
57
<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, 1995, 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.
58
<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 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
59
<PAGE>
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
shall 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."
60
<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 280,230 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).... 4,726,495 34.3% 24.5%
126 East 56th Street, 22nd
Floor
New York, NY 10022
Equity-Linked Investors II 1,522,028 11.0% 7.9%
(4).........................
c/o Desai Capital
Management, Inc.
540 Madison Avenue, 36th
Floor
New York, NY 10022
Festival Company, Inc. ..... 1,014,685 7.4% 5.3%
Wisma Barito Pacific, Tower
B
Lt. 11, J1 S. Paman Kav.
62-63 Jakarta 11410
Indonesia
Pomona Capital, L.P.(5)..... 733,251 5.3% 3.8%
780 Third Avenue
New York, NY 10017-7076
Kenneth B. Hamlet(6)........ 238,168 1.7% 1.2%
Robert R. Creager(7)........ 432,708 3.1% 2.2%
James A. Barth(8)........... 88,843 * *
Gordon E. (Ned) Druehl, Jr.
............................ -- -- --
Pang T. Ho, Ph.D.(9) ....... 53,645 * *
Reiner Kaesbach(10)......... 140,115 1.0% *
Stuart J. Ellman(11)........ 4,726,495 34.3% 24.5%
Michael D. Granoff(12)...... 733,251 5.3% 3.8%
Michael Ramsay(13).......... 7,500 * *
James D. Robinson IV(14).... 4,726,495 34.3% 24.5%
Jeffrey A. Bixler(15)....... -- -- --
Eric S. Hass(16)............ 132,826 * *
All current executive
officers and directors as a
group
(10 persons)(17)............ 6,420,725 44.8% 32.4%
</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 13,788,931 shares of Common
Stock outstanding as of September 30, 1996 and 19,288,931 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 280,230 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.
61
<PAGE>
(3) Includes 1,808,907 shares held by Sunset Partners, L.P. ("Sunset"),
1,591,412 shares held by Sunset Partners II, L.P. ("Sunset II") and
1,326,176 shares held by Sunset Partners III, L.P. ("Sunset III"). RRE
Investors, L.L.C. is the general partner of each of Sunset Partners,
L.P., Sunset Partners II, L.P. and Sunset Partners III, L.P.
(collectively, the "Sunset Partnerships"). 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 244,417 shares held by Pomona Capital, L.P. ("Pomona"), 195,534
shares held by SOF Venture Capital, L.P. ("SOF Venture"), 175,980 shares
held by SP Offshore Venture Capital, L.P. ("SP Offshore") and 117,320
shares held by SP Venture Capital, L.P. ("SP Venture"). Michael D.
Granoff, a director of the Company, is the sole shareholder of Pomona
Partners, Inc., which serves as the general partner of SOF Venture, SP
Offshore and SP Venture, and which also serves as the general partner of
Pomona Associates, L.P., the general partner of Pomona. 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 140,115
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 1,808,907 shares held by Sunset, 1,591,412 shares held by Sunset
II and 1,326,176 shares held by Sunset III. Mr. Ellman is a member of the
Company's Board of Directors and a member of RRE Investors, L.L.C., a
limited liability company that serves as general partner of each of the
Sunset Partnerships. Mr. Ellman disclaims beneficial ownership of such
shares except to the extent of his pecuniary interest therein.
(12) Includes 244,417 shares held by Pomona, 195,534 shares held by SOF
Venture, 175,980 shares held by SP Offshore and 117,320 shares held by SP
Venture. Mr. Granoff, a member of the Company's Board of Directors, is
the sole shareholder of Pomona Partners, Inc., the general partner of SOF
Venture, SP Offshore and SP Venture and the general partner of Pomona
Associates, L.P., which serves as the general partner of Pomona. Mr.
Granoff disclaims beneficial ownership of such shares except to the
extent of his pecuniary interest therein.
(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 1,808,907 shares held by Sunset, 1,591,412 shares held by Sunset
II and 1,326,176 shares held by Sunset III. Mr. Robinson is a member of
the Company's Board of Directors and a member of RRE Investors, L.L.C., a
limited liability company that serves as general partner of each of the
Sunset Partnerships. Mr. Robinson disclaims beneficial ownership of such
shares except to the extent of his pecuniary interest therein.
(15) Mr. Bixler resigned from the Company effective in December 1995.
(16) Includes 46,140 shares held by Mr. Hass individually and 86,686 shares
held by Mr. Hass and his wife, as trustees of the Hass Community Property
Trust. Mr. Hass resigned from the Company effective in March 1996.
(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 132,826 shares
beneficially held by Eric S. Hass, who resigned as an officer of the
Company effective in March 1996. Includes an assumed 140,115 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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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 13,508,701 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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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 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 4,020,000 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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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
19,288,931 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 13,788,431 shares of Common Stock
outstanding, including the assumed issuance of 280,230 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
9,409,000 additional Restricted Shares of Common Stock subject to lock-up
agreements will become eligible for sale in the public market. Of the
approximately 9,409,000 Restricted Shares that will become available for sale
in the public market beginning 180 days after the Effective Date,
approximately 7,411,000 shares will be subject to certain volume and other
resale restrictions pursuant to Rule 144. Thereafter, approximately 4,065,000
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
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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 17,457 shares of the Company's Common Stock.
71
<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.
72
<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-19
Consolidated Balance Sheets............................................ F-20
Consolidated Statements of Operations.................................. F-21
Consolidated Statements of Shareholders' Deficiency.................... F-22
Consolidated Statements of Cash Flows.................................. F-23
Notes to Consolidated Financial Statements............................. F-24
MagiNet Corporation Unaudited Pro Forma Condensed Combined Financial
Statements:
Unaudited Pro Forma Condensed Combined Financial Information........... F-35
Unaudited Pro Forma Condensed Combined Balance Sheets.................. F-37
Unaudited Pro Forma Condensed Combined Statements of Operations........ F-38
Notes to Unaudited Pro Forma Condensed Combined Financial Statements... F-40
</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.
On August 8, 1996, the Board of Directors authorized the Company to proceed
with an Initial Public Offering (IPO) of Common Stock and increased the
authorized number of shares of Common Stock to 45,000,000. Upon completion of
the IPO, all of the Company's 10,908,878 shares of convertible Preferred Stock
outstanding as of 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 is expected to be effective in
November 1996.
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. 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.
F-18
<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-19
<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-20
<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-21
<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-22
<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-23
<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-24
<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-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)
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-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)
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-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)
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-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)
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-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)
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-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)
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-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)
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-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)
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-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)
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-34
<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 280,000 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-35
<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-36
<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-37
<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) $ (1.50)
Shares used in computation of
net loss per share............ 12,392 12,672 (H)
</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>
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) $ (1.16)
Shares used in computation of
net loss per share............ 12,407 12,687 (G)
</TABLE>
See accompanying notes.
F-39
<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 280,000 shares of
MagiNet Common Stock as if the transaction had occurred on January 1,
1996.
F-40
<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 280,000 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-41
<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-42
<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................................................................. 33
Acquisition of Prodac.................................................... 45
Management............................................................... 49
Certain Transactions..................................................... 59
Principal Stockholders................................................... 61
Description of Capital Stock............................................. 63
Shares Eligible for Future Sale.......................................... 66
Certain United States Federal Tax Considerations for Non-U.S. Holders of
Common Stock............................................................ 67
Underwriting............................................................. 69
Legal Matters............................................................ 71
Experts.................................................................. 72
Additional Information................................................... 72
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 9, 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 $12.00 and $14.00 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................................................................. 33
Acquisition of Prodac.................................................... 45
Management............................................................... 49
Certain Transactions..................................................... 59
Principal Stockholders................................................... 61
Description of Capital Stock............................................. 63
Shares Eligible for Future Sale.......................................... 66
Certain United States Federal Tax Considerations for Non-U.S. Holders of
Common Stock............................................................ 67
Underwriting............................................................. 69
Legal Matters............................................................ 71
Experts.................................................................. 72
Additional Information................................................... 72
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>
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.
10.17+** 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.
10.30** 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.
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.
</TABLE>
II-4
<PAGE>
<TABLE>
<C> <S>
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.
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>
- --------
* To be filed by amendment.
** Previously filed.
+ Confidential treatment has been requested with respect to certain portions
of this exhibit pursuant to a request for confidential treatment filed with
the Securities and Exchange Commission on September 18, 1996, as amended.
Omitted portions have been filed separately with the Commission.
(b) Financial Statement Schedules
None.
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
financial statements or notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 14 of
this Registration Statement or otherwise, the Registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Securities Act, and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer, or controlling person of the
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered hereunder, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
II-5
<PAGE>
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. 3 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 9TH DAY OF
DECEMBER, 1996.
MAGINET CORPORATION
By /s/ James A. Barth
----------------------------------
JAMES A. BARTH
EXECUTIVE VICE PRESIDENT, CHIEF
FINANCIAL OFFICER AND SECRETARY
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 3 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 December 9, 1996
- ------------------------------------- Board, President
(KENNETH B. HAMLET) and Chief Executive
Officer (Principal
Executive Officer)
/s/ James A. Barth Executive Vice December 9, 1996
- ------------------------------------- President, Chief
(JAMES A. BARTH) Financial Officer
and Secretary
(Principal
Financial and
Accounting Officer)
Robert R. Creager* Director December 9, 1996
- -------------------------------------
(ROBERT R. CREAGER)
Stuart J. Ellman* Director December 9, 1996
- -------------------------------------
(STUART J. ELLMAN)
Michael D. Granoff* Director December 9, 1996
- -------------------------------------
(MICHAEL D. GRANOFF)
Michael Ramsay* Director December 9, 1996
- -------------------------------------
(MICHAEL RAMSAY)
James D. Robinson IV* Director December 9, 1996
- -------------------------------------
(JAMES D. ROBINSON IV)
* By: /s/ James A. Barth
------------------------------
(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>
<C> <S>
10.17+** Agreement between Registrant and United International Pictures,
dated June 28, 1996.
10.18** Employment Agreement between Registrant and Kenneth B. Hamlet,
dated November 28, 1995.
10.19** Employment Agreement between Registrant and Robert R. Creager,
dated September 22, 1995.
10.20** Offer of Employment Letter from Registrant to Gordon E. (Ned)
Druehl, Jr., dated June 18, 1996.
10.21** Lease for the Registrant's headquarters in 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.
10.30** 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>
<C> <S>
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.
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>
- --------
* To be filed by amendment.
** Previously filed.
+ Confidential treatment has been requested with respect to certain portions
of this exhibit pursuant to a request for confidential treatment filed with
the Securities and Exchange Commission on September 18, 1995. Omitted
portions have been filed separately with the Commission.
<PAGE>
Exhibit 1.1
4,400,000 shares
MAGINET CORPORATION
Common Stock
UNDERWRITING AGREEMENT
----------------------
December ___, 1996
LEHMAN BROTHERS INC.
HAMBRECHT & QUIST LLC
As Representatives of the several
U.S. Underwriters named in Schedule 1,
c/o Lehman Brothers Inc.
Three World Financial Center
New York, New York 10285
Dear Sirs:
MagiNet Corporation, a Delaware corporation (the "Company"),
proposes to sell 4,400,000 shares (the "Firm Stock") of the Company's Common
Stock, par value $.001 per share (the "Common Stock"), to the U.S. Underwriters
named in Schedule 1 hereto (the "U.S. Underwriters"). In addition, the Company
proposes to grant to the U.S. Underwriters an option to purchase up to an
additional 660,000 shares of the Common Stock on the terms and for the purposes
set forth in Section 3 (the "Option Stock"). The Firm Stock and the Option
Stock, if purchased, are hereinafter collectively called the "Stock." This is to
confirm the agreement concerning the purchase of the Stock from the Company by
the U.S. Underwriters.
It is understood by all parties that the Company is
concurrently entering into an agreement dated the date hereof (the
"International Underwriting Agreement") providing for the sale by the Company of
1,265,000 shares of Common Stock (including the over-allotment option
thereunder) (the "International Stock") through arrangements with certain
underwriters outside the United States (the "International Managers"), for whom
Lehman Brothers International ( Europe) and Hambrecht & Quist LLC are acting as
lead managers. The U.S. Underwriters and the International Managers
simultaneously are entering into an agreement between the U.S. and international
underwriting syndicates (the "Agreement Between U.S. Underwriters and
International Managers") which provides for, among other things, the transfer of
shares of Common Stock between the two syndicates. Two forms of prospectus are
to be used in connection with the offering and sale of shares of Common Stock
contemplated by the foregoing, one relating to the Stock and the other relating
to the International Stock. The latter form of prospectus will be identical to
the former except for certain substitute pages as included in the registration
statement and amendments thereto referred to below.
<PAGE>
Except as used in Sections 2, 3, 4, 9 and 10 herein, and except as the context
may otherwise require, references herein to the Stock shall include all shares
of the Common Stock which may be sold pursuant to either this Agreement or the
International Underwriting Agreement, and references herein to any prospectus
whether in preliminary or final form, and whether as amended or supplemented,
shall include both the U.S. and the international versions thereof.
1. Representations, Warranties and Agreements of the
Company. The Company represents, warrants and agrees that:
(a) A registration statement on Form S-1, and
amendments thereto, with respect to the Stock have (i) been
prepared by the Company in conformity with the requirements of
the United States Securities Act of 1933, as amended (the
"Securities Act"), and the rules and regulations (the "Rules
and Regulations") of the United States Securities and Exchange
Commission (the "Commission") thereunder, (ii) been filed with
the Commission under the Securities Act and (iii) become
effective under the Securities Act. Copies of such
registration statement and the amendments thereto have been
delivered by the Company to you as the representatives (the
"Representatives") of the U.S. Underwriters. As used in this
Agreement, "Effective Time" means the date and the time as of
which such registration statement, or the most recent
post-effective amendment thereto, if any, was declared
effective by the Commission; "Effective Date" means the date
of the Effective Time; "Preliminary Prospectus" means each
prospectus included in such registration statement, or
amendments thereof, before it became effective under the
Securities Act and any prospectus filed with the Commission by
the Company with the consent of the Representatives pursuant
to Rule 424(a) of the Rules and Regulations; "Registration
Statement" means such registration statement, as amended at
the Effective Time, including all information contained in the
final prospectus filed with the Commission pursuant to Rule
424(b) of the Rules and Regulations in accordance with Section
5(a) hereof and deemed to be a part of the registration
statement as of the Effective Time pursuant to paragraph (b)
of Rule 430A of the Rules and Regulations; and "Prospectus"
means such final prospectus, as first filed with the
Commission pursuant to Rule 424(b) of the Rules and
Regulations. The Commission has not issued any order
preventing or suspending the use of any Preliminary
Prospectus.
(b) The Registration Statement conforms, and the
Prospectus and any further amendments or supplements to the
Registration Statement or the Prospectus will, when they
become effective (in the case of the Registration Statement
and any amendments thereto) or are filed with the Commission
(in the case of the Prospectus and any amendment or supplement
thereto), conform in all material respects to the requirements
of the Securities Act and the Rules and Regulations and do not
and will not, as of the applicable effective date (as to the
Registration Statement and any amendment thereto) and as of
the applicable filing date (as to the Prospectus and any
amendment or supplement thereto), contain an untrue statement
of a material fact or
2.
<PAGE>
omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading;
provided that no representation or warranty is made as to
information contained in or omitted from the Registration
Statement or the Prospectus in reliance upon and in conformity
with written information furnished to the Company through the
Representatives by or on behalf of any U.S. Underwriter
specifically for inclusion therein.
(c) The Company and each of its subsidiaries (as
defined in Section 16) have been duly incorporated and are
validly existing as corporations in good standing under the
laws of their respective jurisdictions of incorporation, are
duly qualified to do business and are in good standing as
foreign corporations in each jurisdiction in which the failure
to be so qualified would have a material adverse effect on the
Company's business, financial condition, and results of
operations, taken as a whole, have all power and authority to
own or hold their respective properties and to conduct the
businesses in which they are engaged and no proceeding has
been instituted in any such jurisdiction revoking, limiting or
curtailing, or seeking to revoke, limit or curtail such power
and authority or qualification.
(d) The Company has an authorized capitalization as
set forth under the heading "Capitalization" in the
Prospectus, and all of the issued shares of capital stock of
the Company have been duly and validly authorized and issued,
are fully paid and non-assessable and conform to the
description thereof contained in the Prospectus; and except as
disclosed in or contemplated by the Prospectus or the
financial statements of the Company and the related notes
thereto included in the Prospectus all of the issued shares of
capital stock of each subsidiary of the Company have been duly
authorized and validly issued and are fully paid and
non-assessable and (except for directors' qualifying shares,
preemptive rights of the Company's joint venture partners, and
liens and pledges established in connection with the Company's
senior secured debt) are owned directly or indirectly by the
Company, free and clear of all liens, encumbrances, equities
or claims.
(e) The unissued shares of the Stock to be issued and
sold by the Company to the U.S. Underwriters hereunder and
under the International Underwriting Agreement have been duly
authorized and, when issued and delivered against payment
therefor as provided herein and in the International
Underwriting Agreement, will be duly authorized, validly
issued, fully paid and non-assessable; and the Stock will
conform to the description thereof contained in the
Prospectus.
(f) This Agreement has been duly authorized, executed
and delivered by the Company and constitutes a valid and
binding agreement of the Company enforceable against the
Company in accordance with its terms, subject to the effects
of bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium and other similar laws relating to
or affecting creditors' rights generally, general equitable
3.
<PAGE>
principles (whether considered in a proceeding in equity or at
law) or an implied covenant of good faith and fair dealing.
(g) The execution, delivery and performance of this
Agreement and the International Underwriting Agreement by the
Company and the consummation of the transactions contemplated
hereby will not conflict with or result in a breach or
violation of any of the terms or provisions of, or constitute
a default under, any material indenture, mortgage, deed of
trust, loan agreement or other agreement or instrument to
which the Company or any of its subsidiaries is a party or by
which the Company or any of its subsidiaries is bound or to
which any of the property or assets of the Company or any of
its subsidiaries is subject, nor will such actions result in
any violation of the provisions of the charter or by-laws of
the Company or any of its subsidiaries or any statute or any
order, rule or regulation of any court or governmental agency
or body having jurisdiction over the Company or any of its
subsidiaries or any of their properties or assets; and except
for the registration of the Stock under the Securities Act and
such consents, approvals, authorizations, registrations or
qualifications as may be required under the United States
Securities and Exchange Act of 1934, as amended (the "Exchange
Act"), and applicable state or foreign securities laws in
connection with the purchase and distribution of the Stock by
the U.S. Underwriters and the International Managers, no
consent, approval, authorization or order of, or filing or
registration with, any such court or governmental agency or
body is required for the execution, delivery and performance
of this Agreement or the International Underwriting Agreement
by the Company and the consummation of the transactions
contemplated hereby and thereby.
(h) Except as disclosed in the Prospectus, there are
no contracts, agreements or understandings between the Company
and any person granting such person the right (other than
rights which have been waived or satisfied) to require the
Company to file a registration statement under the Securities
Act with respect to any securities of the Company owned or to
be owned by such person or to require the Company to include
such securities in the securities registered pursuant to the
Registration Statement or in any securities being registered
pursuant to any other registration statement filed by the
Company under the Securities Act.
(i) Except as described in the Registration
Statement, the Company has not sold or issued any shares of
Common Stock during the six-month period preceding the date of
the Prospectus, including any sales pursuant to Rule 144A
under, or Regulations D or S of, the Securities Act, other
than shares issued pursuant to employee benefit plans, stock
option plans or other employee compensation plans or pursuant
to outstanding options, rights or warrants.
(j) Neither the Company nor any of its
subsidiaries has sustained, since the date of the latest
audited financial statements included in the Prospectus,
any material
4.
<PAGE>
loss or interference with its business from fire, explosion,
flood or other calamity, whether or not covered by insurance,
or from any labor dispute or court or governmental action,
order or decree, otherwise than as set forth or contemplated
in the Prospectus; and, since such date, there has not been
any change in the capital stock or long-term debt of the
Company or any of its subsidiaries or any material adverse
change, or any development involving a prospective material
adverse change, in or affecting the general affairs,
management, consolidated financial position, stockholders'
equity or results of operations of the Company and its
subsidiaries taken as a whole, otherwise than as set forth or
contemplated in the Prospectus.
(k) The financial statements (including the related
notes and supporting schedules) filed as part of the
Registration Statement or included in the Prospectus present
fairly the financial condition and results of operations of
the entities purported to be shown thereby, at the dates and
for the periods indicated, and have been prepared in
conformity with generally accepted accounting principles
applied on a consistent basis throughout the periods involved.
(l) To the best of the Company's knowledge, Ernst &
Young LLP, who have expressed their opinion with respect to
the financial statements of the Company, whose report appears
in the Prospectus and who have delivered the initial letter
referred to in Section 7(f) hereof, are independent public
accountants as required by the Securities Act and the Rules
and Regulations.
(m) Except as described in the Prospectus, and
subject to the liens and pledges established in connection
with the Company's senior secured debt and the financing
activities of Prodac Prozessdatentechnik GmbH ("Prodac") and
the Company's subsidiaries in Japan and Korea, the Company or
the applicable subsidiary has good and marketable title to all
real property and good and marketable title to all personal
property reflected as owned by it in the financial statements
hereinabove described (or elsewhere in the Prospectus), in
each case free and clear of all liens, encumbrances and
defects except such as are described in the Prospectus or such
as do not materially and adversely affect the value of such
property and do not materially interfere with the use made and
proposed to be made of such property by the Company and its
subsidiaries; and all real property and buildings held under
lease by the Company and its subsidiaries are held by them
under valid, subsisting and enforceable leases, with such
exceptions as are not material and do not interfere with the
use made and proposed to be made of such property and
buildings by the Company and its subsidiaries.
(n) The Company and each of its subsidiaries carry,
or are covered by, insurance in such amounts and covering such
risks as is adequate for the conduct of their respective
businesses and the value of their respective properties and as
is
5.
<PAGE>
customary for companies engaged in similar businesses in
similar industries and in similar stages of development.
(o) Except as described in the Prospectus, the
Company and each of its subsidiaries own or possess adequate
rights to use all material patents, patent applications,
trademarks, service marks, trade names, trademark
registrations, service mark registrations, copyrights and
licenses necessary for the conduct of their respective
businesses and, except as described in the Prospectus, the
Company has no knowledge that the conduct of their respective
businesses will conflict with, and they have not received any
notice of any claim of conflict with, any such rights of
others.
(p) There are no legal or governmental proceedings
pending to which the Company or any of its subsidiaries is a
party or of which any property or assets of the Company or any
of its subsidiaries is the subject which, if determined
adversely to the Company or any of its subsidiaries, is
reasonably likely to have a material adverse effect on the
consolidated financial position, stockholders' equity, results
of operations, business or prospects of the Company and its
subsidiaries, taken as a whole; and to the best of the
Company's knowledge, no such proceedings are threatened or
contemplated by governmental authorities or threatened by
others.
(q) There are no contracts or other documents which
are required to be described in the Prospectus or filed as
exhibits to the Registration Statement by the Securities Act
or by the Rules and Regulations which have not been described
in the Prospectus or filed as exhibits to the Registration
Statement or incorporated therein by reference as permitted by
the Rules and Regulations.
(r) No relationship, direct or indirect, exists
between or among the Company on the one hand, and the
directors, officers, stockholders, customers or suppliers of
the Company on the other hand, which is required to be
described in the Prospectus which is not so described.
(s) No labor disturbance by the employees of the
Company exists or, to the knowledge of the Company, is
imminent which could reasonably be expected to have a material
adverse effect on the consolidated financial position,
stockholders' equity, results of operations, business or
prospects of the Company and its subsidiaries taken as a
whole.
(t) The Company is in compliance in all material
respects with all presently applicable provisions of the
Employee Retirement Income Security Act of 1974, as amended,
including the regulations and published interpretations
thereunder ("ERISA"); no "reportable event" (as defined in
ERISA) has occurred with respect to any "pension plan" (as
defined in ERISA) for which the Company would have any
6.
<PAGE>
liability; the Company has not incurred and does not expect to
incur liability under I)T(i)tle IV of ERISA with respect to
termination of, or withdrawal from, any "pension plan" or (ii)
Sections 412 or 4971 of the Internal Revenue Code of 1986, as
amended, including the regulations and published
interpretations thereunder (the "Code"); and each "pension
plan" for which the Company would have any liability that is
intended to be qualified under Section 401(a) of the Code is
so qualified in all material respects and nothing has
occurred, whether by action or by failure to act, which would
cause the loss of such qualification.
(u) The Company has filed all federal, state and
local income and franchise tax returns required to be filed
through the date hereof and has paid all taxes due thereon,
and no tax deficiency has been determined adversely to the
Company or any of its subsidiaries which has had (nor does the
Company have any knowledge of any tax deficiency which, if
determined adversely to the Company or any of its
subsidiaries, could reasonably be expected to have) a material
adverse effect on the consolidated financial position,
stockholders' equity, results of operations, business or
prospects of the Company and its subsidiaries taken as a
whole.
(v) Since the date as of which information is given
in the Prospectus through the date hereof, and except as may
otherwise be disclosed in the Prospectus, the Company has not
(i) issued any securities, (ii) incurred any material
liability or obligation, direct or contingent, other than
liabilities and obligations which were incurred in the
ordinary course of business, (iii) entered into any material
transaction not in the ordinary course of business or (iv)
declared or paid any dividend on its capital stock.
(w) The Company (i) makes and keeps accurate books
and records and (ii) maintains internal accounting controls
which provide reasonable assurance that (A) transactions are
executed in accordance with management's authorization, (B)
transactions are recorded as necessary to permit preparation
of its financial statements and to maintain accountability for
its assets, (C) access to its assets is permitted only in
accordance with management's authorization and (D) the
reported accountability for its assets is compared with
existing assets at reasonable intervals.
(x) Neither the Company nor any of its subsidiaries
(i) is in violation of its charter or by-laws, (ii) is in
default in any material respect, and no event has occurred
which, with notice or lapse of time or both, would constitute
such a default, in the due performance or observance of any
term, covenant or condition contained in any material
indenture, mortgage, deed of trust, loan agreement or other
agreement or instrument to which it is a party or by which it
is bound or to which any of its properties or assets is
subject or (iii) is in violation in any material respect of
any law, ordinance, governmental rule, regulation or court
decree to which it or its property or assets may be subject or
has failed to obtain any license, permit, certificate,
franchise
7.
<PAGE>
or other governmental authorization or permit necessary to the
ownership of its property or to the conduct of its business,
except where such failure, default or violation to obtain any
license is not reasonably likely to have a material adverse
effect upon the Company and its subsidiaries, taken as a
whole.
(y) Neither the Company nor any of its subsidiaries,
nor any director, officer, agent, employee or other person
associated with or acting on behalf of the Company or any of
its subsidiaries, has used any corporate funds for any
unlawful contribution, gift, entertainment or other unlawful
expense relating to political activity; made any direct or
indirect unlawful payment to any foreign or domestic
government official or employee from corporate funds; violated
or is in violation of any provision of the Foreign Corrupt
Practices Act of 1977; or made any bribe, rebate, payoff,
influence payment, kickback or other unlawful payment.
(z) There has been no storage, disposal, generation,
manufacture, refinement, transportation, handling or treatment
of toxic wastes, medical wastes, hazardous wastes or hazardous
substances by the Company or any of its subsidiaries (or, to
the knowledge of the Company, any of their predecessors in
interest) at, upon or from any of the property now or
previously owned or leased by the Company or its subsidiaries
in violation of any applicable law, ordinance, rule,
regulation, order, judgment, decree or permit or which would
require remedial action under any applicable law, ordinance,
rule, regulation, order, judgment, decree or permit, except
for any violation or remedial action which would not have, or
could not be reasonably likely to have, singularly or in the
aggregate with all such violations and remedial actions, a
material adverse effect on the general affairs, management,
financial position, stockholders' equity or results of
operations of the Company and its subsidiaries, taken as a
whole; there has been no material spill, discharge, leak,
emission, injection, escape, dumping or release of any kind
onto such property or into the environment surrounding such
property of any toxic wastes, medical wastes, solid wastes,
hazardous wastes or hazardous substances due to or caused by
the Company or any of its subsidiaries or with respect to
which the Company or any of its subsidiaries have knowledge,
except for any such spill, discharge, leak, emission,
injection, escape, dumping or release which would not have or
would not be reasonably likely to have, singularly or in the
aggregate with all such spills, discharges, leaks, emissions,
injections, escapes, dumpings and releases, a material adverse
effect on the general affairs, management, consolidated
financial position, stockholders' equity or results of
operations of the Company and its subsidiaries, taken as a
whole; and the terms "hazardous wastes", "toxic wastes",
"hazardous substances" and "medical wastes" shall have the
meanings specified in any applicable local, state, federal and
foreign laws or regulations with respect to environmental
protection.
8.
<PAGE>
(aa) Neither the Company nor any subsidiary is an
"investment company" within the meaning of such term under the
United States Investment Company Act of 1940 and the rules and
regulations of the Commission thereunder.
2. Purchase of the Stock by the U.S. Underwriters. On the
basis of the representations and warranties contained in, and subject to the
terms and conditions of, this Agreement, the Company agrees to sell 4,400,000
shares of the Firm Stock to the several U.S. Underwriters and each of the U.S.
Underwriters, severally and not jointly, agrees to purchase the number of shares
of the Firm Stock set forth opposite that U.S. Underwriter's name in Schedule 1
hereto. The respective purchase obligations of the U.S. Underwriters with
respect to the Firm Stock shall be rounded among the U.S. Underwriters to avoid
fractional shares, as the Representatives may determine.
In addition, the Company grants to the U.S. Underwriters an
option to purchase up to 660,000 shares of Option Stock. Such option is granted
solely for the purpose of covering over-allotments in the sale of Firm Stock and
is exercisable as provided in Section 4 hereof. Shares of Option Stock shall be
purchased severally for the account of the U.S. Underwriters in proportion to
the number of shares of Firm Stock set forth opposite the name of such U.S.
Underwriters in Schedule 1 hereto. The respective purchase obligations of each
U.S. Underwriter with respect to the Option Stock shall be adjusted by the
Representatives so that no U.S. Underwriter shall be obligated to purchase
Option Stock other than in 100 share amounts. The price of both the Firm Stock
and any Option Stock shall be $_____ per share.
The Company shall not be obligated to deliver any of the Stock
to be delivered on the First Delivery Date or the Second Delivery Date (as
hereinafter defined), as the case may be, except upon payment for all the Stock
to be purchased on such Delivery Date as provided herein and in the
International Underwriting Agreement.
3. Offering of Stock by the U.S. Underwriters.
Upon authorization by the Representatives of the release of
the Firm Stock, the several U.S. Underwriters propose to offer the Firm Stock
for sale upon the terms and conditions set forth in the Prospectus.
It is understood that up to 220,000 shares of the Firm Stock
will initially be reserved by the several U.S. Underwriters for offer and sale
upon the terms and conditions set forth in the Prospectus and in accordance with
the rules and regulations of the National Association of Securities Dealers,
Inc. to employees and persons having business relationships with the Company and
its subsidiaries who have heretofore delivered to the Representatives offers to
purchase shares of Firm Stock in form satisfactory to the Representatives, and
that any allocation of such Firm Stock among such persons will be made in
accordance with timely directions received by the Representatives from the
Company; provided, that under no circumstances will the Representatives or any
U.S. Underwriter be liable to the Company or to any such person for any action
taken or omitted in good
9.
<PAGE>
faith in connection with such offering to employees and persons having business
relationships with the Company and its subsidiaries. It is further understood
that any shares of such Firm Stock which are not purchased by such persons will
be offered by the U.S. Underwriters to the public upon the terms and conditions
set forth in the Prospectus.
Each U.S. Underwriter agrees that, except to the extent
permitted by the Agreement Between U.S. Underwriters and International Managers,
it will not offer or sell any of the Stock outside of the United States or
Canada.
4. Delivery of and Payment for the Stock. Delivery of and
payment for the Firm Stock shall be made at the office of Wilson Sonsini
Goodrich & Rosati, Professional Corporation, 650 Page Mill Road, Palo Alto,
California 94304, at 10:00 A.M., New York City time, on the fourth full business
day following the date of this Agreement or at such other date or place as shall
be determined by agreement between the Representatives and the Company. This
date and time are sometimes referred to as the "First Delivery Date." On the
First Delivery Date, the Company shall deliver or cause to be delivered
certificates representing the Firm Stock to the Representatives for the account
of each U.S. Underwriter against payment to or upon the order of the Company of
the purchase price by wire transfer to an account designated by the Company.
Time shall be of the essence, and delivery of the Firm Stock at the time and
place specified pursuant to this Agreement is a further condition of the
obligation of each U.S. Underwriter to purchase the Firm Stock hereunder. Upon
delivery, the Firm Stock shall be registered in such names and in such
denominations as the Representatives shall request in writing not less than two
full business days prior to the First Delivery Date. For the purpose of
expediting the checking and packaging of the certificates for the Firm Stock,
the Company shall make the certificates representing the Firm Stock available
for inspection by the Representatives in New York, New York, not later than 2:00
P.M., New York City time, on the business day prior to the First Delivery Date.
At any time on or before the thirtieth day after the date of
this Agreement the option granted in Section 2 may be exercised in whole or in
part, but only once, by written notice being given to the Company by the
Representatives. Such notice shall set forth the aggregate number of shares of
Option Stock as to which the option is being exercised, the names in which the
shares of Option Stock are to be registered, the denominations in which the
shares of Option Stock are to be issued and the date and time, as determined by
the Representatives, when the shares of Option Stock are to be delivered;
provided, however, that this date and time shall not be earlier than the First
Delivery Date nor earlier than the second business day after the date on which
the option shall have been exercised nor later than the fifth business day after
the date on which the option shall have been exercised. The date and time the
shares of Option Stock are delivered are sometimes referred to as the "Second
Delivery Date" and the First Delivery Date and the Second Delivery Date are
sometimes each referred to as a "Delivery Date."
Delivery of and payment for the Option Stock shall be made at
the place specified in the first sentence of the first paragraph of this Section
4 (or at such other place as shall be determined by agreement between the
Representatives and the Company) at 10:00 A.M., New York City time,
10.
<PAGE>
on the Second Delivery Date. On the Second Delivery Date, the Company shall
deliver or cause to be delivered the certificates representing the Option Stock
to the Representatives for the account of each U.S. Underwriter against payment
to or upon the order of the Company of the purchase price by wire transfer to an
account designated by the Company. Time shall be of the essence, and delivery of
the Option Stock at the time and place specified pursuant to this Agreement is a
further condition of the obligation of each U.S. Underwriter to purchase the
Option Stock hereunder. Upon delivery, the Option Stock shall be registered in
such names and in such denominations as the Representatives shall request in the
aforesaid written notice. For the purpose of expediting the checking and
packaging of the certificates for the Option Stock, the Company shall make the
certificates representing the Option Stock available for inspection by the
Representatives in New York, New York, not later than 2:00 P.M., New York City
time, on the business day prior to the Second Delivery Date.
5. Further Agreements of the Company. The Company agrees:
(a) To prepare the Prospectus in a form approved by
the Representatives and to file such Prospectus pursuant to
Rule 424(b) under the Securities Act not later than the
Commission's close of business on the second business day
following the execution and delivery of this Agreement or, if
applicable, such earlier time as may be required by Rule
430A(a)(3) under the Securities Act; to make no further
amendment or any supplement to the Registration Statement or
to the Prospectus except as permitted herein; to advise the
Representatives, promptly after it receives notice thereof, of
the time when any amendment to the Registration Statement has
been filed or becomes effective or any supplement to the
Prospectus or any amended Prospectus has been filed and to
furnish the Representatives with copies thereof; to advise the
Representatives, promptly after it receives notice thereof, of
the issuance by the Commission of any stop order or of any
order preventing or suspending the use of any Preliminary
Prospectus or the Prospectus, of the suspension of the
qualification of the Stock for offering or sale in any
jurisdiction, of the initiation or threatening of any
proceeding for any such purpose, or of any request by the
Commission for the amending or supplementing of the
Registration Statement or the Prospectus or for additional
information; and, in the event of the issuance of any stop
order or of any order preventing or suspending the use of any
Preliminary Prospectus or the Prospectus or suspending any
such qualification, to use promptly its best efforts to obtain
its withdrawal;
(b) To furnish promptly to each of the
Representatives and to counsel for the U.S. Underwriters a
signed copy of the Registration Statement as originally filed
with the Commission, and each amendment thereto filed with the
Commission, including all consents and exhibits filed
therewith;
(c) To deliver promptly to the Representatives
such number of the following documents as the Representatives
shall reasonably request: I)c(i)nformed copies of the
11.
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Registration Statement as originally filed with the Commission
and each amendment thereto (in each case excluding exhibits
other than this Agreement and the computation of per share
earnings) and (ii) each Preliminary Prospectus, the Prospectus
and any amended or supplemented Prospectus; and, if the
delivery of a prospectus is required at any time after the
Effective Time in connection with the offering or sale of the
Stock or any other securities relating thereto and if at such
time any events shall have occurred as a result of which the
Prospectus as then amended or supplemented would include an
untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements
therein, in the light of the circumstances under which they
were made when such Prospectus is delivered, not misleading,
or, if for any other reason it shall be necessary to amend or
supplement the Prospectus in order to comply with the
Securities Act, to notify the Representatives and, upon their
request, to prepare and furnish without charge to each U.S.
Underwriter and to any dealer in securities as many copies as
the Representatives may from time to time reasonably request
of an amended or supplemented Prospectus which will correct
such statement or omission or effect such compliance.
(d) To file promptly with the Commission any
amendment to the Registration Statement or the Prospectus or
any supplement to the Prospectus that may, in the judgment of
the Company or the Representatives, be required by the
Securities Act or requested by the Commission;
(e) Prior to filing with the Commission any amendment
to the Registration Statement or supplement to the Prospectus
or any Prospectus pursuant to Rule 424 of the Rules and
Regulations, to furnish a copy thereof to the Representatives
and counsel for the U.S. Underwriters and obtain the consent
of the Representatives to the filing;
(f) As soon as practicable after the Effective Date,
to make generally available to the Company's security holders
and to deliver to the Representatives an earnings statement of
the Company and its subsidiaries (which need not be audited)
complying with Section 11(a) of the Securities Act and the
Rules and Regulations (including, at the option of the
Company, Rule 158);
(g) For a period of five years following the
Effective Date, to furnish to the Representatives copies of
all materials furnished by the Company to its stockholders and
all public reports and all reports and financial statements
furnished by the Company to the principal national securities
exchange upon which the Common Stock may be listed pursuant to
requirements of or agreements with such exchange or to the
Commission pursuant to the Exchange Act or any rule or
regulation of the Commission thereunder;
(h) Promptly from time to time to take such
action as the Representatives may reasonably request to
qualify the Stock for offering and sale under the securities
12.
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laws of such jurisdictions as the Representatives may request
and to comply with such laws so as to permit the continuance
of sales and dealings therein in such jurisdictions for as
long as may be necessary to complete the distribution of the
Stock; provided that in connection therewith the Company shall
not be required to qualify as a foreign corporation or to file
a general consent to service of process in any jurisdiction;
(i) For a period of 180 days from the date of the
Prospectus, not to, directly or indirectly, offer for sale,
sell or otherwise dispose of (or enter into any transaction or
device which is designed to, or could be reasonably expected
to, result in the disposition by any person at any time in the
future of) any shares of Common Stock (other than the Stock
and shares issued pursuant to employee benefit plans,
qualified stock option plans or other employee compensation
plans existing on the date hereof or pursuant to currently
outstanding options, warrants or rights), or sell or grant
options, rights or warrants with respect to any shares of
Common Stock (other than the grant of options pursuant to
option or stock purchase plans existing on the date hereof),
without the prior written consent of Lehman Brothers Inc.; and
to cause each officer and director of the Company to furnish
to the Representatives, prior to the First Delivery Date, a
letter or letters, in form and substance satisfactory to
counsel for the U.S. Underwriters, pursuant to which each such
person shall agree not to, directly or indirectly, offer for
sale, sell or otherwise dispose of (or enter into any
transaction or device which is designed to, or could be
expected to, result in the disposition by any such person at
any time in the future of) any shares of Common Stock for a
period of 180 days from the date of the Prospectus, without
the prior written consent of Lehman Brothers Inc.;
(j) Prior to the Effective Date, to apply for the
inclusion of the Stock on the Nasdaq National Market, and to
use its best efforts to complete that inclusion, subject only
to official notice of issuance and evidence of satisfactory
distribution, prior to the First Delivery Date;
(k) Upon the filing with the Commission of any
reports on Form SR pursuant to Rule 463 of the Rules and
Regulations, to furnish a copy thereof to the counsel for the
U.S. Underwriters, and to deliver promptly to the
Representatives a signed copy of each report on Form SR filed
by it with the Commission;
(l) To apply the net proceeds from the sale of
the Stock being sold by the Company as set forth in the
Prospectus; and
(m) To take such steps as shall be necessary to
ensure that neither the Company nor any subsidiary shall
become an "investment company" within the meaning of such term
under the United States Investment Company Act of 1940 and the
rules and regulations of the Commission thereunder.
13.
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6. Expenses. The Company agrees to pay (a) the costs
incident to the authorization, issuance, sale and delivery of the Stock and any
taxes payable in that connection; (b) the costs incident to the preparation,
printing and filing under the Securities Act of the Registration Statement and
any amendments and exhibits thereto; (C) the costs of distributing the
Registration Statement as originally filed and each amendment thereto and any
post-effective amendments thereof (including, in each case, exhibits), any
Preliminary Prospectus, the Prospectus and any amendment or supplement to the
Prospectus, all as provided in this Agreement; (d) the costs of producing and
distributing this Agreement, the Agreement Between U.S. Underwriters and
International Managers, any Supplemental Agreement Among U.S. Underwriters and
any other related documents in connection with the offering, purchase, sale and
delivery of the Stock; (e) the filing fees incident to securing any required
review by the National Association of Securities Dealers, Inc. of the terms of
sale of the Stock; (f) the Nasdaq National Market application fee; (g) the fees
and expenses of qualifying the Stock under the securities laws of the several
jurisdictions as provided in Section 5(h) and of preparing, printing and
distributing a Blue Sky Memorandum (including related fees and expenses of
counsel to the U.S. Underwriters to the extent reasonable and customary for such
work); and (h) all other costs and expenses incident to the performance of the
obligations of the Company under this Agreement; provided that, except as
specifically provided in this Section 6 and in Section 11, the U.S. Underwriters
shall pay the fees, costs and expenses of their counsel and their other costs
and expenses and any transfer taxes on the Stock which they may sell and the
expenses of advertising any offering of the Stock made by the U.S. Underwriters.
7. Conditions of U.S. Underwriters' Obligations. The
respective obligations of the U.S. Underwriters hereunder are subject to the
accuracy, when made and on each Delivery Date, of the representations and
warranties of the Company contained herein, to the performance by the Company of
its obligations hereunder, and to each of the following additional terms and
conditions; provided, however, that the conditions set forth in Sections 7(e),
7(f) and 7(g) shall not apply in connection with the sale of Option Stock on the
Second Delivery Date:
(a) The Prospectus shall have been timely filed with
the Commission in accordance with Section 5(a); no stop order
suspending the effectiveness of the Registration Statement or
any part thereof shall have been issued and no proceeding for
that purpose shall have been initiated or threatened by the
Commission; and any request of the Commission for inclusion of
additional information in the Registration Statement or the
Prospectus or otherwise shall have been complied with.
(b) No U.S. Underwriter or International Manager
shall have discovered and disclosed to the Company on or prior
to such Delivery Date that the Registration Statement or the
Prospectus or any amendment or supplement thereto contains an
untrue statement of a fact which, in the opinion of Brobeck,
Phleger & Harrison LLP, counsel for the U.S. Underwriters, is
material or omits to state a fact which, in the opinion of
such counsel, is material and is required to be stated therein
or is necessary to make the statements therein not misleading.
14.
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(c) All corporate proceedings and other legal matters
incident to the authorization, form and validity of this
Agreement, the International Underwriting Agreement, the
Stock, the Registration Statement and the Prospectus, and all
other legal matters relating to this Agreement and the
transactions contemplated hereby shall be reasonably
satisfactory in all material respects to counsel for the U.S.
Underwriters, and the Company shall have furnished to such
counsel all documents and information that they may reasonably
request to enable them to pass upon such matters.
(d) Wilson Sonsini Goodrich & Rosati, Professional
Corporation, shall have furnished to the Representatives its
written opinion, as counsel to the Company, addressed to the
U.S. Underwriters and dated such Delivery Date, in form and
substance reasonably satisfactory to the Representatives, to
the effect that:
(i) The Company has been duly incorporated and
is validly existing as a corporation in good standing
under the laws of the state of Delaware, is qualified
to do business and is in good standing as a foreign
corporation in each jurisdiction in which the failure
to be so qualified would have a material adverse
effect on the Company's business, financial
condition, or results of operations and has all power
and authority necessary to own or hold its properties
and conduct the business in which it is engaged;
(ii) The Company has an authorized
capitalization as set forth under the caption
"Capitalization" in the Prospectus, and all of the
issued shares of capital stock of the Company
(including the shares of Stock being delivered on
such Delivery Date) have been duly authorized and
validly issued, are fully paid and non-assessable and
conform to the description thereof contained in the
Prospectus;
(iii) There are no preemptive or other rights to
subscribe for or to purchase, nor any restriction
upon the voting or transfer of, any shares of the
Stock pursuant to the Company's charter or by-laws or
any agreement or other instrument known to such
counsel;
(iv) The building in which the Company's
principal executive offices are located is held by
the Company under valid, subsisting and enforceable
leases, with such exceptions that are not material
and do not interfere with the use made and proposed
to be made of such property and buildings by the
Company;
(v) To such counsel's knowledge and other than
as set forth in the Prospectus, there are no legal or
governmental proceedings pending to which the Company
is a party or of which any property or assets of the
Company is the subject which are required to be
described in the Prospectus;
15.
<PAGE>
(vi) The Registration Statement was declared
effective under the Securities Act as of the date and
time specified in such opinion, the Prospectus was
filed with the Commission pursuant to the
subparagraph of Rule 424(b) of the Rules and
Regulations specified in such opinion on the date
specified therein and no stop order suspending the
effectiveness of the Registration Statement has been
issued and, to the knowledge of such counsel, no
proceeding for that purpose is pending or threatened
by the Commission;
(vii) The Registration Statement and the
Prospectus and any further amendments or supplements
thereto made by the Company prior to such Delivery
Date (other than the financial statements and notes
thereto, financial schedules and other financial and
statistical data included therein, as to which such
counsel need express no opinion) comply as to form in
all material respects with the requirements of the
Securities Act and the Rules and Regulations;
(viii) The statements contained in the Prospectus
under the caption "Certain United States Federal Tax
Considerations for Non-U.S. Holders of Common Stock,"
insofar as they describe federal statutes, rules and
regulations, constitute a fair summary thereof;
(ix) To such counsel's knowledge, there are no
contracts or other documents which are required to be
described in the Prospectus or filed as exhibits to
the Registration Statement by the Securities Act or
by the Rules and Regulations which have not been so
described or filed;
(x) This Agreement and the International
Underwriting Agreement have each been duly
authorized, executed and delivered by the Company and
each constitutes a valid and binding obligation of
the Company enforceable against the Company in
accordance with its terms, subject to the effects of
bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium and other similar laws
relating to or affecting creditors' rights generally,
general equitable principles (whether considered in a
proceeding in equity or at law) or an implied
covenant of good faith and fair dealing;
(xi) The issue and sale of the shares of Stock
being delivered on such Delivery Date by the Company
and the compliance by the Company with all of the
provisions of this Agreement and the International
Underwriting Agreement and the consummation of the
transactions contemplated hereby and thereby will not
conflict with or result in a breach or violation of
any of the terms or provisions of, or constitute a
default under, any material indenture, mortgage, deed
of trust, loan agreement or other agreement or
instrument known to such counsel to which the Company
is a party or by which the
16.
<PAGE>
Company is bound or to which any of the property or
assets of the Company is subject (but excluding any
such document or agreement which is governed by the
laws of any foreign jurisdiction), nor will such
actions result in any violation of the provisions of
the charter or by-laws of the Company or any statute
or any order, rule or regulation known to such
counsel of any court or governmental agency or body
having jurisdiction over the Company or any of its
properties or assets; and, except for the
registration of the Stock under the Securities Act
and such consents, approvals, authorizations,
registrations or qualifications as may be required
under the Exchange Act and applicable state
securities laws in connection with the purchase and
distribution of the Stock by the U.S. Underwriters
and the International Managers, no consent, approval,
authorization or order of, or filing or registration
with, any federal or state court or governmental
agency or body is required for the execution,
delivery and performance of this Agreement or the
International Underwriting Agreement by the Company
and the consummation of the transactions contemplated
hereby and thereby; and
(xii) To such counsel's knowledge, and except as
disclosed in the Prospectus, there are no contracts,
agreements or understandings between the Company and
any person granting such person the right (other than
rights which have been waived or satisfied) to
require the Company to file a registration statement
under the Securities Act with respect to any
securities of the Company owned or to be owned by
such person or to require the Company to include such
securities in the securities registered pursuant to
the Registration Statement or in any securities being
registered pursuant to any other registration
statement filed by the Company under the Securities
Act.
In rendering such opinion, such counsel may I)s(i)ate
that its opinion is limited to matters governed by the Federal
laws of the United States of America, the laws of the State of
California and the General Corporation Law of the State of
Delaware and that such counsel is not admitted in the State of
Delaware; (ii) state that no opinion is given with respect to
the matters on which the Company's other counsel are opining,
and (iii) limit the disclosure or publication of the opinion
to the U.S. Underwriters and International Managers. Such
counsel shall also have furnished to the Representatives a
written statement, addressed to the U.S. Underwriters and
dated such Delivery Date, in form and substance satisfactory
to the Representatives, to the effect that (x) such counsel
has acted as counsel to the Company on a regular basis, has
acted as counsel to the Company in connection with previous
financing transactions and has acted as counsel to the Company
in connection with the preparation of the Registration
Statement, and (y) based on the foregoing, no facts have come
to the attention of such counsel which lead it to believe that
the Registration Statement, as of the Effective Date,
contained any untrue statement of a material fact or omitted
to state a material fact required to be stated therein or
necessary in order to make the statements therein
17.
<PAGE>
not misleading, or that the Prospectus as of its date or as of
such Delivery Date contains any untrue statement of a material
fact or omits to state a material fact required to be stated
therein or necessary in order to make the statements therein,
in light of the circumstances under which they were made, not
misleading.
(e) The Representatives shall have received from
Brobeck, Phleger & Harrison LLP, counsel for the U.S.
Underwriters, such opinion or opinions, dated such Delivery
Date, with respect to the issuance and sale of the Stock, the
Registration Statement, the Prospectus and other related
matters as the Representatives may reasonably require, and the
Company shall have furnished to such counsel such documents as
they reasonably request for the purpose of enabling them to
pass upon such matters.
(f) At the time of execution of this Agreement, the
Representatives shall have received from Ernst & Young LLP, a
letter, in form and substance satisfactory to the
Representatives, addressed to the U.S. Underwriters and dated
the date hereof I)c(i)nfirming that they are independent
public accountants within the meaning of the Securities Act
and are in compliance with the applicable requirements
relating to the qualification of accountants under Rule 2-01
of Regulation S-X of the Commission and (ii) stating, as of
the date hereof (or, with respect to matters involving changes
or developments since the respective dates as of which
specified financial information is given in the Prospectus, as
of a date not more than five days prior to the date hereof),
the conclusions and findings of such firm with respect to the
financial information and other matters ordinarily covered by
accountants' "comfort letters" to underwriters in connection
with registered public offerings.
(g) With respect to the letter of Ernst & Young LLP,
referred to in the preceding paragraph and delivered to the
Representatives concurrently with the execution of this
Agreement (the "initial letter"), the Company shall have
furnished to the Representatives a letter (the "bring-down
letter") of such accountants, addressed to the U.S.
Underwriters and dated such Delivery Date (i) confirming that
they are independent public accountants within the meaning of
the Securities Act and are in compliance with the applicable
requirements relating to the qualification of accountants
under Rule 2-01 of Regulation S-X of the Commission, (ii)
stating, as of the date of the bring-down letter (or, with
respect to matters involving changes or developments since the
respective dates as of which specified financial information
is given in the Prospectus, as of a date not more than five
days prior to the date of the bring-down letter), the
conclusions and findings of such firm with respect to the
financial information and other matters covered by the initial
letter and (iii) confirming in all material respects the
conclusions and findings set forth in the initial letter.
(h) The Company shall have furnished to the
Representatives a certificate of the Company, dated such
Delivery Date, executed by its Chairman of the Board,
18.
<PAGE>
its President or a Vice President and its chief financial
officer stating, on behalf of the Company, that:
(i) The representations, warranties and
agreements of the Company in Section 1 are true and
correct as of such Delivery Date; the Company has
complied with all its agreements contained herein;
and the conditions set forth in Sections 7(a) and
7I)h(i)ve been fulfilled; and
(ii) They have carefully examined the
Registration Statement and the Prospectus and (A) as
of the Effective Date, the Registration Statement and
Prospectus did not include any untrue statement of a
material fact and did not omit to state a material
fact required to be stated therein or necessary to
make the statements therein not misleading, and (B)
since the Effective Date no event has occurred which
should have been set forth in a supplement or
amendment to the Registration Statement or the
Prospectus.
(i) (i) Neither the Company nor any of its
subsidiaries shall have sustained since the date of the latest
audited financial statements included in the Prospectus any
loss or interference with its business from fire, explosion,
flood or other calamity, whether or not covered by insurance,
or from any labor dispute or court or governmental action,
order or decree, otherwise than as set forth or contemplated
in the Prospectus or (ii) since such date there shall not have
been any change in the capital stock or long-term debt of the
Company or any of its subsidiaries or any change, or any
development involving a prospective change, in or affecting
the general affairs, management, consolidated financial
position, stockholders' equity or results of operations of the
Company and its subsidiaries, otherwise than as set forth or
contemplated in the Prospectus, the effect of which, in any
such case described in clause (i) or (ii), is, in the judgment
of the Representatives, so material and adverse as to make it
impracticable or inadvisable to proceed with the public
offering or the delivery of the Stock being delivered on such
Delivery Date on the terms and in the manner contemplated in
the Prospectus.
(j) Subsequent to the execution and delivery of this
Agreement there shall not have occurred any of the following:
(i) trading in securities generally on the New York Stock
Exchange or the American Stock Exchange or in the
over-the-counter market, or trading in any securities of the
Company on any exchange or in the over-the-counter market,
shall have been suspended or minimum prices shall have been
established on any such exchange or such market by the
Commission, by such exchange or by any other regulatory body
or governmental authority having jurisdiction, (ii) a banking
moratorium shall have been declared by Federal or state
authorities, (iii) the United States shall have become engaged
in hostilities, there shall have been an escalation in
hostilities involving the United States or there shall have
been a declaration of a national emergency or war by the
United States or (iv) there
19.
<PAGE>
shall have occurred such a material adverse change in general
economic, political or financial conditions (or the effect of
international conditions on the financial markets in the
United States shall be such) as to make it, in the judgment of
a majority in interest of the several U.S. Underwriters,
impracticable or inadvisable to proceed with the public
offering or delivery of the Stock being delivered on such
Delivery Date on the terms and in the manner contemplated in
the Prospectus.
(k) The Nasdaq National Market shall have approved
the Stock for inclusion, subject only to official notice of
issuance and evidence of satisfactory distribution.
(l) The closing under the International Underwriting
Agreement shall have occurred concurrently with the closing
hereunder on the First Delivery Date.
(m) Wilson Sonsini Goodrich & Rosati, Professional
Corporation, shall have furnished to the Representatives on
the First Delivery Date its written opinion, as U.S. counsel
to each of MagiNet Israel, Inc., a California corporation
("MagiNet Israel"), MagiNet South Africa, Inc., a California
corporation ("MagiNet South Africa"), Pacific Pay Video
Limited, a California corporation ("PPVL"), and MagiNet
International Corporation, a California corporation ("MagiNet
International"), addressed to the U.S. Underwriters, in form
and substance reasonably satisfactory to the Representatives,
to the effect that:
(i) Each of MagiNet Israel, MagiNet South
Africa, PPVL, and MagiNet International
(collectively, the "California Subsidiaries") has
been duly incorporated and is validly existing as a
corporation in good standing under the laws of the
State of California and has all power and authority
necessary under California law to hold their
respective properties and conduct their respective
businesses;
(ii) MagiNet Israel has an authorized
capitalization of 1,000 shares of Common Stock, of
which 100 shares are issued and outstanding; MagiNet
South Africa has an authorized capitalization of 100
shares of Common Stock, all of which are issued and
outstanding; PPVL has an authorized capitalization of
15,000,000 shares of Common Stock, of which 100
shares are issued and outstanding, and 8,978,930
shares of Preferred Stock, none of which are
outstanding; and MagiNet International has an
authorized capitalization of 1,000 shares of Common
Stock, of which 100 shares are issued and
outstanding. The Company owns all the outstanding
shares of each of the California Subsidiaries free
and clear of all liens, encumbrances, equities or
claims, except for liens and pledges established in
connection with the Company's senior secured debt.
All such outstanding shares have been duly authorized
and validly issued, and are fully paid and
nonassessable;
20.
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(iii) There are no preemptive or other rights to
subscribe for or purchase, nor any restrictions upon
the voting or transfer of, any shares of stock of
such California Subsidiary pursuant to the charter or
by-laws of such California Subsidiary or any
agreement or other instrument known to such counsel.
(iv) To such counsel's knowledge and other than
as set forth in the Prospectus, there are no legal or
governmental proceedings pending to which such
California Subsidiary is a party or of which any
property or assets of such California Subsidiary are
subject which are required to be described in the
Prospectus.
(n) For each of MagiNet Israel, MagiNet South Africa,
MagiNet Australia Pty Limited, MagiNet (H.K.) Ltd., MagiNet,
KK Ltd., MagiNet New Zealand Limited, MagiNet (Singapore) Pte.
Ltd., MagiNet Taiwan, Inc., and Pacific Pay Video (Thailand)
Co. Ltd. (collectively, the "Foreign Subsidiaries"), the
Representatives shall have received on the First Delivery Date
an opinion of foreign counsel for each such Foreign Subsidiary
in form and substance reasonably satisfactory to the
Representatives, as is customary in local practice in such
jurisdiction, and subject to such reasonable qualifications as
such local counsel shall require to the effect that:
(i) Such Foreign Subsidiary has been duly
incorporated and is validly existing and in good
standing and duly qualified to conduct business under
the laws of the country in which it is incorporated
and/or operates, provided that with respect to the
due incorporation and valid existence of MagiNet
Israel and MagiNet South Africa, local counsel shall
not be required to deliver such opinion, which shall
be delivered by Wilson Sonsini Goodrich & Rosati,
Professional Corporation as described above;
(ii) The capitalization of such Foreign
Subsidiary is as set forth in such opinion, including
the number of shares authorized for issuance and the
number of shares outstanding as of the First Delivery
Date (excluding MagiNet Israel and MagiNet South
Africa, which opinion shall be delivered by Wilson
Sonsini Goodrich & Rosati, Professional Corporation,
as described above);
(iii) All issued shares of the capital stock of
such Foreign Subsidiary have been duly authorized and
validly issued and are fully paid and nonassessable
(excluding MagiNet Israel and MagiNet South Africa,
which opinion will be delivered by Wilson Sonsini
Goodrich & Rosati, Professional Corporation, as
described above) and, subject to the liens and
encumbrances established in connection with the
Company's senior secured debt, are owned directly or
indirectly by the Company;
21.
<PAGE>
(iv) There are no preemptive rights or other
rights to subscribe for or to purchase, nor any
restrictions upon the voting or transfer of, any
shares of the capital stock of such Foreign
Subsidiary pursuant to the charter documents of any
such Foreign Subsidiary (except for MagiNet Israel
and MagiNet South Africa, which opinion will be
delivered by Wilson Sonsini Goodrich & Rosati,
Professional Corporation, as described above) or any
agreement or other instrument known to such counsel;
(v) To the best of such counsel's knowledge,
there are no legal or governmental proceedings
pending to which such Foreign Subsidiary is a party
or of which any property or assets of such Foreign
Subsidiary are subject which, if determined adversely
to such foreign subsidiary, would have a material
adverse effect on the business, operating results or
financial condition of such Foreign Subsidiary;
(vi) The issue and sale to the public of shares
of the Company's Common Stock pursuant to the
Registration Statement will not result in a breach or
violation of any of the terms or provisions of any
contract material to such Foreign Subsidiary's
business, operating results or financial condition,
which contracts shall be listed on a schedule
reasonably satisfactory to the Representatives
attached to such opinion, nor will such actions
result in any violation of the charter or bylaws of
such Foreign Subsidiary; and
(vii) Each of the hotel contracts to which such
Foreign Subsidiary is a party, to be identified in a
schedule of such contracts reasonably satisfactory to
the Representatives, constitutes a legal, valid, and
binding obligation of the parties thereto,
enforceable in accordance with its terms.
(o) Bruckhaus Westrick Stegeman shall have furnished
to the Representatives on the First Delivery Date its written
opinion, as counsel to each of MagiNet GmbH and Prodac
(collectively, the "German Subsidiaries"), in form and
substance reasonably satisfactory to the Representatives, as
is customary in local practice in Germany, and subject to such
reasonable qualifications as such counsel shall require to the
effect that:
(i) Each of the German Subsidiaries has been
duly incorporated and is validly existing and duly
qualified to conduct business in good standing under
the laws of Germany;
(ii) The capitalization of each of the German
Subsidiaries is as set forth in such opinion,
including the number of shares authorized for
issuance and the number of shares outstanding as of
the First Delivery Date;
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(iii) All issued shares of the capital stock of each of the
German Subsidiaries have been duly authorized and validly issued
and are fully paid and nonassessable and, subject to the liens
and encumbrances established in connection with the Company's
senior secured debt, are owned directly or indirectly by the
Company or MagiNet GmbH, as the case may be;
(iv) There are no preemptive rights or other rights to
subscribe for or to purchase, nor any restrictions upon the
voting or transfer of, any shares of the capital stock of either
of the Germany Subsidiaries pursuant to the charter documents of
such German Subsidiary or any agreement or other instrument known
to such counsel;
(v) To the best of such counsel's knowledge, there are no
legal or governmental proceedings pending to which either German
Subsidiary is a party or of which any property or assets of
either German Subsidiary are subject which, if determined
adversely to such German Subsidiary, would have a material
adverse effect on the business, operating results or financial
condition of such German Subsidiary;
(vi) The issued and sale to the public of shares of the
Company's Common Stock pursuant to the Registration Statement
will not result in a breach or violation of any of the terms or
provisions of any contract material to such German Subsidiary's
business, operating results or financial condition, which
contracts shall be listed on a schedule reasonably satisfactory
to the Representatives attached to such opinion, nor will such
actions result in any violation of the charter or bylaws of such
German Subsidiary; and
(vii) Each of the hotel contracts to which Prodac or any
subsidiary of Prodac is a party, to be identified in a schedule
of such contracts reasonably satisfactory to the Representatives,
constitutes a legal, valid, and binding obligation of the
parties thereto, enforceable in accordance with its terms.
All opinions, letters, evidence and certificates mentioned above or
elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if they are in form and substance reasonably satisfactory
to counsel for the U.S. Underwriters.
8. Indemnification and Contributions.
(a) The Company shall indemnify and hold harmless each U.S.
Underwriter, its officers and employees and each person, if any, who controls
any U.S. Underwriter within the meaning of the Securities Act, from and against
any loss, claim, damage or liability, joint or several, or any action in respect
thereof (including, but not limited to, any loss, claim, damage, liability or
action relating to purchases and sales of Stock), to which that U.S.
Underwriter, officer, employee
23.
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or controlling person may become subject, under the Securities Act or otherwise,
insofar as such loss, claim, damage, liability or action arises out of, or is
based upon, I)a(i)y untrue statement or alleged untrue statement of a material
fact contained (A) in any Preliminary Prospectus, the Registration Statement or
the Prospectus or in any amendment or supplement thereto or (B) in any blue sky
application or other document prepared or executed by the Company (or based upon
any written information furnished by the Company) specifically for the purpose
of qualifying any or all of the Stock under the securities laws of any state or
other jurisdiction (any such application, document or information being
hereinafter called a "Blue Sky Application"), (ii) the omission or alleged
omission to state in any Preliminary Prospectus, the Registration Statement or
the Prospectus, or in any amendment or supplement thereto, or in any Blue Sky
Application any material fact required to be stated therein or necessary to make
the statements therin not misleading or (iii) any act or failure to act or any
alleged act or failure to act by any U.S. Underwriter in connection with, or
relating in any manner to, the Stock or the offering contemplated hereby, and
which is include as part of or referred to in any loss, claim, damage, liability
or action arising out of or based upon matters covered by clause (i) or (ii)
above (provided that the Company shall not be liable under this clause (iii) to
the extent that it is determined in a final judgment by a court of competent
jurisdiction that such loss, claim, damage, liability or action resulted
directly from any such acts or failures to act undertaken or omitted to be taken
by such U.S. Underwriter through its gross negligence or willful misconduct),
and shall reimburse each U.S. Underwriter and each such officer, employee or
controlling person promptly upon demand for any legal or other expenses
reasonably incurred by that U.S. Underwriter, officer, employee or controlling
person in connection with investigating or defending or preparing to defend
against any such loss, claim, damage, liability or action as such expenses are
incurred; provided, however, that the Company shall not be liable in any such
case to the extent that any such loss, claim, damage, liability or action arises
out of, or is based upon, any untrue statement or alleged untrue statement or
omission or alleged omission made in any Preliminary Prospectus, the
Registration Statement or the Prospectus, or in any such amendment or
supplement, or in any Blue Sky Application, in reliance upon and in conformity
with written information concerning such U.S. Underwriter furnished to the
Company through the Representatives by or on behalf of any U.S. Underwriter
specifically for inclusion therin; and provided further that as to any
Preliminary Prospectus this indemnity agreement shall not inure to the benefit
of any U.S. Underwriter to the extent that any such loss, claim, damage,
liability or action arises out of, or is based upon, any untrue statement or
alleged untrue statement or omission or alleged omission made in any Preliminary
Prospectus if a copy of the Prospectus was not sent to such U.S. Underwriter as
required by the Securities Act and if the untrue statement or omission has been
corrected in the Prospectus unless such failure to send a Prospectus resulted
from non-compliance by the Company with Section 5(c) hereof. The foregoing
indemnity agreement is in addition to any liability which the Company may
otherwise have to any U.S. Underwriter or to any officer, employee or
controlling person of that U.S. Underwriter.
(b) Each U.S. Underwriter, severally and not jointly, shall
indemnify and hold harmless the Company, its officers and employees, each of its
directors, and each person, if any, who controls the Company within the meaning
of the Securities Act, from and against any loss, claim, damage or liability,
joint or several, or any action in respect thereof, to which the Company or any
24.
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such director, officer or controlling person may become subject, under the
Securities Act or otherwise, insofar as such loss, claim, damage, liability or
action arises out of, or is based upon, (i) any untrue statement or alleged
untrue statement of a material fact contained in any Preliminary Prospectus, the
Registration Statement or the Prospectus or in any amendment or supplement
thereto, or (ii) the omission or alleged omission to state in any Preliminary
Prospectus, the Registration Statement of the Prospectus, or in any amendment or
supplement thereto, or in any Blue Sky Application any material fact required to
be stated therein or necessary to make the statements therein not misleading,
but in each case only to the extent that the untrue statement or alleged untrue
statement or omission or alleged omission was made in reliance upon and in
conformity with written information concerning such U.S. Underwriter furnished
to the Company through the Representatives by or on behalf of the U.S.
Underwriter specifically for inclusion therein, and shall reimburse the Company
and any such director, officer or controlling person for any legal expenses
reasonably incurred by the Company or any such director, officer or controlling
person in connection with investigating or defending or preparing to defend
against any such loss, claim damage, liability or action as such expenses are
incurred. The foregoing indemnity agreement is in addition to any liability
which any U.S. Underwriter may otherwise have to the Company or any such
director, officer, employee or controlling person.
(c) Promptly after receipt by an indemnified party under this Section
8 notice of any claim or the commencement of any action, the indemnified party
shall, if a claim in respect thereof is to be made against the indemnifying
party under this Section 8, notify the indemnifying party in writing of the
claim or the commencement of that action; provided, however, that the failure to
notify the indemnifying party shall not relieve it from any liability which it
may have under this Section 8 except to the extent it has been material
prejudiced by such failure and, provided further, that the failure to notify the
indemnifying party shall not relieve it from any liability which it may have to
an indemnified party otherwise than under this Section 8. If any such claim or
action shall be brought against an indemnified party, and it shall notify the
indemnifying party thereof, the indemnifying party shall be entitled to
participate therein and, to the extent that it wishes, jointly with any other
similarly notified indemnifying party, to assume the defense thereof with
counsel reasonably satisfactory to the indemnified party. After notice from the
indemnifying party to the indemnified party of its election to assume the
defense of such claim or action indemnified party shall not be liable to the
indemnified party under this Section 8 for any legal or other expenses
subsequently incurred by the indemnified party in connection with the defense
thereof other than reasonable costs of investigation; provided, however, that
the Representatives shall have the right to employ counsel to represent jointly
the Representatives and those other U.S. Underwriters and their respective
officers, employees and controlling persons who may be subject to liability
arising out of any claim in respect of which indemnity may be sought by the U.S.
Underwriters against the Company under this Section 8 if, in the reasonable
judgement of the Representatives, it is advisable for the Representatives and
those U.S. Underwriters, officers, employees and controlling persons to be
jointly represented by separate counsel, and in that event the reasonable fees
and expenses of such separate counsel shall be paid by the Company. No
indemnifying party shall (i) without the prior written consent of the
indemnified parties (which consent shall not be unreasonably withheld), settle
or compromise or consent to the entry of any judgement with respect to any
pending or threatened
25.
<PAGE>
claim, action, suit or proceedings in respect of which indemnification or
contribution may be sought hereunder (whether or not the indemnified parties are
actual or potential parties to such claim or action) unless such settlement,
compromise or consent includes an unconditional release of each indemnified
party from all liability arising out of such claim, action, suit or proceedings,
or (ii) be liable for any settlement of any such action effected without its
written consent (which consent shall not be unreasonably withheld), but if
settled with the consent of the indemnifying party or if there be a final
judgement of the plaintiff in any such action, the indemnifying party agrees to
indemnify and hold harmless any indemnified party from and against any loss or
liability by reason of such settlement or judgement.
(d) If the indemnification provided for in this Section 8 shall for
any reason be unavailable to or insufficient to hold harmless an indemnified
party under Section 8(a) or 8(b) in respect of any loss, claim, damage or
liability, or any action in respect thereof, referred to therein, then each
indemnifying party shall, in lieu of indemnifying such indemnified party,
contribute to the amount paid or payable by such indemnified party as a result
of such loss, claim, damage or liability, or action in respect thereof, (i) in
such proportion as shall be appropriate to reflect the relative benefits
received by the Company on the one hand and the U.S. Underwriters on the other
from the offering of the Stock or (ii) if the allocation provided by clause (i)
above is not permitted by applicable law, in such proportion as is appropriate
to reflect not only the relative benefits referred to in clause (i) above but
also the relative fault of the Company on the one hand and the U.S. Underwriters
on the other with respect to the statements or omissions which resulted in such
loss, claim, damage or liability, or action in respect thereof, as well as any
other relevant equitable considerations. The relative benefits received by the
Company on the one hand and the U.S. Underwriters on the other with respect to
such offering shall be deemed to be in the same proportion as the total net
proceeds from the offering of the Stock purchased under this Agreement (before
deducting expenses) received by the Company on the one hand, and the total
underwriting discounts and commissions received by the U.S. Underwriters with
respect to the shares of the Stock purchased under this Agreement, on the other
hand, bear to the total gross proceeds from the offering of the shares of the
Stock under this Agreement, in each case as set forth in the table on the cover
page of the Prospectus. The relative fault shall be determined by reference to
whether the untrue or alleged untrue statement of a material fact or omission or
alleged omission to state a material fact relates to information supplied by the
Company or the U.S. Underwriters, the intent of the parties and their relative
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The Company and the U.S. Underwriters agree that it would
not be just and equitable if contributions pursuant to this Section 8(d) were to
be determined by pro rata allocation (even if the U.S. Underwriters were treated
as one entity for such purpose) or by any other method of allocation which does
not take into account the equitable considerations referred to herein. The
amount paid or payable by an indemnified party as a result of the loss, claim,
damage or liability, or action in respect thereof, referred to above in this
Section 8 shall be deemed to include, for purposes of this Section 8(d), any
legal or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 8(d), no U.S. Underwriter shall
be required to contribute any amount in excess of the amount by which the total
price at which the Stock underwritten by it and distributed to the public was
offered
26.
<PAGE>
to the public exceeds the amount of any damages which such U.S. Underwriter has
otherwise paid or become liable to pay by reason of any untrue or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The U.S. Underwriters' obligations to contribute
as provided in this Section 8(d) are several in proportion to their respective
underwriting obligations and not joint.
(e) The U.S. Underwriters severally confirm that the statements with
respect to the public offering of the Stock by the U.S. Underwriters set forth
on the cover page of, the legend concerning over-allotments on the inside front
cover page of and the concession and reallowance figures appearing under the
caption "Underwriting" in, the Prospectus are correct, and the U.S. Underwriters
confirm and the Company acknowledges that such statements constitute the only
information concerning such U.S. Underwriters furnished in writing to the
Company by or on behalf of the U.S. Underwriters specifically for inclusion in
the Registration Statement and the Prospectus.
9. Defaulting U.S. Underwriters.
If, on either Delivery Date, any U.S. Underwriter defaults in the
performance of its obligations under this Agreement, the remaining
non-defaulting U.S. Underwriters shall be obligated to purchase the Stock which
the defaulting U.S. Underwriter agreed but failed to purchase on such Delivery
Date in the respective proportions which the number of shares of the Firm Stock
set opposite the name of each remaining non-defaulting U.S. Underwriter in
Schedule 1 hereto bears to the total number of shares of the Firm Stock set
opposite the names of all the remaining non-defaulting U.S. Underwriters in
Schedule 1 hereto; provided, however, that the remaining non-defaulting U.S.
Underwriters shall not be obligated to purchase any of the Stock on such
Delivery Date if the total number of shares of the Stock which the defaulting
U.S. Underwriter or U.S. Underwriters agreed but failed to purchase on such date
exceeds 9.09% of the total number of shares of the Stock to be purchased on such
Delivery Date, and any remaining non-defaulting U.S. Underwriter shall not be
obligated to purchase more than 110% of the number of shares of the Stock which
it agreed to purchase on such Delivery Date pursuant to the terms of Section 2.
If the foregoing maximums are exceeded, the remaining non-faulting U.S.
Underwriters, or those other underwriters satisfactory to the Representatives
who so agree, shall have the right, but shall not be obligated, to purchase, in
such proportion as may be agreed upon among them, all the Stock to be purchased
on such Delivery Date. If the remaining U.S. Underwriters or other underwriters
satisfactory to the Representatives do not elect to purchase the shares which
the defaulting U.S. Underwriters or U.S. Underwriters agreed but failed to
purchase on such Delivery Date, this Agreement (or, with respect to the Second
Delivery Date, the obligation of the U.S. Underwriters to purchase, and of the
Company to sell, the Option Stock) shall terminate without liability on the
part of any non-defaulting U.S. Underwriter or the Company, except that the
Company will continue to be liable for the payment of expenses to the extent set
forth in Sections 6 and 11. As used in this Agreement, the term "U.S.
Underwriter" includes, for all purposes of this Agreement unless the context
requires otherwise, any party not listed in Schedule 1 hereto who, pursuant to
this Section 9, purchases Firm Stock which a defaulting U.S. Underwriter agreed
but failed to purchase.
27.
<PAGE>
Nothing contained herein shall relieve a defaulting U.S. Underwriter
of any liability it may have to the Company for damages caused by its default.
If other underwriters are obligated or agree to purchase the Stock of a
defaulting or withdrawing U.S. Underwriter, either the Representatives or the
Company may postpone the Delivery Date for up to seven full business days in
order to effect any changes that in the opinion of counsel for the Company or
counsel for the U.S. Underwriters may be necessary in the Registration
Statement, the Prospectus or in any other document or arrangement.
10. Termination. The obligations of the U.S. Underwriters hereunder
may be terminated by the Representatives by notice given to and received by the
Company prior to delivery of and payment for the Firm Stock if, prior to that
time, any of the events described in Sections 7I)o(i) 7(j) shall have occurred
or if the U.S. Underwriters shall decline to purchase the Stock for any reason
permitted under this Agreement.
11. Reimbursement of U.S. Underwriters' Expenses. If the Company
shall fail to tender the Stock for delivery to the U.S. Underwriters by reason
of any failure, refusal or inability on the part of the Company to perform any
agreement on its part to be performed, or because any other condition of the
U.S. Underwriters' obligations hereunder required to be fulfilled by the Company
is not fulfilled, the Company will reimburse the U.S. Underwriters for all
reasonable out-of-pocket expenses (including fees and disbursements of counsel)
incurred by the U.S. Underwriters in connection with this Agreement and the
proposed purchase of the Stock, and upon demand the Company shall pay the full
amount thereof to the Representatives. If this Agreement is terminated pursuant
to Section 10 by reason of the default of one or more U.S. Underwriters, the
Company shall not be obligated to reimburse any defaulting U.S. Underwriter on
account of those expenses.
12. Notices. etc. All statements, request, notices and agreements
hereunder shall be in writing. and;
(a) if to the U.S. Underwriters, shall be delivered or sent by
mail, telex or facsimile transmission to Lehman Brothers Inc., Three
World Financial Center, New York, New York 10285, Attention: Syndicate
Department (Fax: 212-526-6588), with a copy, in the case of any notice
pursuant to Section 8(c), to the Director of Litigation, Office of the
General Counsel, Lehman Brothers Inc., 3 World Financial Center, 10th
Floor, New York, NY 10285;
(b) if to the Company, shall be delivered or sent by mail,
telex or facsimile transmission to the address of the Company set
forth in the Registration Statement, Attention: Kenneth B. Hamlet,
President and Chief Executive Officer (Fax: 408-734-1687) with a copy
to Wilson Sonsini Goodrich & Rosati, Professional Corporation,
Attention: Thomas C. DeFilipps, Esq. (Fax: 415-493-6811);
provided, however, that any notice to an U.S. Underwriter pursuant to Section
8(c) shall be delivered or sent by mail, telex or facsimile transmission to such
U.S. Underwriter at its address set forth in
28.
<PAGE>
its acceptance telex to the Representatives, which address will be supplied to
any other party hereto by the Representatives upon request. Any such statements,
requests, notices or agreements shall take effect at the time of receipt
thereof. The Company shall be entitled to act and rely upon any request,
consent, notice or agreement given or made on behalf of the U.S. Underwriters by
Lehman Brothers Inc., on behalf of the Representatives.
13. Persons Entitled to Benefit of Agreement. This Agreement shall
inure to the benefit of and be binding upon the U.S. Underwriters, the Company,
and their respective successors. This Agreement and the terms and provisions
hereof are for the sole benefit of only those persons, except that (A) the
representatives, warranties, indemnities and agreements of the Company contained
in this Agreement shall also be deemed to be for the benefit of the person or
persons, if any, who control any U.S. Underwriter within the meaning of Section
15 of the Securities Act and for the benefit of each International Manager (and
controlling persons thereof) who offers or sells any shares of Common Stock in
accordance with the terms of the Agreement Between U.S. Underwriters and
International Managers and (B) the indemnity agreement of the U.S. Underwriters
contained in Section 8(b) of this Agreement shall be deemed to be for the
benefit of directors of the Company, officers of the Company who have signed the
Registration Statement and any person controlling the Company within the meaning
of Section 15 of the Securities Act. Nothing in this Agreement is intended or
shall be construed to give any person, other than the persons referred to in
this Section 13, any legal or equitable right, remedy or claim under or in
respect of this Agreement or any provision contained herein.
14. Survival. The respective indemnities, representations, warranties
and agreements of the Company and the U.S. Underwriters contained in this
Agreement or made by or on behalf on them, respectively, pursuant to this
Agreement, shall survive the delivery of and payment for the Stock and shall
remain in full force and effect regardless of any investigation made by or on
behalf of any of them or any person controlling any of them.
15. Definition of the Terms "Business Day" and "Subsidiary". For
purposes of this Agreement, (a) "business day" means any day on which the New
York Stock Exchange, Inc. is open for trading and (b) "subsidiary" has the
meaning set forth in Rule 405 of the Rules and Regulations.
16. Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of California
17. Counterparts. This Agreement may be executed in one or more
counterparts and, if executed in more than one counterpart, the executed
counterparts shall each be deemed to be an original but all such counterparts
shall together constitute one and the same instrument.
18. Headings. The headings herein are inserted for convenience of
reference only and are not intended to be part of, or to affect the meaning or
interpretation of, this Agreement.
29.
<PAGE>
If the foregoing correctly sets forth the agreement between the Company
and the U.S. Underwriters, please indicate your acceptance in the space provided
for that purpose below.
Very truly yours,
MAGINET CORPORATION
By:
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
Accepted:
LEHMAN BROTHERS INC.
HAMBRECHT & QUIST LLC
For themselves and as Representatives
of the several U.S. Underwriters named
in Schedule 1 hereto
BY LEHMAN BROTHERS INC.
By
---------------------
Authorized Representative
<PAGE>
SCHEDULE 1
Number of
U.S. Underwriters Shares
- ----------------- --------
Lehman Brothers Inc.........................................
Hambrecht & Quist LLC.......................................
Total ========
<PAGE>
Exhibit 1.2
1,100,000 shares
MAGINET CORPORATION
Common Stock
INTERNATIONAL UNDERWRITING AGREEMENT
------------------------------------
December ___, 1996
LEHMAN BROTHERS INTERNATIONAL (EUROPE)
HAMBRECHT & QUIST LLC
As Lead Managers of the several
International Managers named in Schedule 1,
c/o Lehman Brothers International (Europe)
1 Broadgate London
EC2M 7HA England
Dear Sirs:
MagiNet Corporation, a Delaware corporation (the "Company"), proposes
to sell 1,100,000 shares (the "Firm Stock") of the Company's Common Stock, par
value $.001 per share (the "Common Stock"), to the International Managers named
in Schedule 1 hereto (the "International Managers"). In addition, the Company
proposes to grant to the International Managers an option to purchase up to an
additional 165,000 shares of the Common Stock on the terms and for the purposes
set forth in Section 3 (the "Option Stock"). The Firm Stock and the Option
Stock, if purchased, are hereinafter collectively called the "Stock." This is
to confirm the agreement concerning the purchase of the Stock from the Company
by the International Managers.
It is understood by all parties that the Company is concurrently
entering into an agreement dated the date hereof (the "U.S. Underwriting
Agreement") providing for the sale by the Company of 5,060,000 shares of Common
Stock (including the over-allotment option thereunder) (the "U.S. Stock")
through arrangements with certain underwriters in the United States (the "U.S.
Underwriters"), for whom Lehman Brothers Inc. and Hambrecht & Quist LLC are
acting as ther representatives (the "Representatives"). The International
Managers and the U.S. Underwriters simultaneously are entering into an agreement
between the U.S. and international underwriting syndicates (the "Agreement
Between U.S. Underwriters and International Managers") which provides for, among
other things, the transfer of shares of Common Stock between the two syndicates.
Two forms of prospectus are to be used in connection with the offering and sale
of shares of Common Stock contemplated by the foregoing, one relating to the
Stock and the other relating to the U.S. Stock. The latter form of prospectus
will be identical to the former except for certain substitute pages as included
in the registration statement and amendments thereto referred to below. Except
as used
<PAGE>
in Sections 2, 3, 4, 9 and 10 herein, and except as the context may otherwise
require, references herein to the Stock shall include all shares of the Common
Stock which may be sold pursuant to either this Agreement or the U.S.
Underwriting Agreement, and references herein to any prospectus whether in
preliminary or final form, and whether as amended or supplemented, shall include
both the U.S. and the international versions thereof.
1 Representations, Warranties and Agreements of the Company. The
Company represents, warrants and agrees that:
(a) A registration statement on Form S-1, and amendments thereto,
with respect to the Stock have (i) been prepared by the Company in
conformity with the requirements of the United States Securities Act of
1933, as amended (the "Securities Act"), and the rules and regulations
(the "Rules and Regulations") of the United States Securities and
Exchange Commission (the "Commission") thereunder, (ii) been filed with
the Commission under the Securities Act and (iii) become effective
under the Securities Act. Copies of such registration statement and the
amendments thereto have been delivered by the Company to you as the
lead managers (the "Lead Managers") of the International Managers. As
used in this Agreement, "Effective Time" means the date and the time as
of which such registration statement, or the most recent post-effective
amendment thereto, if any, was declared effective by the Commission;
"Effective Date" means the date of the Effective Time; "Preliminary
Prospectus" means each prospectus included in such registration
statement, or amendments thereof, before it became effective under the
Securities Act and any prospectus filed with the Commission by the
Company with the consent of the Lead Managers pursuant to Rule 424(a)
of the Rules and Regulations; "Registration Statement" means such
registration statement, as amended at the Effective Time, including all
information contained in the final prospectus filed with the Commission
pursuant to Rule 424(b) of the Rules and Regulations in accordance with
Section 5(a) hereof and deemed to be a part of the registration
statement as of the Effective Time pursuant to paragraph (b) of Rule
430A of the Rules and Regulations; and "Prospectus" means such final
prospectus, as first filed with the Commission pursuant to Rule 424(b)
of the Rules and Regulations. The Commission has not issued any order
preventing or suspending the use of any Preliminary Prospectus.
(b) The Registration Statement conforms, and the Prospectus and
any further amendments or supplements to the Registration Statement or the
Prospectus will, when they become effective (in the case of the Registration
Statement and any amendments thereto) or are filed with the Commission (in the
case of the Prospectus and any amendment or supplement thereto), conform in all
material respects to the requirements of the Securities Act and the Rules and
Regulations and do not and will not, as of the applicable effective date (as to
the Registration Statement and any amendment thereto) and as of the applicable
filing date (as to the Prospectus and any amendment or supplement thereto),
contain an untrue statement of a material fact or
2.
<PAGE>
omit to state a material fact required to be stated therein or necessary to make
the statements therein not misleading; provided that no representation or
warranty is made as to information contained in or omitted from the Registration
Statement or the Prospectus in reliance upon and in conformity with written
information furnished to the Company through the Lead Managers by or on behalf
of any International Manager specifically for inclusion therein.
(c) The Company and each of its subsidiaries (as defined in Section
16) have been duly incorporated and are validly existing as corporations in good
standing under the laws of their respective jurisdictions of incorporation, are
duly qualified to do business and are in good standing as foreign corporations
in each jurisdiction in which the failure to be so qualified would have a
material adverse effect on the Company's business, financial condition, and
results of operations, taken as a whole, have all power and authority to own or
hold their respective properties and to conduct the businesses in which they are
engaged and no proceeding has been instituted in any such jurisdiction revoking,
limiting or curtailing, or seeking to revoke, limit or curtail such power and
authority or qualification.
(d) The Company has an authorized capitalization as set forth under
the heading "Capitalization" in the Prospectus, and all of the issued shares of
capital stock of the Company have been duly and validly authorized and issued,
are fully paid and non-assessable and conform to the description thereof
contained in the Prospectus; and except as disclosed in or contemplated by the
Prospectus or the financial statements of the Company and the related notes
thereto included in the Prospectus all of the issued shares of capital stock of
each subsidiary of the Company have been duly authorized and validly issued and
are fully paid and non-assessable and (except for directors' qualifying shares,
preemptive rights of the Company's joint venture partners, and liens and pledges
established in connection with the Company's senior secured debt) are owned
directly or indirectly by the Company, free and clear of all liens,
encumbrances, equities or claims.
(e) The unissued shares of the Stock to be issued and sold by the
Company to the International Managers hereunder and to the U.S. Underwriters
under the U.S. Underwriting Agreement have been duly authorized and, when issued
and delivered against payment therefor as provided herein and in the U.S.
Underwriting Agreement, will be duly authorized, validly issued, fully paid and
non-assessable; and the Stock will conform to the description thereof contained
in the Prospectus.
(f) This Agreement has been duly authorized, executed and delivered
by the Company and constitutes a valid and binding agreement of the Company
enforceable against the Company in accordance with its terms, subject to the
effects of bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium and other similar laws relating to or affecting creditors' rights
generally, general equitable
3.
<PAGE>
principles (whether considered in a proceeding in equity or at law) or an
implied covenant of good faith and fair dealing.
(g) The execution, delivery and performance of this Agreement and the
U.S. Underwriting Agreement by the Company and the consummation of the
transactions contemplated hereby will not conflict with or result in a breach or
violation of any of the terms or provisions of, or constitute a default under,
any material indenture, mortgage, deed of trust, loan agreement or other
agreement or instrument to which the Company or any of its subsidiaries is a
party or by which the Company or any of its subsidiaries is bound or to which
any of the property or assets of the Company or any of its subsidiaries is
subject, nor will such actions result in any violation of the provisions of the
charter or by-laws of the Company or any of its subsidiaries or any statute or
any order, rule or regulation of any court or governmental agency or body having
jurisdiction over the Company or any of its subsidiaries or any of their
properties or assets; and except for the registration of the Stock under the
Securities Act and such consents, approvals, authorizations, registrations or
qualifications as may be required under the United States Securities and
Exchange Act of 1934, as amended (the "Exchange Act"), and applicable state or
foreign securities laws in connection with the purchase and distribution of the
Stock by the International Managers and the U.S. Underwriters, no consent,
approval, authorization or order of, or filing or registration with, any such
court or governmental agency or body is required for the execution, delivery and
performance of this Agreement or the U.S. Underwriting Agreement by the Company
and the consummation of the transactions contemplated hereby and thereby.
(h) Except as disclosed in the Prospectus, there are no contracts,
agreements or understandings between the Company and any person granting such
person the right (other than rights which have been waived or satisfied) to
require the Company to file a registration statement under the Securities Act
with respect to any securities of the Company owned or to be owned by such
person or to require the Company to include such securities in the securities
registered pursuant to the Registration Statement or in any securities being
registered pursuant to any other registration statement filed by the Company
under the Securities Act.
(i) Except as described in the Registration Statement, the Company
has not sold or issued any shares of Common Stock during the six-month period
preceding the date of the Prospectus, including any sales pursuant to Rule 144A
under, or Regulations D or S of, the Securities Act, other than shares issued
pursuant to employee benefit plans, stock option plans or other employee
compensation plans or pursuant to outstanding options, rights or warrants.
(j) Neither the Company nor any of its subsidiaries has sustained,
since the date of the latest audited financial statements included in the
Prospectus, any material
4.
<PAGE>
loss or interference with its business from fire, explosion, flood or other
calamity, whether or not covered by insurance, or from any labor dispute or
court or governmental action, order or decree, otherwise than as set forth or
contemplated in the Prospectus; and, since such date, there has not been any
change in the capital stock or long-term debt of the Company or any of its
subsidiaries or any material adverse change, or any development involving a
prospective material adverse change, in or affecting the general affairs,
management, consolidated financial position, stockholders' equity or results of
operations of the Company and its subsidiaries taken as a whole, otherwise than
as set forth or contemplated in the Prospectus.
(k) The financial statements (including the related notes and
supporting schedules) filed as part of the Registration Statement or included in
the Prospectus present fairly the financial condition and results of operations
of the entities purported to be shown thereby, at the dates and for the periods
indicated, and have been prepared in conformity with generally accepted
accounting principles applied on a consistent basis throughout the periods
involved.
(l) To the best of the Company's knowledge, Ernst & Young LLP, who
have expressed their opinion with respect to the financial statements of the
Company, whose report appears in the Prospectus and who have delivered the
initial letter referred to in Section 7(f) hereof, are independent public
accountants as required by the Securities Act and the Rules and Regulations.
(m) Except as described in the Prospectus, and subject to the liens
and pledges established in connection with the Company's senior secured debt and
the financing activities of Prodac Prozessdatentechnik GmbH ("Prodac") and the
Company's subsidiaries in Japan and Korea, the Company or the applicable
subsidiary has good and marketable title to all real property and good and
marketable title to all personal property reflected as owned by it in the
financial statements hereinabove described (or elsewhere in the Prospectus), in
each case free and clear of all liens, encumbrances and defects except such as
are described in the Prospectus or such as do not materially and adversely
affect the value of such property and do not materially interfere with the use
made and proposed to be made of such property by the Company and its
subsidiaries; and all real property and buildings held under lease by the
Company and its subsidiaries are held by them under valid, subsisting and
enforceable leases, with such exceptions as are not material and do not
interfere with the use made and proposed to be made of such property and
buildings by the Company and its subsidiaries.
(n) The Company and each of its subsidiaries carry, or are covered
by, insurance in such amounts and covering such risks as is adequate for the
conduct of their respective businesses and the value of their respective
properties and as is
5.
<PAGE>
customary for companies engaged in similar businesses in similar industries and
in similar stages of development.
(o) Except as described in the Prospectus, the Company and each of
its subsidiaries own or possess adequate rights to use all material patents,
patent applications, trademarks, service marks, trade names, trademark
registrations, service mark registrations, copyrights and licenses necessary for
the conduct of their respective businesses and, except as described in the
Prospectus, the Company has no knowledge that the conduct of their respective
businesses will conflict with, and they have not received any notice of any
claim of conflict with, any such rights of others.
(p) There are no legal or governmental proceedings pending to which
the Company or any of its subsidiaries is a party or of which any property or
assets of the Company or any of its subsidiaries is the subject which, if
determined adversely to the Company or any of its subsidiaries, is reasonably
likely to have a material adverse effect on the consolidated financial position,
stockholders' equity, results of operations, business or prospects of the
Company and its subsidiaries, taken as a whole; and to the best of the Company's
knowledge, no such proceedings are threatened or contemplated by governmental
authorities or threatened by others.
(q) There are no contracts or other documents which are required to
be described in the Prospectus or filed as exhibits to the Registration
Statement by the Securities Act or by the Rules and Regulations which have not
been described in the Prospectus or filed as exhibits to the Registration
Statement or incorporated therein by reference as permitted by the Rules and
Regulations.
(r) No relationship, direct or indirect, exists between or among the
Company on the one hand, and the directors, officers, stockholders, customers or
suppliers of the Company on the other hand, which is required to be described in
the Prospectus which is not so described.
(s) No labor disturbance by the employees of the Company exists or,
to the knowledge of the Company, is imminent which could reasonably be expected
to have a material adverse effect on the consolidated financial position,
stockholders' equity, results of operations, business or prospects of the
Company and its subsidiaries taken as a whole.
(t) The Company is in compliance in all material respects with all
presently applicable provisions of the Employee Retirement Income Security Act
of 1974, as amended, including the regulations and published interpretations
thereunder ("ERISA"); no "reportable event" (as defined in ERISA) has occurred
with respect to any "pension plan" (as defined in ERISA) for which the Company
would have any
6.
<PAGE>
liability; the Company has not incurred and does not expect to incur liability
under (i) Title IV of ERISA with respect to termination of, or withdrawal from,
any "pension plan" or (ii) Sections 412 or 4971 of the Internal Revenue Code of
1986, as amended, including the regulations and published interpretations
thereunder (the "Code"); and each "pension plan" for which the Company would
have any liability that is intended to be qualified under Section 401(a) of the
Code is so qualified in all material respects and nothing has occurred, whether
by action or by failure to act, which would cause the loss of such
qualification.
(u) The Company has filed all federal, state and local income and
franchise tax returns required to be filed through the date hereof and has paid
all taxes due thereon, and no tax deficiency has been determined adversely to
the Company or any of its subsidiaries which has had (nor does the Company have
any knowledge of any tax deficiency which, if determined adversely to the
Company or any of its subsidiaries, could reasonably be expected to have) a
material adverse effect on the consolidated financial position, stockholders'
equity, results of operations, business or prospects of the Company and its
subsidiaries taken as a whole.
(v) Since the date as of which information is given in the Prospectus
through the date hereof, and except as may otherwise be disclosed in the
Prospectus, the Company has not (i) issued any securities, (ii) incurred any
material liability or obligation, direct or contingent, other than liabilities
and obligations which were incurred in the ordinary course of business, (iii)
entered into any material transaction not in the ordinary course of business or
(iv) declared or paid any dividend on its capital stock.
(w) The Company (i) makes and keeps accurate books and records and
(ii) maintains internal accounting controls which provide reasonable assurance
that (A) transactions are executed in accordance with management's
authorization, (B) transactions are recorded as necessary to permit preparation
of its financial statements and to maintain accountability for its assets, (C)
access to its assets is permitted only in accordance with management's
authorization and (D) the reported accountability for its assets is compared
with existing assets at reasonable intervals.
(x) Neither the Company nor any of its subsidiaries (i) is in
violation of its charter or by-laws, (ii) is in default in any material respect,
and no event has occurred which, with notice or lapse of time or both, would
constitute such a default, in the due performance or observance of any term,
covenant or condition contained in any material indenture, mortgage, deed of
trust, loan agreement or other agreement or instrument to which it is a party or
by which it is bound or to which any of its properties or assets is subject or
(iii) is in violation in any material respect of any law, ordinance,
governmental rule, regulation or court decree to which it or its property or
assets may be subject or has failed to obtain any license, permit, certificate,
franchise
7.
<PAGE>
or other governmental authorization or permit necessary to the ownership of its
property or to the conduct of its business, except where such failure, default
or violation to obtain any license is not reasonably likely to have a material
adverse effect upon the Company and its subsidiaries, taken as a whole.
(y) Neither the Company nor any of its subsidiaries, nor any
director, officer, agent, employee or other person associated with or acting on
behalf of the Company or any of its subsidiaries, has used any corporate funds
for any unlawful contribution, gift, entertainment or other unlawful expense
relating to political activity; made any direct or indirect unlawful payment to
any foreign or domestic government official or employee from corporate funds;
violated or is in violation of any provision of the Foreign Corrupt Practices
Act of 1977; or made any bribe, rebate, payoff, influence payment, kickback or
other unlawful payment.
(z) There has been no storage, disposal, generation, manufacture,
refinement, transportation, handling or treatment of toxic wastes, medical
wastes, hazardous wastes or hazardous substances by the Company or any of its
subsidiaries (or, to the knowledge of the Company, any of their predecessors in
interest) at, upon or from any of the property now or previously owned or leased
by the Company or its subsidiaries in violation of any applicable law,
ordinance, rule, regulation, order, judgment, decree or permit or which would
require remedial action under any applicable law, ordinance, rule, regulation,
order, judgment, decree or permit, except for any violation or remedial action
which would not have, or could not be reasonably likely to have, singularly or
in the aggregate with all such violations and remedial actions, a material
adverse effect on the general affairs, management, financial position,
stockholders' equity or results of operations of the Company and its
subsidiaries, taken as a whole; there has been no material spill, discharge,
leak, emission, injection, escape, dumping or release of any kind onto such
property or into the environment surrounding such property of any toxic wastes,
medical wastes, solid wastes, hazardous wastes or hazardous substances due to or
caused by the Company or any of its subsidiaries or with respect to which the
Company or any of its subsidiaries have knowledge, except for any such spill,
discharge, leak, emission, injection, escape, dumping or release which would not
have or would not be reasonably likely to have, singularly or in the aggregate
with all such spills, discharges, leaks, emissions, injections, escapes,
dumpings and releases, a material adverse effect on the general affairs,
management, consolidated financial position, stockholders' equity or results of
operations of the Company and its subsidiaries, taken as a whole; and the terms
"hazardous wastes", "toxic wastes", "hazardous substances" and "medical wastes"
shall have the meanings specified in any applicable local, state, federal and
foreign laws or regulations with respect to environmental protection.
8.
<PAGE>
(aa) Neither the Company nor any subsidiary is an "investment
company" within the meaning of such term under the United States
Investment Company Act of 1940 and the rules and regulations of the
Commission thereunder.
2. Purchase of the Stock by the International Managers. On the basis
of the representations and warranties contained in, and subject to the terms and
conditions of, this Agreement, the Company agrees to sell 1,100,000 shares of
the Firm Stock to the several International Managers and each of the
International Managers, severally and not jointly, agrees to purchase the number
of shares of the Firm Stock set forth opposite that International Manager's name
in Schedule 1 hereto. The respective purchase obligations of the International
Managers with respect to the Firm Stock shall be rounded among the International
Managers to avoid fractional shares, as the Lead Managers may determine.
In addition, the Company grants to the International Managers an
option to purchase up to 165,000 shares of Option Stock. Such option is granted
solely for the purpose of covering over-allotments in the sale of Firm Stock and
is exercisable as provided in Section 4 hereof. Shares of Option Stock shall be
purchased severally for the account of the International Managers in proportion
to the number of shares of Firm Stock set forth opposite the name of such
International Managers in Schedule 1 hereto. The respective purchase
obligations of each International Manager with respect to the Option Stock shall
be adjusted by the Lead Managers so that no International Manager shall be
obligated to purchase Option Stock other than in 100 share amounts. The price
of both the Firm Stock and any Option Stock shall be $_____ per share.
The Company shall not be obligated to deliver any of the Stock to be
delivered on the First Delivery Date or the Second Delivery Date (as hereinafter
defined), as the case may be, except upon payment for all the Stock to be
purchased on such Delivery Date as provided herein and in the U.S. Underwriting
Agreement.
3. Offering of Stock by the International Managers.
Upon authorization by the Lead Managers of the release of the Firm
Stock, the several International Managers propose to offer the Firm Stock for
sale upon the terms and conditions set forth in the Prospectus.
It is understood that up to 55,000 shares of the Firm Stock will
initially be reserved by the several International Managers for offer and sale
upon the terms and conditions set forth in the Prospectus and in accordance with
the rules and regulations of the National Association of Securities Dealers,
Inc. to employees and persons having business relationships with the Company and
its subsidiaries who have heretofore delivered to the International Managers
offers to purchase shares of Firm Stock in form satisfactory to the Lead
Managers, and that any allocation of such Firm Stock among such persons will be
made in accordance with timely directions received by the Lead Managers from the
Company; provided, that under no circumstances will the Lead Managers or any
International Manager be liable to the Company or to any such person for any
action taken or omitted
9.
<PAGE>
in good faith in connection with such offering to employees and persons having
business relationships with the Company and its subsidiaries. It is further
understood that any shares of such Firm Stock which are not purchased by such
persons will be offered by the International Managers to the public upon the
terms and conditions set forth in the Prospectus.
Each International Manager agrees that, except to the extent permitted
by the Agreement Between U.S. Underwriters and International Managers, it will
not offer or sell any of the Stock in the United States or Canada.
4. Delivery of and Payment for the Stock. Delivery of and payment for
the Firm Stock shall be made at the office of Wilson Sonsini Goodrich & Rosati,
Professional Corporation, 650 Page Mill Road, Palo Alto, California 94304, at
10:00 A.M., New York City time, on the fourth full business day following the
date of this Agreement or at such other date or place as shall be determined by
agreement between the Lead Managers and the Company. This date and time are
sometimes referred to as the "First Delivery Date." On the First Delivery Date,
the Company shall deliver or cause to be delivered certificates representing the
Firm Stock to the Lead Managers for the account of each International Manager
against payment to or upon the order of the Company of the purchase price by
wire transfer to an account designated by the Company. Time shall be of the
essence, and delivery of the Firm Stock at the time and place specified pursuant
to this Agreement is a further condition of the obligation of each International
Manager to purchase the Firm Stock hereunder. Upon delivery, the Firm Stock
shall be registered in such names and in such denominations as the Lead Managers
shall request in writing not less than two full business days prior to the First
Delivery Date. For the purpose of expediting the checking and packaging of the
certificates for the Firm Stock, the Company shall make the certificates
representing the Firm Stock available for inspection by the Lead Managers in New
York, New York, not later than 2:00 P.M., New York City time, on the business
day prior to the First Delivery Date.
At any time on or before the thirtieth day after the date of this
Agreement the option granted in Section 2 may be exercised in whole or in part,
but only once, by written notice being given to the Company by the Lead
Managers. Such notice shall set forth the aggregate number of shares of Option
Stock as to which the option is being exercised, the names in which the shares
of Option Stock are to be registered, the denominations in which the shares of
Option Stock are to be issued and the date and time, as determined by the Lead
Managers, when the shares of Option Stock are to be delivered; provided,
however, that this date and time shall not be earlier than the First Delivery
Date nor earlier than the second business day after the date on which the option
shall have been exercised nor later than the fifth business day after the date
on which the option shall have been exercised. The date and time the shares of
Option Stock are delivered are sometimes referred to as the "Second Delivery
Date" and the First Delivery Date and the Second Delivery Date are sometimes
each referred to as a "Delivery Date."
Delivery of and payment for the Option Stock shall be made at the
place specified in the first sentence of the first paragraph of this Section 4
(or at such other place as shall be determined by agreement between the Lead
Managers and the Company) at 10:00 A.M., New York City time,
10.
<PAGE>
on the Second Delivery Date. On the Second Delivery Date, the Company shall
deliver or cause to be delivered the certificates representing the Option Stock
to the Lead Managers for the account of each International Manager against
payment to or upon the order of the Company of the purchase price by wire
transfer to an account designated by the Company. Time shall be of the essence,
and delivery of the Option Stock at the time and place specified pursuant to
this Agreement is a further condition of the obligation of each International
Manager to purchase the Option Stock hereunder. Upon delivery, the Option Stock
shall be registered in such names and in such denominations as the Lead Managers
shall request in the aforesaid written notice. For the purpose of expediting the
checking and packaging of the certificates for the Option Stock, the Company
shall make the certificates representing the Option Stock available for
inspection by the Lead Managers in New York, New York, not later than 2:00 P.M.,
New York City time, on the business day prior to the Second Delivery Date.
5. Further Agreements of the Company. The Company agrees:
(a) To prepare the Prospectus in a form approved by the Lead
Managers and to file such Prospectus pursuant to Rule 424(b) under the
Securities Act not later than the Commission's close of business on
the second business day following the execution and delivery of this
Agreement or, if applicable, such earlier time as may be required by
Rule 430A(a)(3) under the Securities Act; to make no further amendment
or any supplement to the Registration Statement or to the Prospectus
except as permitted herein; to advise the Lead Managers, promptly
after it receives notice thereof, of the time when any amendment to
the Registration Statement has been filed or becomes effective or any
supplement to the Prospectus or any amended Prospectus has been filed
and to furnish the Lead Managers with copies thereof; to advise the
Lead Managers, promptly after it receives notice thereof, of the
issuance by the Commission of any stop order or of any order
preventing or suspending the use of any Preliminary Prospectus or the
Prospectus, of the suspension of the qualification of the Stock for
offering or sale in any jurisdiction, of the initiation or threatening
of any proceeding for any such purpose, or of any request by the
Commission for the amending or supplementing of the Registration
Statement or the Prospectus or for additional information; and, in the
event of the issuance of any stop order or of any order preventing or
suspending the use of any Preliminary Prospectus or the Prospectus or
suspending any such qualification, to use promptly its best efforts to
obtain its withdrawal;
(b) To furnish promptly to each of the Lead Managers and to
counsel for the International Managers a signed copy of the
Registration Statement as originally filed with the Commission, and
each amendment thereto filed with the Commission, including all
consents and exhibits filed therewith;
(c) To deliver promptly to the Lead Managers such number of the
following documents as the Lead Managers shall reasonably request: (i)
conformed copies of the
11.
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Registration Statement as originally filed with the Commission and
each amendment thereto (in each case excluding exhibits other than
this Agreement and the computation of per share earnings) and (ii)
each Preliminary Prospectus, the Prospectus and any amended or
supplemented Prospectus; and, if the delivery of a prospectus is
required at any time after the Effective Time in connection with the
offering or sale of the Stock or any other securities relating thereto
and if at such time any events shall have occurred as a result of
which the Prospectus as then amended or supplemented would include an
untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made when such Prospectus is
delivered, not misleading, or, if for any other reason it shall be
necessary to amend or supplement the Prospectus in order to comply
with the Securities Act, to notify the Lead Managers and, upon their
request, to prepare and furnish without charge to each International
Manager and to any dealer in securities as many copies as the Lead
Managers may from time to time reasonably request of an amended or
supplemented Prospectus which will correct such statement or omission
or effect such compliance.
(d) To file promptly with the Commission any amendment to the
Registration Statement or the Prospectus or any supplement to the
Prospectus that may, in the judgment of the Company or the Lead
Managers, be required by the Securities Act or requested by the
Commission;
(e) Prior to filing with the Commission any amendment to the
Registration Statement or supplement to the Prospectus or any
Prospectus pursuant to Rule 424 of the Rules and Regulations, to
furnish a copy thereof to the Lead Managers and counsel for the
International Managers and obtain the consent of the Lead Managers to
the filing;
(f) As soon as practicable after the Effective Date, to make
generally available to the Company's security holders and to deliver
to the Lead Managers an earnings statement of the Company and its
subsidiaries (which need not be audited) complying with Section 11(a)
of the Securities Act and the Rules and Regulations (including, at the
option of the Company, Rule 158);
(g) For a period of five years following the Effective Date, to
furnish to the Lead Managers copies of all materials furnished by the
Company to its stockholders and all public reports and all reports and
financial statements furnished by the Company to the principal
national securities exchange upon which the Common Stock may be listed
pursuant to requirements of or agreements with such exchange or to the
Commission pursuant to the Exchange Act or any rule or regulation of
the Commission thereunder;
12.
<PAGE>
(h) Promptly from time to time to take such action as the Lead
Managers may reasonably request to qualify the Stock for offering and
sale under the securities laws of such jurisdictions as the Lead
Managers may request and to comply with such laws so as to permit the
continuance of sales and dealings therein in such jurisdictions for as
long as may be necessary to complete the distribution of the Stock;
provided that in connection therewith the Company shall not be
required to qualify as a foreign corporation or to file a general
consent to service of process in any jurisdiction;
(i) For a period of 180 days from the date of the Prospectus, not
to, directly or indirectly, offer for sale, sell or otherwise dispose
of (or enter into any transaction or device which is designed to, or
could be reasonably expected to, result in the disposition by any
person at any time in the future of) any shares of Common Stock (other
than the Stock and shares issued pursuant to employee benefit plans,
qualified stock option plans or other employee compensation plans
existing on the date hereof or pursuant to currently outstanding
options, warrants or rights), or sell or grant options, rights or
warrants with respect to any shares of Common Stock (other than the
grant of options pursuant to option or stock purchase plans existing
on the date hereof), without the prior written consent of Lehman
Brothers International (Europe); and to cause each officer and
director of the Company to furnish to the Lead Managers, prior to the
First Delivery Date, a letter or letters, in form and substance
satisfactory to counsel for the International Managers, pursuant to
which each such person shall agree not to, directly or indirectly,
offer for sale, sell or otherwise dispose of (or enter into any
transaction or device which is designed to, or could be expected to,
result in the disposition by any such person at any time in the future
of) any shares of Common Stock for a period of 180 days from the date
of the Prospectus, without the prior written consent of Lehman
Brothers Inc.;
(j) Prior to the Effective Date, to apply for the inclusion of
the Stock on the Nasdaq National Market, and to use its best efforts
to complete that inclusion, subject only to official notice of
issuance and evidence of satisfactory distribution, prior to the First
Delivery Date;
(k) Upon the filing with the Commission of any reports on Form SR
pursuant to Rule 463 of the Rules and Regulations, to furnish a copy
thereof to the counsel for the International Managers, and to deliver
promptly to the Lead Managers a signed copy of each report on Form SR
filed by it with the Commission;
(l) To apply the net proceeds from the sale of the Stock being
sold by the Company as set forth in the Prospectus; and
(m) To take such steps as shall be necessary to ensure that
neither the Company nor any subsidiary shall become an "investment
company" within the
13.
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meaning of such term under the United States Investment Company Act of
1940 and the rules and regulations of the Commission thereunder.
6. Expenses. The Company agrees to pay (a) the costs incident to the
authorization, issuance, sale and delivery of the Stock and any taxes payable in
that connection; (b) the costs incident to the preparation, printing and filing
under the Securities Act of the Registration Statement and any amendments and
exhibits thereto; (C) the costs of distributing the Registration Statement as
originally filed and each amendment thereto and any post-effective amendments
thereof (including, in each case, exhibits), any Preliminary Prospectus, the
Prospectus and any amendment or supplement to the Prospectus, all as provided in
this Agreement; (d) the costs of producing and distributing this Agreement, the
Agreement Between U.S. Underwriters and International Managers, any
International Selling Agreement and any other related documents in connection
with the offering, purchase, sale and delivery of the Stock; (e) the filing fees
incident to securing any required review by the National Association of
Securities Dealers, Inc. of the terms of sale of the Stock; (f) the Nasdaq
National Market application fee; (g) the fees and expenses of qualifying the
Stock under the securities laws of the several jurisdictions as provided in
Section 5(h) and of preparing, printing and distributing a Blue Sky Memorandum
(including related fees and expenses of counsel to the International Managers to
the extent reasonable and customary for such work); and (h) all other costs and
expenses incident to the performance of the obligations of the Company under
this Agreement; provided that, except as specifically provided in this Section 6
and in Section 11, the International Managers shall pay the fees, costs and
expenses of their counsel and their other costs and expenses and any transfer
taxes on the Stock which they may sell and the expenses of advertising any
offering of the Stock made by the International Managers.
7. Conditions of International Managers' Obligations. The respective
obligations of the International Managers hereunder are subject to the accuracy,
when made and on each Delivery Date, of the representations and warranties of
the Company contained herein, to the performance by the Company of its
obligations hereunder, and to each of the following additional terms and
conditions; provided, however, that the conditions set forth in Sections 7(e),
7(f) and 7(g) shall not apply in connection with the sale of Option Stock on the
Second Delivery Date:
(a) The Prospectus shall have been timely filed with the
Commission in accordance with Section 5(a); no stop order suspending
the effectiveness of the Registration Statement or any part thereof
shall have been issued and no proceeding for that purpose shall have
been initiated or threatened by the Commission; and any request of the
Commission for inclusion of additional information in the Registration
Statement or the Prospectus or otherwise shall have been complied
with.
(b) No International Manager or U.S. Underwriter shall have
discovered and disclosed to the Company on or prior to such Delivery
Date that the Registration Statement or the Prospectus or any
amendment or supplement thereto contains an untrue statement of a fact
which, in the opinion of Brobeck, Phleger & Harrison LLP, counsel for
the International Managers, is material or omits to state a fact
which, in
14.
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the opinion of such counsel, is material and is required to be stated
therein or is necessary to make the statements therein not misleading.
(c) All corporate proceedings and other legal matters incident to
the authorization, form and validity of this Agreement, the U.S.
Underwriting Agreement, the Stock, the Registration Statement and the
Prospectus, and all other legal matters relating to this Agreement and
the transactions contemplated hereby shall be reasonably satisfactory
in all material respects to counsel for the International Managers,
and the Company shall have furnished to such counsel all documents and
information that they may reasonably request to enable them to pass
upon such matters.
(d) Wilson Sonsini Goodrich & Rosati, Professional Corporation,
shall have furnished to the Lead Managers its written opinion, as
counsel to the Company, addressed to the International Managers and
dated such Delivery Date, in form and substance reasonably
satisfactory to the Lead Managers, to the effect that:
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the
state of Delaware, is qualified to do business and is in good
standing as a foreign corporation in each jurisdiction in which
the failure to be so qualified would have a material adverse
effect on the Company's business, financial condition, or results
of operations and has all power and authority necessary to own or
hold its properties and conduct the business in which it is
engaged;
(ii) The Company has an authorized capitalization as set forth
under the caption "Capitalization" in the Prospectus, and all of
the issued shares of capital stock of the Company (including the
shares of Stock being delivered on such Delivery Date) have been
duly authorized and validly issued, are fully paid and non-
assessable and conform to the description thereof contained in the
Prospectus;
(iii) There are no preemptive or other rights to subscribe for
or to purchase, nor any restriction upon the voting or transfer
of, any shares of the Stock pursuant to the Company's charter or
by-laws or any agreement or other instrument known to such
counsel;
(iv) The building in which the Company's principal executive
offices are located is held by the Company under valid, subsisting
and enforceable leases, with such exceptions that are not material
and do not interfere with the use made and proposed to be made of
such property and buildings by the Company;
15.
<PAGE>
(v) To such counsel's knowledge and other than as set forth in the
Prospectus, there are no legal or governmental proceedings pending to which the
Company is a party or of which any property or assets of the Company is the
subject which are required to be described in the Prospectus;
(vi) The Registration Statement was declared effective under the
Securities Act as of the date and time specified in such opinion, the Prospectus
was filed with the Commission pursuant to the subparagraph of Rule 424(b) of the
Rules and Regulations specified in such opinion on the date specified therein
and no stop order suspending the effectiveness of the Registration Statement has
been issued and, to the knowledge of such counsel, no proceeding for that
purpose is pending or threatened by the Commission;
(vii) The Registration Statement and the Prospectus and any further
amendments or supplements thereto made by the Company prior to such Delivery
Date (other than the financial statements and notes thereto, financial schedules
and other financial and statistical data included therein, as to which such
counsel need express no opinion) comply as to form in all material respects with
the requirements of the Securities Act and the Rules and Regulations;
(viii) The statements contained in the Prospectus under the caption
"Certain United States Federal Tax Considerations for Non-U.S. Holders of Common
Stock," insofar as they describe federal statutes, rules and regulations,
constitute a fair summary thereof;
(ix) To such counsel's knowledge, there are no contracts or other
documents which are required to be described in the Prospectus or filed as
exhibits to the Registration Statement by the Securities Act or by the Rules and
Regulations which have not been so described or filed;
(x) This Agreement and the U.S. Underwriting Agreement have each
been duly authorized, executed and delivered by the Company and each constitutes
a valid and binding obligation of the Company enforceable against the Company in
accordance with its terms, subject to the effects of bankruptcy, insolvency,
fraudulent conveyance, reorganization, moratorium and other similar laws
relating to or affecting creditors' rights generally, general equitable
principles (whether considered in a proceeding in equity or at law) or an
implied covenant of good faith and fair dealing;
(xi) The issue and sale of the shares of Stock being delivered on
such Delivery Date by the Company and the compliance by the Company with all of
the provisions of this Agreement and the U.S. Underwriting Agreement and
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the consummation of the transactions contemplated hereby and
thereby will not conflict with or result in a breach or violation
of any of the terms or provisions of, or constitute a default
under, any material indenture, mortgage, deed of trust, loan
agreement or other agreement or instrument known to such counsel
to which the Company is a party or by which the Company is bound
or to which any of the property or assets of the Company is
subject (but excluding any such document or agreement which is
governed by the laws of any foreign jurisdiction), nor will such
actions result in any violation of the provisions of the charter
or by-laws of the Company or any statute or any order, rule or
regulation known to such counsel of any court or governmental
agency or body having jurisdiction over the Company or any of its
properties or assets; and, except for the registration of the
Stock under the Securities Act and such consents, approvals,
authorizations, registrations or qualifications as may be required
under the Exchange Act and applicable state securities laws in
connection with the purchase and distribution of the Stock by the
International Managers and the U.S. Underwriters, no consent,
approval, authorization or order of, or filing or registration
with, any federal or state court or governmental agency or body is
required for the execution, delivery and performance of this
Agreement or the U.S. Underwriting Agreement by the Company and
the consummation of the transactions contemplated hereby and
thereby; and
(xii) To such counsel's knowledge, and except as disclosed in
the Prospectus, there are no contracts, agreements or
understandings between the Company and any person granting such
person the right (other than rights which have been waived or
satisfied) to require the Company to file a registration statement
under the Securities Act with respect to any securities of the
Company owned or to be owned by such person or to require the
Company to include such securities in the securities registered
pursuant to the Registration Statement or in any securities being
registered pursuant to any other registration statement filed by
the Company under the Securities Act.
In rendering such opinion, such counsel may (i) state that its
opinion is limited to matters governed by the Federal laws of the United States
of America, the laws of the State of California and the General Corporation Law
of the State of Delaware and that such counsel is not admitted in the State of
Delaware; (ii) state that no opinion is given with respect to the matters on
which the Company's other counsel are opining, and (iii) limit the disclosure or
publication of the opinion to the International Managers and the U.S.
Underwriters. Such counsel shall also have furnished to the Lead Managers a
written statement, addressed to the International Managers and dated such
Delivery Date, in form and substance satisfactory to the Representatives, to the
effect that (x) such counsel has acted as counsel to the Company on a regular
basis, has acted as counsel to the Company in connection with previous financing
transactions and has
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acted as counsel to the Company in connection with the preparation of the
Registration Statement, and (y) based on the foregoing, no facts have come to
the attention of such counsel which lead it to believe that the Registration
Statement, as of the Effective Date, contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary in order to make the statements therein not misleading, or that the
Prospectus as of its date or as of such Delivery Date contains any untrue
statement of a material fact or omits to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading.
(e) The Lead Managers shall have received from Brobeck, Phleger &
Harrison LLP, counsel for the International Managers, such opinion or opinions,
dated such Delivery Date, with respect to the issuance and sale of the Stock,
the Registration Statement, the Prospectus and other related matters as the Lead
Managers may reasonably require, and the Company shall have furnished to such
counsel such documents as they reasonably request for the purpose of enabling
them to pass upon such matters.
(f) At the time of execution of this Agreement, the Lead Managers
shall have received from Ernst & Young LLP, a letter, in form and substance
satisfactory to the Lead Managers, addressed to the International Managers and
dated the date hereof (i) confirming that they are independent public
accountants within the meaning of the Securities Act and are in compliance with
the applicable requirements relating to the qualification of accountants under
Rule 2-01 of Regulation S-X of the Commission and (ii) stating, as of the date
hereof (or, with respect to matters involving changes or developments since the
respective dates as of which specified financial information is given in the
Prospectus, as of a date not more than five days prior to the date hereof), the
conclusions and findings of such firm with respect to the financial information
and other matters ordinarily covered by accountants' "comfort letters" to
underwriters in connection with registered public offerings.
(g) With respect to the letter of Ernst & Young LLP, referred to in
the preceding paragraph and delivered to the Lead Managers concurrently with the
execution of this Agreement (the "initial letter"), the Company shall have
furnished to the Lead Managers a letter (the "bring-down letter") of such
accountants, addressed to the International Managers and dated such Delivery
Date (i) confirming that they are independent public accountants within the
meaning of the Securities Act and are in compliance with the applicable
requirements relating to the qualification of accountants under Rule 2-01 of
Regulation S-X of the Commission, (ii) stating, as of the date of the bring-down
letter (or, with respect to matters involving changes or developments since the
respective dates as of which specified financial information is given in the
Prospectus, as of a date not more than five days prior to the date of the bring-
down letter), the conclusions and findings of such firm with respect to the
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financial information and other matters covered by the initial letter and (iii)
confirming in all material respects the conclusions and findings set forth in
the initial letter.
(h) The Company shall have furnished to the Lead Managers a
certificate of the Company, dated such Delivery Date, executed by its Chairman
of the Board, its President or a Vice President and its chief financial officer
stating, on behalf of the Company, that:
(i) The representations, warranties and agreements of the
Company in Section 1 are true and correct as of such Delivery Date;
the Company has complied with all its agreements contained herein; and
the conditions set forth in Sections 7(a) and 7(i) have been
fulfilled; and
(ii) They have carefully examined the Registration Statement and
the Prospectus and (A) as of the Effective Date, the Registration
Statement and Prospectus did not include any untrue statement of a
material fact and did not omit to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading, and (B) since the Effective Date no event has occurred
which should have been set forth in a supplement or amendment to the
Registration Statement or the Prospectus.
(i) (i) Neither the Company nor any of its subsidiaries shall have
sustained since the date of the latest audited financial statements included in
the Prospectus any loss or interference with its business from fire, explosion,
flood or other calamity, whether or not covered by insurance, or from any labor
dispute or court or governmental action, order or decree, otherwise than as set
forth or contemplated in the Prospectus or (ii) since such date there shall not
have been any change in the capital stock or long-term debt of the Company or
any of its subsidiaries or any change, or any development involving a
prospective change, in or affecting the general affairs, management,
consolidated financial position, stockholders' equity or results of operations
of the Company and its subsidiaries, otherwise than as set forth or contemplated
in the Prospectus, the effect of which, in any such case described in clause (i)
or (ii), is, in the judgment of the Lead Managers, so material and adverse as to
make it impracticable or inadvisable to proceed with the public offering or the
delivery of the Stock being delivered on such Delivery Date on the terms and in
the manner contemplated in the Prospectus.
(j) Subsequent to the execution and delivery of this Agreement there
shall not have occurred any of the following: (i) trading in securities
generally on the New York Stock Exchange or the American Stock Exchange or in
the over-the-counter market, or trading in any securities of the Company on any
exchange or in the over-the-counter market, shall have been suspended or minimum
prices shall have been established on any such exchange or such market by the
Commission, by such
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exchange or by any other regulatory body or governmental authority having
jurisdiction, (ii) a banking moratorium shall have been declared by Federal or
state authorities, (iii) the United States shall have become engaged in
hostilities, there shall have been an escalation in hostilities involving the
United States or there shall have been a declaration of a national emergency or
war by the United States or (iv) there shall have occurred such a material
adverse change in general economic, political or financial conditions (or the
effect of international conditions on the financial markets in the United States
shall be such) as to make it, in the judgment of a majority in interest of the
several International Managers, impracticable or inadvisable to proceed with the
public offering or delivery of the Stock being delivered on such Delivery Date
on the terms and in the manner contemplated in the Prospectus.
(k) The Nasdaq National Market shall have approved the Stock for
inclusion, subject only to official notice of issuance and evidence of
satisfactory distribution.
(l) The closing under the U.S. Underwriting Agreement shall have
occurred concurrently with the closing hereunder on the First Delivery Date.
(m) Wilson Sonsini Goodrich & Rosati, Professional Corporation, shall
have furnished to the Lead Managers on the First Delivery Date its written
opinion, as U.S. counsel to each of MagiNet Israel, Inc., a California
corporation ("MagiNet Israel"), MagiNet South Africa, Inc., a California
corporation ("MagiNet South Africa"), Pacific Pay Video Limited, a California
corporation ("PPVL"), and MagiNet International Corporation, a California
corporation ("MagiNet International"), addressed to the International Managers,
in form and substance reasonably satisfactory to the Lead Managers, to the
effect that:
(i) Each of MagiNet Israel, MagiNet South Africa, PPVL, and
MagiNet International (collectively, the "California Subsidiaries")
has been duly incorporated and is validly existing as a corporation in
good standing under the laws of the State of California and has all
power and authority necessary under California law to hold their
respective properties and conduct their respective businesses;
(ii) MagiNet Israel has an authorized capitalization of 1,000
shares of Common Stock, of which 100 shares are issued and
outstanding; MagiNet South Africa has an authorized capitalization of
100 shares of Common Stock, all of which are issued and outstanding;
PPVL has an authorized capitalization of 15,000,000 shares of Common
Stock, of which 100 shares are issued and outstanding, and 8,978,930
shares of Preferred Stock, none of which are outstanding; and MagiNet
International has an authorized capitalization of 1,000 shares of
Common Stock, of which 100 shares are issued and
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outstanding. The Company owns all the outstanding shares of each of
the California Subsidiaries free and clear of all liens, encumbrances,
equities or claims, except for liens and pledges established in
connection with the Company's senior secured debt. All such
outstanding shares have been duly authorized and validly issued, and
are fully paid and nonassessable;
(iii) There are no preemptive or other rights to subscribe for or
purchase, nor any restrictions upon the voting or transfer of, any
shares of stock of such California Subsidiary pursuant to the charter
or by-laws of such California Subsidiary or any agreement or other
instrument known to such counsel.
(iv) To such counsel's knowledge and other than as set forth in
the Prospectus, there are no legal or governmental proceedings pending
to which such California Subsidiary is a party or of which any
property or assets of such California Subsidiary are subject which are
required to be described in the Prospectus.
(n) For each of MagiNet Israel, MagiNet South Africa, MagiNet
Australia Pty Limited, MagiNet (H.K.) Ltd., MagiNet, KK Ltd., MagiNet New
Zealand Limited, MagiNet (Singapore) Pte. Ltd., MagiNet Taiwan, Inc., and
Pacific Pay Video (Thailand) Co. Ltd. (collectively, the "Foreign
Subsidiaries"), the Lead Managers shall have received on the First Delivery Date
an opinion of foreign counsel for each such Foreign Subsidiary in form and
substance reasonably satisfactory to the Lead Managers, as is customary in local
practice in such jurisdiction, and subject to such reasonable qualifications as
such local counsel shall require to the effect that:
(i) Such Foreign Subsidiary has been duly incorporated and is
validly existing and in good standing and duly qualified to conduct
business under the laws of the country in which it is incorporated
and/or operates, provided that with respect to the due incorporation
and valid existence of MagiNet Israel and MagiNet South Africa, local
counsel shall not be required to deliver such opinion, which shall be
delivered by Wilson Sonsini Goodrich & Rosati, Professional
Corporation as described above;
(ii) The capitalization of such Foreign Subsidiary is as set
forth in such opinion, including the number of shares authorized for
issuance and the number of shares outstanding as of the First Delivery
Date (excluding MagiNet Israel and MagiNet South Africa, which opinion
shall be delivered by Wilson Sonsini Goodrich & Rosati, Professional
Corporation, as described above);
(iii) All issued shares of the capital stock of such Foreign
Subsidiary have been duly authorized and validly issued and are fully
paid and
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nonassessable (excluding MagiNet Israel and MagiNet South Africa,
which opinion will be delivered by Wilson Sonsini Goodrich & Rosati,
Professional Corporation, as described above) and, subject to the
liens and encumbrances established in connection with the Company's
senior secured debt, are owned directly or indirectly by the Company;
(iv) There are no preemptive rights or other rights to subscribe
for or to purchase, nor any restrictions upon the voting or transfer
of, any shares of the capital stock of such Foreign Subsidiary
pursuant to the charter documents of any such Foreign Subsidiary
(except for MagiNet Israel and MagiNet South Africa, which opinion
will be delivered by Wilson Sonsini Goodrich & Rosati, Professional
Corporation, as described above) or any agreement or other instrument
known to such counsel;
(v) To the best of such counsel's knowledge, there are no legal
or governmental proceedings pending to which such Foreign Subsidiary
is a party or of which any property or assets of such Foreign
Subsidiary are subject which, if determined adversely to such foreign
subsidiary, would have a material adverse effect on the business,
operating results or financial condition of such Foreign Subsidiary;
(vi) The issue and sale to the public of shares of the Company's
Common Stock pursuant to the Registration Statement will not result in
a breach or violation of any of the terms or provisions of any
contract material to such Foreign Subsidiary's business, operating
results or financial condition, which contracts shall be listed on a
schedule reasonably satisfactory to the Lead Managers attached to such
opinion, nor will such actions result in any violation of the charter
or bylaws of such Foreign Subsidiary; and
(vii) Each of the hotel contracts to which such Foreign Subsidiary
is a party, to be identified in a schedule of such contracts
reasonably satisfactory to the Lead Managers, constitutes a legal,
valid, and binding obligation of the parties thereto, enforceable in
accordance with its terms.
(o) Bruckhaus Westrick Stegeman shall have furnished to the Lead
Managers on the First Delivery Date its written opinion, as counsel to each of
MagiNet GmbH and Prodac (collectively, the "German Subsidiaries"), in form and
substance reasonably satisfactory to the Lead Managers, as is customary in
local practice in Germany, and subject to such reasonable qualifications as such
counsel shall require to the effect that:
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(i) Each of the German Subsidiaries has been duly incorporated
and is validly existing and duly qualified to conduct business in good
standing under the laws of Germany;
(ii) The capitalization of each of the German Subsidiaries is as
set forth in such opinion, including the number of shares authorized
for issuance and the number of shares outstanding as of the First
Delivery Date;
(iii) All issued shares of the capital stock of each of the German
Subsidiaries have been duly authorized and validly issued and are
fully paid and nonassessable and, subject to the liens and
encumbrances established in connection with the Company's senior
secured debt, are owned directly or indirectly by the Company or
MagiNet GmbH, as the case may be;
(iv) There are no preemptive rights or other rights to subscribe
for or to purchase, nor any restrictions upon the voting or transfer
of, any shares of the capital stock of either of the Germany
Subsidiaries pursuant to the charter documents of such German
Subsidiary or any agreement or other instrument known to such counsel;
(v) To the best of such counsel's knowledge, there are no legal
or governmental proceedings pending to which either German Subsidiary
is a party or of which any property or assets of either German
Subsidiary are subject which, if determined adversely to such German
Subsidiary, would have a material adverse effect on the business,
operating results or financial condition of such German Subsidiary;
(vi) The issue and sale to the public of shares of the Company's
Common Stock pursuant to the Registration Statement will not result in
a breach or violation of any of the terms or provisions of any
contract material to such German Subsidiary's business, operating
results or financial condition, which contracts shall be listed on a
schedule reasonably satisfactory to the Lead Managers attached to such
opinion, nor will such actions result in any violation of the charter
or bylaws of such German Subsidiary; and
(vii) Each of the hotel contracts to which Prodac or any
subsidiary of Prodac is a party, to be identified in a schedule of
such contracts reasonably satisfactory to the Lead Managers,
constitutes a legal, valid, and binding obligation of the parties
thereto, enforceable in accordance with its terms.
All opinions, letters, evidence and certificates mentioned above or
elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if they are in form and substance reasonably satisfactory
to counsel for the International Managers.
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8. Indemnification and Contribution.
(a) The Company shall indemnify and hold harmless each International
Manager, its officers and employees and each person, if any, who controls any
International Manager within the meaning of the Securities Act, from and against
any loss, claim, damage or liability, joint or several, or any action in respect
thereof (including, but not limited to, any loss, claim, damage, liability or
action relating to purchases and sales of Stock), to which that International
Manager, officer, employee or controlling person may become subject, under the
Securities Act or otherwise, insofar as such loss, claim, damage, liability or
action arises out of, or is based upon, (i) any untrue statement or alleged
untrue statement of a material fact contained (A) in any Preliminary Prospectus,
the Registration Statement or the Prospectus or in any amendment or supplement
thereto or (B) in any blue sky application or other document prepared or
executed by the Company (or based upon any written information furnished by the
Company) specifically for the purpose of qualifying any or all of the Stock
under the securities laws of any state or other jurisdiction (any such
application, document or information being hereinafter called a "Blue Sky
Application"), (ii) the omission or alleged omission to state in any
Preliminary Prospectus, the Registration Statement or the Prospectus, or in any
amendment or supplement thereto, or in any Blue Sky Application any material
fact required to be stated therein or necessary to make the statements therein
not misleading or (iii) any act or failure to act or any alleged act or failure
to act by any International Manager in connection with, or relating in any
manner to, the Stock or the offering contemplated hereby, and which is included
as part of or referred to in any loss, claim, damage, liability or action
arising out of or based upon matters covered by clause (i) or (ii) above
(provided that the Company shall not be liable under this clause (iii) to the
extent that it is determined in a final judgment by a court of competent
jurisdiction that such loss, claim, damage, liability or action resulted
directly from any such acts or failures to act undertaken or omitted to be taken
by such International Manager through its gross negligence or willful
misconduct), and shall reimburse each International Manager and each such
officer, employee or controlling person promptly upon demand for any legal or
other expenses reasonably incurred by that International Manager, officer,
employee or controlling person in connection with investigating or defending or
preparing to defend against any such loss, claim, damage, liability or action as
such expenses are incurred; provided, however, that the Company shall not be
liable in any such case to the extent that any such loss, claim, damage,
liability or action arises out of, or is based upon, any untrue statement or
alleged untrue statement or omission or alleged omission made in any Preliminary
Prospectus, the Registration Statement or the Prospectus, or in any such
amendment or supplement, or in any Blue Sky Application, in reliance upon and in
conformity with written information concerning such International Manager
furnished to the Company through the Lead Managers by or on behalf of any
International Manager specifically for inclusion therein; and provided further
that as to any Preliminary Prospectus this indemnity agreement shall not inure
to the benefit of any International Manager to the extent that any such loss,
claim, damage, liability or action arises out of, or is based upon, any untrue
statement or alleged untrue statement or omission or alleged omission made in
any Preliminary Prospectus if a copy of the Prospectus was not sent to such
person by such International Manager as required by the Securities Act and if
the untrue statement or omission has been corrected in the Prospectus unless
such failure to send a Prospectus resulted from non-compliance by the Company
with Section 5(c) hereof. The foregoing indemnity agreement is in
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addition to any liability which the Company may otherwise have to any
International Manager or to any officer, employee or controlling person of that
International Manager.
(b) Each International Manager, severally and not jointly, shall
indemnify and hold harmless the Company, its officers and employees, each of its
directors, and each person, if any, who controls the Company within the meaning
of the Securities Act, from and against any loss, claim, damage or liability,
joint or several, or any action in respect thereof, to which the Company or any
such director, officer or controlling person may become subject, under the
Securities Act or otherwise, insofar as such loss, claim, damage, liability or
action arises out of, or is based upon, (i) any untrue statement or alleged
untrue statement of a material fact contained in any Preliminary Prospectus, the
Registration Statement or the Prospectus or in any amendment or supplement
thereto, or (ii) the omission or alleged omission to state in any Preliminary
Prospectus, the Registration Statement or the Prospectus, or in any amendment or
supplement thereto, or in any Blue Sky Application any material fact required to
be stated therein or necessary to make the statements therein not misleading,
but in each case only to the extent that the untrue statement or alleged untrue
statement or omission or alleged omission was made in reliance upon and in
conformity with written information concerning such International Manager
furnished to the Company through the Lead Managers by or on behalf of that
International Manager specifically for inclusion therein, and shall reimburse
the Company and any such director, officer or controlling person for any legal
or other expenses reasonably incurred by the Company or any such director,
officer or controlling person in connection with investigating or defending or
preparing to defend against any such loss, claim, damage, liability or action as
such expenses are incurred. The foregoing indemnity agreement is in addition to
any liability which any International Manager may otherwise have to the Company
or any such director, officer, employee or controlling person.
(c) Promptly after receipt by an indemnified party under this Section
8 of notice of any claim or the commencement of any action, the indemnified
party shall, if a claim in respect thereof is to be made against the
indemnifying party under this Section 8, notify the indemnifying party in
writing of the claim or the commencement of that action; provided, however, that
the failure to notify the indemnifying party shall not relieve it from any
liability which it may have under this Section 8 except to the extent it has
been materially prejudiced by such failure and, provided further, that the
failure to notify the indemnifying party shall not relieve it from any liability
which it may have to an indemnified party otherwise than under this Section 8.
If any such claim or action shall be brought against an indemnified party, and
it shall notify the indemnifying party thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it wishes, jointly with
any other similarly notified indemnifying party, to assume the defense thereof
with counsel reasonably satisfactory to the indemnified party. After notice from
the indemnifying party to the indemnified party of its election to assume the
defense of such claim or action, the indemnifying party shall not be liable to
the indemnified party under this Section 8 for any legal or other expenses
subsequently incurred by the indemnified party in connection with the defense
thereof other than reasonable costs of investigation; provided, however, that
the Lead Managers shall have the right to employ counsel to represent jointly
the Lead Managers and those other International Managers and their respective
officers, employees and controlling persons who may be subject to liability
arising out of any claim
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in respect of which indemnity may be sought by the International Managers
against the Company under this Section 8 if, in the reasonable judgment of the
Lead Managers, it is advisable for the Lead Managers and those International
Managers, officers, employees and controlling persons to be jointly represented
by separate counsel, and in that event the reasonable fees and expenses of such
separate counsel shall be paid by the Company. No indemnifying party shall (i)
without the prior written consent of the indemnified parties (which consent
shall not be unreasonably withheld), settle or compromise or consent to the
entry of any judgment with respect to any pending or threatened claim, action,
suit or proceeding in respect of which indemnification or contribution may be
sought hereunder (whether or not the indemnified parties are actual or potential
parties to such claim or action) unless such settlement, compromise or consent
includes an unconditional release of each indemnified party from all liability
arising out of such claim, action, suit or proceeding, or (ii) be liable for any
settlement of any such action effected without its written consent (which
consent shall not be unreasonably withheld), but if settled with the consent of
the indemnifying party or if there be a final judgment of the plaintiff in any
such action, the indemnifying party agrees to indemnify and hold harmless any
indemnified party from and against any loss or liability by reason of such
settlement or judgment.
(d) If the indemnification provided for in this Section 8 shall for
any reason be unavailable to or insufficient to hold harmless an indemnified
party under Section 8(a) or 8(b) in respect of any loss, claim, damage or
liability, or any action in respect thereof, referred to therein, then each
indemnifying party shall, in lieu of indemnifying such indemnified party,
contribute to the amount paid or payable by such indemnified party as a result
of such loss, claim, damage or liability, or action in respect thereof, (i) in
such proportion as shall be appropriate to reflect the relative benefits
received by the Company on the one hand and the International Managers on the
other from the offering of the Stock or (ii) if the allocation provided by
clause (i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the Company on the one hand and the
International Managers on the other with respect to the statements or omissions
which resulted in such loss, claim, damage or liability, or action in respect
thereof, as well as any other relevant equitable considerations. The relative
benefits received by the Company on the one hand and the International Managers
on the other with respect to such offering shall be deemed to be in the same
proportion as the total net proceeds from the offering of the Stock purchased
under this Agreement (before deducting expenses) received by the Company on the
one hand, and the total underwriting discounts and commissions received by the
International Managers with respect to the shares of the Stock purchased under
this Agreement, on the other hand, bear to the total gross proceeds from the
offering of the shares of the Stock under this Agreement, in each case as set
forth in the table on the cover page of the Prospectus. The relative fault shall
be determined by reference to whether the untrue or alleged untrue statement of
a material fact or omission or alleged omission to state a material fact relates
to information supplied by the Company or the International Managers, the intent
of the parties and their relative knowledge, access to information and
opportunity to correct or prevent such statement or omission. The Company and
the International Managers agree that it would not be just and equitable if
contributions pursuant to this Section 8(d) were to be determined by pro rata
allocation (even if the International Managers were treated as one entity for
such purpose) or by any other method of
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allocation which does not take into account the equitable considerations
referred to herein. The amount paid or payable by an indemnified party as a
result of the loss, claim, damage or liability, or action in respect thereof,
referred to above in this Section 8 shall be deemed to include, for purposes of
this Section 8(d), any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any such action
or claim. Notwithstanding the provisions of this Section 8(d), no International
Manager shall be required to contribute any amount in excess of the amount by
which the total price at which the Stock underwritten by it and distributed to
the public was offered to the public exceeds the amount of any damages which
such International Manager has otherwise paid or become liable to pay by reason
of any untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. The International
Managers' obligations to contribute as provided in this Section 8(d) are several
in proportion to their respective underwriting obligations and not joint.
(e) The International Managers severally confirm that the statements
with respect to the public offering of the Stock by the International Managers
set forth on the cover page of, the legend concerning over-allotments on the
inside front cover page of and the concession and reallowance figures appearing
under the caption "Underwriting" in, the Prospectus are correct, and the
International Managers confirm and the Company acknowledges that such statements
constitute the only information concerning such International Managers furnished
in writing to the Company by or on behalf of the International Managers
specifically for inclusion in the Registration Statement and the Prospectus.
9. Defaulting International Managers.
If, on either Delivery Date, any International Manager defaults in the
performance of its obligations under this Agreement, the remaining non-
defaulting International Managers shall be obligated to purchase the Stock which
the defaulting International Manager agreed but failed to purchase on such
Delivery Date in the respective proportions which the number of shares of the
Firm Stock set opposite the name of each remaining non-defaulting International
Manager in Schedule 1 hereto bears to the total number of shares of the Firm
Stock set opposite the names of all the remaining non-defaulting International
Managers in Schedule 1 hereto; provided, however, that the remaining non-
defaulting International Managers shall not be obligated to purchase any of the
Stock on such Delivery Date if the total number of shares of the Stock which the
defaulting International Manager or International Managers agreed but failed to
purchase on such date exceeds 9.09% of the total number of shares of the Stock
to be purchased on such Delivery Date, and any remaining non-defaulting
International Manager shall not be obligated to purchase more than 110% of the
number of shares of the Stock which it agreed to purchase on such Delivery Date
pursuant to the terms of Section 2. If the foregoing maximums are exceeded, the
remaining non-defaulting International Managers, or those other underwriters
satisfactory to the Lead Managers who so agree, shall have the right, but shall
not be obligated, to purchase, in such proportion as may be agreed upon among
them, all the Stock to be purchased on such Delivery Date. If the remaining
International Managers
27.
<PAGE>
or other underwriters satisfactory to the Lead Managers do not elect to purchase
the shares which the defaulting International Manager or International Managers
agreed but failed to purchase on such Delivery Date, this Agreement (or, with
respect to the Second Delivery Date, the obligation of the International
Managers to purchase, and of the Company to sell, the Option Stock) shall
terminate without liability on the part of any non-defaulting International
Manager or the Company, except that the Company will continue to be liable for
the payment of expenses to the extent set forth in Sections 6 and 11. As used in
this Agreement, the term "International Manager" includes, for all purposes of
this Agreement unless the context requires otherwise, any party not listed in
Schedule 1 hereto who, pursuant to this Section 9, purchases Firm Stock which a
defaulting International Manager agreed but failed to purchase.
Nothing contained herein shall relieve a defaulting International
Manager of any liability it may have to the Company for damages caused by its
default. If other underwriters are obligated or agree to purchase the Stock of
a defaulting or withdrawing International Manager, either the Lead Managers or
the Company may postpone the Delivery Date for up to seven full business days in
order to effect any changes that in the opinion of counsel for the Company or
counsel for the International Managers may be necessary in the Registration
Statement, the Prospectus or in any other document or arrangement.
10. Termination. The obligations of the International Managers
hereunder may be terminated by the Lead Managers by notice given to and received
by the Company prior to delivery of and payment for the Firm Stock if, prior to
that time, any of the events described in Sections 7(i) or 7(j) shall have
occurred or if the International Managers shall decline to purchase the Stock
for any reason permitted under this Agreement.
11. Reimbursement of International Managers' Expenses. If the
Company shall fail to tender the Stock for delivery to the International
Managers by reason of any failure, refusal or inability on the part of the
Company to perform any agreement on its part to be performed, or because any
other condition of the International Managers' obligations hereunder required to
be fulfilled by the Company is not fulfilled, the Company will reimburse the
International Managers for all reasonable out-of-pocket expenses (including fees
and disbursements of counsel) incurred by the International Managers in
connection with this Agreement and the proposed purchase of the Stock, and upon
demand the Company shall pay the full amount thereof to the Lead Managers. If
this Agreement is terminated pursuant to Section 10 by reason of the default of
one or more International Managers, the Company shall not be obligated to
reimburse any defaulting International Manager on account of those expenses.
12. Notices, etc. All statements, requests, notices and agreements
hereunder shall be in writing, and:
(a) if to the International Managers, shall be delivered or sent
by mail, telex or facsimile transmission to Lehman Brothers
International (Europe), Three World Financial Center, New York, New
York 10285, Attention: Syndicate Department
28.
<PAGE>
(Fax: 212-526-6588), with a copy, in the case of any notice pursuant
to Section 8(c), to the Director of Litigation, Office of the General
Counsel, Lehman Brothers Inc., 3 World Financial Center, 10th Floor,
New York, NY 10285;
(b) if to the Company, shall be delivered or sent by mail, telex
or facsimile transmission to the address of the Company set forth in
the Registration Statement, Attention: Kenneth B. Hamlet, President
and Chief Executive Officer (Fax: 408-734-1687) with a copy to Wilson
Sonsini Goodrich & Rosati, Professional Corporation, Attention: Thomas
C. DeFilipps, Esq. (Fax: 415-493-6811);
provided, however, that any notice to an International Manager pursuant to
Section 8(c) shall be delivered or sent by mail, telex or facsimile transmission
to such International Manager at its address set forth in its acceptance telex
to the Lead Managers, which address will be supplied to any other party hereto
by the Lead Managers upon request. Any such statements, requests, notices or
agreements shall take effect at the time of receipt thereof. The Company shall
be entitled to act and rely upon any request, consent, notice or agreement given
or made on behalf of the International Managers by Lehman Brothers International
(Europe), on behalf of the Lead Managers.
13. Persons Entitled to Benefit of Agreement. This Agreement shall
inure to the benefit of and be binding upon the International Managers, the
Company, and their respective successors. This Agreement and the terms and
provisions hereof are for the sole benefit of only those persons, except that
(A) the representations, warranties, indemnities and agreements of the Company
contained in this Agreement shall also be deemed to be for the benefit of the
person or persons, if any, who control any International Manager within the
meaning of Section 15 of the Securities Act and for the benefit of each U.S.
Underwriter (and controlling persons thereof) who offers or sells any shares of
Common Stock in accordance with the terms of the Agreement Between U.S.
Underwriters and International Managers and (B) the indemnity agreement of the
International Managers contained in Section 8(b) of this Agreement shall be
deemed to be for the benefit of directors of the Company, officers of the
Company who have signed the Registration Statement and any person controlling
the Company within the meaning of Section 15 of the Securities Act. Nothing in
this Agreement is intended or shall be construed to give any person, other than
the persons referred to in this Section 13, any legal or equitable right, remedy
or claim under or in respect of this Agreement or any provision contained
herein.
14. Survival. The respective indemnities, representations,
warranties and agreements of the Company and the International Managers
contained in this Agreement or made by or on behalf on them, respectively,
pursuant to this Agreement, shall survive the delivery of and payment for the
Stock and shall remain in full force and effect, regardless of any investigation
made by or on behalf of any of them or any person controlling any of them.
15. Definition of the Terms "Business Day" and "Subsidiary". For
purposes of this Agreement, (a) "business day" means any day on which the New
York Stock Exchange, Inc. is open for trading and (b) "subsidiary" has the
meaning set forth in Rule 405 of the Rules and Regulations.
29.
<PAGE>
16. Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of California
17. Counterparts. This Agreement may be executed in one or more
counterparts and, if executed in more than one counterpart, the executed
counterparts shall each be deemed to be an original but all such counterparts
shall together constitute one and the same instrument.
18. Headings. The headings herein are inserted for convenience of
reference only and are not intended to be part of, or to affect the meaning or
interpretation of, this Agreement.
30.
<PAGE>
If the foregoing correctly sets forth the agreement between the
Company and the International Managers, please indicate your acceptance in the
space provided for that purpose below.
Very truly yours,
MAGINET CORPORATION
By:__________________________________________
Name:________________________________________
Title:_______________________________________
Accepted:
LEHMAN BROTHERS INTERNATIONAL (EUROPE)
HAMBRECHT & QUIST LLC
For themselves and as Lead Managers
of the several International Managers named
in Schedule 1 hereto
By LEHMAN BROTHERS INTERNATIONAL (EUROPE)
By________________________________
Authorized Representative
<PAGE>
SCHEDULE 1
Number of
International Managers Shares
- ---------------------- ---------
Lehman Brothers International (Europe)......................
Hambrecht & Quist LLC.......................................
Total
=========
<PAGE>
WILSON SONSINI GOODRICH & ROSATI
650 Page Mill Road
Palo Alto, California 94304-1050
Telephone 415-493-9300 Facsimile 415-493-6811
EXHIBIT 5.1
December 9, 1996
MagiNet Corporation
405 Tasman Drive
Sunnyvale, CA 94089
Re: Registration Statement of Form S-1
Ladies and Gentlemen:
We have examined Amendment No. 3 to the Registration Statement on Form S-1
(File No. 333-12185) to be filed by you with the Securities and Exchange
Commission on December 9, 1996 (the "Registration Statement") in connection with
the registration under the Securities Act of 1933, as amended, of 6,325,000
shares (including the underwriters' over-allotment option) of Common Stock of
Maginet Corporation (the "Shares). As your counsel in connection with this
transaction, we have examined the proceedings proposed to be taken in connection
with the sale and issuance of the Shares.
It is our opinion that, upon completion of the proceedings being taken or
contemplated by us, as your counsel, to be taken prior to the issuance of the
Shares, and upon completion of the proceedings being taken in order to permit
such transactions to be carried out in accordance with the securities laws of
the various states, where required, the Shares, when issued and sold in the
manner referred to in the Registration Statement, will be legally and validly
issued, fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement and further consent to the use of our name wherever appearing in the
Registration Statement, including the prospectus constituting a part thereof
and any amendment thereto.
Very truly yours
WILSON SONSINI GOODRICH & ROSATI
/s/ Wilson Sonsini Goodrich & Rosati
------------------------------------
<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. 3 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 9, 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. 3 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 9, 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) (0.93)
<EPS-DILUTED> (2.77) (0.93)
</TABLE>
