SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2000
OR
__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________to ______________
Commission file number 0-27494
LEISUREPLANET HOLDINGS, LTD.
----------------------------
(Exact name of Registrant as Specified in Its Charter)
Bermuda Not Applicable
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
Clarendon House, Church Street, Hamilton HM CX, Bermuda
-------------------------------------------------------
(Address of Principal Executive Offices with Zip Code)
Registrant's Telephone Number, Including Area Code: 809-295-1422
------------
---------------------------------------------------------------------
Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes ____No __
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares of common stock outstanding as of May 10, 2000 was
8,391,899.
<PAGE>
LEISUREPLANET HOLDINGS, LTD.
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2000
PART I - FINANCIAL INFORMATION
ITEM 1 Unaudited Consolidated Balance Sheets at March 31, 2000 and June 30,
1999
Unaudited Consolidated Statements of Income/(loss) and
Comprehensive Income/(loss) for the three and nine months
ended March 31, 2000 and 1999
Unaudited Consolidated statements of Cash Flows for the nine
months ended March 31, 2000 and 1999
Unaudited Consolidated Statement of Changes in Stockholders
Investment for the period June 30, 1999 to March 31, 2000
Notes to the Unaudited Consolidated Financial Statements
ITEM 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations
ITEM 3 Quantitative and Qualitative Disclosures About Market Risk
PART II - OTHER INFORMATION
ITEM 6 Exhibits and Reports on Form 8-K
SIGNATURES
<PAGE>
<TABLE>
<CAPTION>
LEISUREPLANET HOLDINGS, LTD.
CONSOLIDATED BALANCE SHEETS
ASSETS
- --------------------------------------------------------------------------------
JUNE 30,
MARCH 31, 2000 1999
------------------- -------------------
(DOLLARS)
---------------------------------------
CURRENT ASSETS
<S> <C> <C>
Cash on hand 38,406,792 20,813,301
Trade accounts receivable 15,065,992 13,388,561
Less: Allowances for bad debts (388,599) (443,172)
-------------------- --------------------
14,677,393 12,945,389
Inventories (net) 8,948,699 9,152,575
Prepaid expenses and other current assets 25,677,364 5,236,587
Deferred income taxes - 539,884
-------------------- --------------------
TOTAL CURRENT ASSETS 87,710,248 48,687,736
Property, plant and equipment 31,681,481 30,777,399
Less: Accumulated depreciation (12,619,664) (11,488,982)
-------------------- --------------------
19,061,817 19,288,417
Intangible assets (net) 27,549,000 34,024,745
Deferred charges (net) 269,909 868,944
Other assets 37,075 33,988
-------------------- --------------------
134,628,049 102,903,830
==================== ====================
LIABILITIES AND STOCKHOLDERS INVESTMENT
- --------------------------------------------------------------------------------
JUNE 30,
MARCH 31, 2000 1999
------------------- -------------------
(DOLLARS)
---------------------------------------
CURRENT LIABILITIES
Bank overdraft payable 441,803 -
Current portion of long term debt 996,523 3,088,435
Trade accounts payable 10,311,397 9,058,811
Other provisions and accruals 3,999,436 4,618,283
Dividends payable - 1,870,959
Other taxes payable 222,055 558,669
Income tax payable 566,634 1,214,292
---------- ---------
TOTAL CURRENT LIABILITIES 16,537,84 20,409,449
Long term debt 19,981,484 33,598,244
Deferred income taxes 1,205,985 1,551,724
---------- ---------
37,725,31 55,559,417
========= ==========
Minority stockholders investment 14,144,428 32,198,314
Preferred stock 23,224,530 9,891,197
STOCKHOLDERS' INVESTMENT
Capital stock:
A class common stock, $0.01 par value - authorized 23,000,000
shares, issued and outstanding 8,363,676 shares 83,636 53,832
B class common stock, $0.01 par value - authorized 2,000,000
shares, issued and outstanding 946,589 shares 9,466 9,466
FSAH B Class common stock 599 580
Preferred stock, $0.01 par value - authorized 5,000,000 shares,
issued and outstanding nil shares - -
Capital in excess of par 51,081,196 22,971,26
Retained earnings/(loss) (2,698,777) (3,084,700)
---------- ----------
48,476,120 19,950,439
Foreign currency translation adjustments (19,942,346) (14,695,537)
----------- -----------
28,533,774 5,254,902
134,628,049 102,903,830
=========== ===========
</TABLE>
-2-
<PAGE>
LEISUREPLANET HOLDINGS, LTD.
CONSOLIDATED STATEMENTS OF INCOME/(LOSS) AND COMPREHENSIVE
INCOME/(LOSS) FOR THE THREE MONTHS ENDED MARCH 31,
<TABLE>
<CAPTION>
1999
2000 RESTATED
------------------- -------------------
(DOLLARS)
<S> <C> <C>
Revenues 21,100,519 20,221,736
Operating expenses
Cost of sales 14,648,524 12,195,024
Selling, general and administrative costs 12,167,952 7,038,218
Loss on sale of investment in First SA Lifestyle Holdings Limited - 1,094,190
Amortization of intangibles 404,462 754,877
Depreciation 1,063,819 536,429
------------------- -------------------
28,284,757 21,618,738
------------------- -------------------
Operating loss (7,184,238) (1,397,002)
Other income 2,677,666 442,348
Interest income/(expense) 413,425 (444,742)
------------------- -------------------
Loss from consolidated companies before income taxes and minority interests (4,093,147) (1,399,396)
Provision for taxes on income 302,617 (294,056)
------------------- -------------------
Loss from continuing operations before minority interests (3,790,530) (1,693,452)
Minority interest in consolidated subsidiary companies 2,423,463 (855,696)
------------------- -------------------
Loss from continuing operations (1,367,067) (2,549,148)
Income from discontinued operations - 85,596
------------------- -------------------
Net (loss)/income (1,367,067) (2,463,552)
Other comprehensive (loss)/income
Foreign currency translation difference (4,076,618) 1,031,350
------------------- -------------------
Comprehensive loss (5,443,685) (1,432,202)
------------------- -------------------
Basic loss per share from continuing operations ($0.15) ($0.42)
Basic earnings per share from discontinued operations - 0.01
------------------- -------------------
Total basic loss per share ($0.15) ($0.41)
Diluted loss per share from continuing operations ($0.15) ($0.42)
Diluted earnings per share from discontinued operations - 0.01
------------------- -------------------
Total diluted loss per share ($0.15) ($0.41)
</TABLE>
Diluted earnings per share have not been reflected, as the result is
anti-dilutive.
-3-
<PAGE>
LEISUREPLANET HOLDINGS, LTD.
CONSOLIDATED STATEMENTS OF INCOME/(LOSS) AND COMPREHENSIVE
INCOME/(LOSS) FOR THE NINE MONTHS ENDED MARCH 31,
<TABLE>
<CAPTION>
1999
------------------
2000 RESTATED
(DOLLARS)
<S> <C> <C>
Revenues 73,877,806 65,533,336
================== ==================
Operating expenses
Cost of sales 49,403,704 39,736,935
Selling, general and administrative costs 29,542,007 21,662,051
Loss on sale of investment in First SA Lifestyle Holdings Limited - 1,094,190
Amortization of intangibles 1,323,843 1,318,037
Depreciation 3,014,091 1,874,843
------------------ ------------------
83,283,645 65,686,056
================== ==================
Operating loss (9,405,839) (152,720)
Other income 9,754,465 582,254
Interest expense (95,440) (125,913)
------------------ ------------------
Income from consolidated companies before income taxes and
minority interests 253,186 303,621
Provision for taxes on income (1,599,707) (1,647,484)
------------------ ------------------
Income/(loss) from continuing operations before minority interests (1,346,521) (1,343,863)
Minority interest in consolidated subsidiary companies 1,688,190 (2,369,370)
------------------ ------------------
Income from continuing operations 341,669 (3,713,233)
Income from discontinued operations - (841,831)
------------------ ------------------
Net (loss)/income 341,669 (4,555,064)
Other comprehensive (loss)/income
Foreign currency translation difference (5,246,809) 2,173,564
------------------ ------------------
Comprehensive income/(loss) (4,905,140) (2,381,500)
------------------ ------------------
Basic loss per share from continuing operations $0.05 ($0.56)
Basic loss per share from discontinued operations - (0.13)
------------------ ------------------
Total basic loss per share $0.05 ($0.69)
Diluted loss per share from continuing operations $0.18 ($0.56)
Diluted loss per share from discontinued operations - (0.13)
------------------ ------------------
Total diluted loss per share $0.18 ($0.69)
------------------ ------------------
</TABLE>
Diluted earnings per share for 1999 has not been reflected as the result is
anti-dilutive
-4-
<PAGE>
LEISUREPLANET HOLDINGS, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31
<TABLE>
<CAPTION>
1999
2000 RESTATED
(DOLLARS)
Cash flows from operating activities:
<S> <C> <C>
Net Income/(loss) 341,669 (4,555,064)
Loss from discontinued operations - 841,831
----------------- ------------------
Loss from continuing operations 341,669 (3,713,233)
ADJUSTMENTS TO RECONCILE LOSS TO NET CASH (UTILIZED)/GENERATED BY OPERATING
ACTIVITIES:
Depreciation and amortization 4,337,934 3,192,880
Deferred income taxes 291,528 250,076
Net loss on sale of assets 63,167 -
Net gain on sale of portion of investment in First Lifestyle Holdings - (747,093)
Net loss/(gain) on transactions with minorities 13,572,877) 2,976,622
Effect of changes in current assets and current liabilities (5,363,601) (6,202,985)
Minority interest in consolidated subsidiary companies (1,327,782) 2,622,490
Creation of debenture redemption reserve fund 393,750 562,500
----------------- ------------------
Net cash utilized by continuing operating activities (15,196,620) (7,011,987)
Net cash utilized by discontinued operations - (841,831)
----------------- ------------------
Net cash utilized by operating activities (15,196,620) (7,835,818)
----------------- ------------------
Cash flows from investing activities:
Proceeds on minority shares issued in LPI Limited 20,844,442 -
Proceeds on minority shares issued in First Lifestyle
Holdings Limited 16,645 -
Proceeds on dilution in First SA Lifestyle holdings Limited - 10,352,556
Proceeds on First Lifestyle Holdings shares sold 437,773 -
Additional shares in First Lifestyle Holdings acquired - (33,655)
Additional intangibles acquired (1,103,008) (17,896)
Additions to property, plant and equipment (4,447,356) (2,794,041)
Proceeds on disposal of property, plant and equipment 36,445 482,766
Restraint of trade payments - (1,385,197)
Additional purchase price payments - (2,484,510)
Other assets acquired (6,190) (175,812)
Acquisition of subsidiaries (net of cash) - (2,434,902)
Proceeds on disposal of subsidiary (Net of cash of $10,562) - 14,189
----------------- ------------------
Net cash realized by investing activities 15,778,751 1,523,498
----------------- ------------------
Cash flows from financing activities:
Net borrowings in bank overdrafts 466,057 739,916
Repayments of long term debt (1,516,732) (1,775,955)
Repayments of short term debt (1,942,165) (1,314,396)
Proceeds on preference stock issued - 9,891,197
Proceeds/(redemption)on stock issues 21,101,884 (1,900,574)
----------------- ------------------
Net cash provided in financing activities 18,109,044 5,640,188
Effect of exchange rate changes on cash (1,097,684) 4,040,042
------------------ ------------------
Cash generated by operations 17,593,491 3,367,910
Cash on hand at beginning of period 20,813,301 17,948,991
------------------ ------------------
Cash on hand at end of period 38,406,792 21,316,901
================= =================
</TABLE>
-5-
<PAGE>
LEISUREPLANET HOLDINGS, LTD.
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS INVESTMENT
<TABLE>
<CAPTION>
FIRST SOUTH
LEISUREPLANET LEISUREPLANET AFRICAN
HOLDINGS, LTD. HOLDINGS, LTD. HOLDINGS B
A CLASS COMMON B CLASS COMMON CLASS COMMON CAPITAL IN
STOCK STOCK STOCK EXCESS OF PAR
---------------- ----------------- ------------- ----------------
(DOLLARS)
<S> <C> <C>
Balance at June 30, 1999
Options exercised 800 - - 159,200
Debentures converted 165 - - 98,835
Share issue expenses written off - - - (25,092)
Net loss - - - -
Translation difference - - - -
---------- ----------- --------- ----------
Balance at September 30, 1999 54,797 9,466 580 23,204,204
Options exercised 255 - - 120,870
Debentures converted 3,585 - - 2,147,409
A warrants exercised 724 - - 476,626
Escrow shares issued 5,905 - - (5,905
New shares issued 13,793 - - 19,986,207
FSAH B class shares issued - - 19 567,842
Share issue expenses incurred - - - (896,382)
Net profit - - - -
Dividends reversed - - - -
Translation difference - - - -
---------- ----------- --------- ----------
Balance at December 31, 1999 carried forward 79,059 9,466 599 45,600,871
========== =========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
OTHER
COMPREHENSIVE
(LOSS) /INCOME
(FOREIGN
CURRENCY
RETAINED TRANSLATION
(LOSS)/EARNINGS ADJUSTMENTS) TOTAL
----------------- ------------- --------------
<S> <C> <C> <C>
Balance at June 30, 1999 (14,695,537) 5,254,902
Options exercised - - 160,000
Debentures converted - - 99,000
Share issue expenses written off - - (25,092)
Net loss (2,833,436) - (2,833,436)
Translation difference - 518,541 518,541
---------- ----------- ---------
Balance at September 30, 1999 (5,918,136) (14,176,996) 3,173,915
Options exercised - - 121,125
Debentures converted - - 2,150,994
A warrants exercised - - 477,350
Escrow shares issued - - -
New shares issued - - 20,000,000
FSAH B class shares issued - 567,861
Share issue expenses incurred - - (896,382)
Net profit 4,542,176 - 4,542,176
Dividends reversed 44,250 - 44,250
Translation difference - (1,688,732) (1,688,732)
---------- ----------- ---------
Balance at December 31, 1999 carried forward (1,331,710) (15,865,728) 28,492,557
========== =========== ==========
</TABLE>
-6-
<PAGE>
<TABLE>
<CAPTION>
LEISUREPLANET LEISUREPLANET FIRST SOUTH
HOLDINGS, LTD. HOLDINGS, LTD. AFRICAN HOLDINGS
A CLASS COMMON B CLASS COMMON B CLASS COMMON CAPITAL IN
STOCK STOCK STOCK EXCESS OF PAR
----------------- ------------------ ---------------- -----------------
(DOLLARS)
<S> <C> <C> <C> <C>
Balance at December 31, 1999 brought forward 79,059 9,466 599 45,600,871
Options exercised 745 353,130
Warrants exercised 1,699 - - 1,070,057
Escrow shares reversed (4,700) - - 4,700
Debentures converted 6,833 - - 4,952,438
Share issue expenses incurred - - - (900,000)
Net loss - - - -
Translation difference - - - -
---------- ----------- ---------- ------------
Balance at March 31, 2000 83,636 9,466 599 51,081,196
========== =========== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
OTHER
COMPREHENSIVE
(LOSS) /INCOME
(FOREIGN CURRENCY
RETAINED TRANSLATION
(LOSS)/EARNINGS ADJUSTMENTS) TOTAL
- ------------------ ---------------- ------------
<S> <C> <C> <C>
alance at December 31, 1999 brought forward (1,331,710) (15,865,728) 28,492,557
Options exercised - - 353,875
Warrants exercised - - 1,071,756
Escrow shares reversed - - -
Debentures converted - - 4,959,271
Share issue expenses incurred - - (900,000)
Net loss (1,367,067) - (1,367,067)
Translation difference - (4,076,618) (4,076,618)
---------- ----------- ----------
Balance at March 31, 2000 (2,698,777) (19,942,346) 28,533,774
========== =========== ==========
</TABLE>
-7-
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MARCH 31, 2000 AND 1999
1. ORGANIZATION AND PRINCIPAL ACTIVITIES OF THE GROUP
Leisureplanet Holdings, Ltd. (formerly First South Africa Corp., Ltd.)
(the "Company") was founded on September 6, 1995. The purpose of the
Company is to acquire and operate South African companies and acquire
and develop Internet related companies with an emphasis on European
based e-commerce related businesses.
The principal activities of the group include the following:
LIFESTYLE PRODUCTS
The manufacture, sale and distribution of lifestyle enhancing products,
which includes both consumable food products and semi-durable outdoor
and indoor products.
INTERNET RELATED ACTIVITIES
The maintenance and provision of an Internet travel service to Internet
subscribers, providing the convenience of one stop travel planning with
on-line booking and flexibility.
2. SUMMARY OF ACCOUNTING POLICIES
The consolidated financial statements have been prepared in accordance
with US generally accepted accounting principles and incorporate the
following significant accounting policies:
CONSOLIDATION
The Company consolidates its majority owned subsidiaries. The
consolidated financial statements include the accounts of the Company
and its subsidiaries. Minority interests have been taken into account
when determining the net income due to the Company. Intercompany
transactions have been eliminated on consolidation.
ACCOUNTING ESTIMATES
Preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements, disclosure of
contingent liabilities at the financial statement date and reported
amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
EARNINGS/(LOSS) PER SHARE
Earnings/(loss) per share on common shares is based on net
income/(loss) and reflects dilutive effects of any stock options and
warrants that exist at period end.
INTANGIBLE ASSETS
Goodwill, recipes and other intellectual property, and trademarks are
being amortized on a straight-line basis over a period of twenty to
twenty five years. If facts and
-8-
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MARCH 31, 2000 AND 1999
circumstances were to indicate that the carrying amount of goodwill,
recipes and other intellectual property is impaired, the carrying
amount would be reduced to an amount representing the discounted future
cash flows to be generated by the operation.
Also included in intangible assets are non-competition agreements that
are being amortized on a straight-line basis over the six-year term of
the agreements.
The Company has adopted Statement of Financial Accounting Standards No.
121 ("SFAS-121"), Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of. No impairments in
long-lived assets have taken place.
FOREIGN CURRENCY TRANSLATION
The functional currency of the underlying companies in the Lifestyle
enhancing segment is that of South African Rand. Accordingly, the
following rates of exchange have been used for translation purposes:
Assets and liabilities are translated into United States Dollars using
the exchange rates at the balance sheet date.
Common stock and capital in excess of par are translated into United
States Dollars using historical rates at date of issuance.
Revenue, expenses, gains and losses are translated into United States
Dollars using the weighted average exchange rates for each year.
The resultant translation adjustments are reported in the component of
stockholders' investment designated as "Foreign currency translation
adjustment."
FOREIGN ASSETS AND LIABILITIES
Transactions in foreign currencies arise as a result of inventory
purchases from foreign countries and intercompany funding transactions
between the Company and its subsidiaries. Transactions in foreign
currencies are accounted for at the rates ruling on transaction dates.
Exchange gains and losses are charged to the income statement during
the period in which they are incurred. Foreign assets and liabilities
of the group which are not denominated in United States Dollars are
converted into United States Dollars at the exchange rates ruling at
the financial year-end or at the rates of forward cover purchased.
Forward cover is purchased to cover the currency exposure on foreign
liabilities.
INVENTORIES
Inventories are valued at the lower of cost and net realizable value,
using both the first-in, first-out and the weighted average methods.
The value of work-in-progress and finished goods includes an
appropriate portion of manufacturing overheads. A valuation reserve has
been established to reduce the values of certain identified inventories
(determined to be obsolete or otherwise impaired) to their estimated
net realizable values (market or selling price less costs to dispose).
-9-
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MARCH 31, 2000 AND 1999
PROPERTY, PLANT AND EQUIPMENT
Land is stated at cost and is not depreciated. Buildings are
depreciated on the straight-line basis over estimated useful lives of
20 years.
Plant and equipment, and motor vehicles are written off over their
estimated useful lives of 5 to 10 years.
INCOME TAXES
Income tax expense is based on reported earnings before income taxes.
Deferred income taxes represent the impact of temporary differences
between the amounts of assets and liabilities recognized for financial
reporting purposes and such amounts recognized for tax purposes.
Deferred taxes are measured by applying currently enacted tax laws.
FAIR VALUE OF FINANCIAL INSTRUMENTS
As at March 31, 2000, the carrying value of accounts receivable,
accounts payable and investments approximate their fair value. The
carrying value of long-term debt approximates fair value, as the debt,
other than convertible debentures, interest rates are keyed to the
prime lending rate. The convertible debentures are believed to
approximate fair market.
REVENUES
Revenues comprise net invoiced sales of shipped Lifestyle enhancing
products and Internet travel related commissions. Combined revenues
exclude sales to group companies.
Revenues are stated net of allowances granted to customers and trade
discounts. Returns of defective products are offset against revenues.
GAIN ON DISPOSAL OF SUBSIDIARY STOCK
Subsidiary stock disposed of during the period is recognized as a gain
in the statement of income and is separately disclosed as a
non-operating gain.
CASH FLOWS
For the purposes of the statements of cash flows, cash includes cash on
hand and deposits held on notice.
RECLASSIFICATION
Certain items in the prior year financial statements have been
reclassified to conform to the current period presentation.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB adopted SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting
and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts)
be recorded in the balance sheet as either an asset or liability
measured at its fair value and that changes in the derivatives fair
value be recognized currently in earnings unless specific hedge
accounting criteria are met. Special
-10-
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MARCH 31, 2000 AND 1999
accounting for qualifying hedges allows derivatives gains and losses to
offset related results on the hedged item in the income statement and
requires that the Company must formally document, designate and assess
the effectiveness of transactions that receive hedge accounting. SFAS
No. 133 is effective for fiscal years beginning after June 15, 2000.
The Company believes that the future adoption of this statement will
not have a significant impact on the results of operations or financial
position of the Company.
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
2000 1999
----------------- ---------------
DOLLARS
<S> <C> <C>
Finished goods 4,307,613 4,655,361
Work in progress 515,983 587,544
Raw materials and ingredients 3,087,475 2,983,298
Supplies 1,155,025 1,066,595
--------- ---------
Inventories (Gross) 9,066,096 9,292,798
Less: Valuation allowances (117,397) (140,223)
--------- ---------
Inventories (Net) 8,948,699 9,152,575
========= =========
</TABLE>
4. DISCONTINUED OPERATIONS
During the previous fiscal year, the Company discontinued its
operations in the Industrial manufacturing and Packaging business
segments in order to concentrate all of its efforts on its core
operations of Lifestyle enhancing products and Internet travel related
businesses.
-11-
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MARCH 31, 2000 AND 1999
5.EARNINGS PER SHARE
Earnings/(loss) per share data is calculated as follows:
<TABLE>
<CAPTION>
BASIC LOSS PER SHARE FOR THE THREE MONTHS ENDED
MARCH 31, 2000
Net loss available to common stockholders (1,367,067)
SHARES FRACTION OF WEIGHTED AVERAGE
DATES OUTSTANDING OUTSTANDING PERIOD SHARES
----------- ------ ------
<S> <C> <C> <C> <C>
January 1, 2000 8,852,536 1.00 8,852,536
January 1, 2000 to March 31, 2000
Options converted to shares during the quarter 74,500 0.90 66,973
Warrants exercised during the quarter 169,911 0.40 67,298
Escrow shares reversed during the quarter (469,975) 1.00 (469,975)
Debentures converted into shares during the quarter 683,293 0.71 485,566
--------- ---------
WEIGHTED AVERAGE SHARES 9,310,265 9,002,398
========= =========
BASIC LOSS PER SHARE FOR THE NINE MONTHS ENDED
MARCH 31, 2000
Net loss available to common stockholders 341,669
SHARES FRACTION OF WEIGHTED AVERAGE
DATES OUTSTANDING OUTSTANDING PERIOD SHARES
July 1, 1999 6,329,731 1.00 6,329,731
July 1, 1999 to March 31, 2000
New shares issued during the year 1,379,310 0.02 473,194
Options converted to shares during the year 180,000 0.57 97,317
Escrow shares issued during the year 120,621 0.51 80,561
A Warrants exercised during the year 242,311 0.08 49,856
Debentures converted into shares during the year 1,058,292 0.12 312,526
--------- ---------
WEIGHTED AVERAGE SHARES 9,310,265 7,343,185
========= =========
BASIC LOSS PER SHARE FOR THE THREE MONTHS ENDED
MARCH 31, 1999
Net loss available to common stockholders from
continuing operations (2,549,148)
Net income available to common stockholders from
discontinued operations 85,596
----------
Total net loss (2,463,552)
==========
</TABLE>
-12-
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
SHARES FRACTION OF WEIGHTED AVERAGE
DATES OUTSTANDING OUTSTANDING PERIOD SHARES
<S> <C> <C> <C> <C>
Balance at January 1, 1999 6,254,649 1.00 6,254,649
Redemption of shares during the quarter (142,918) 1.00 142,918
Options converted to shares during the quarter 25,500 1.00 25,500
--------- ---------
WEIGHTED AVERAGE SHARES 6,137,231 6,137,231
BASIC LOSS PER SHARE FOR THE NINE MONTHS ENDED MARCH 31, 1999
Net loss available to common stockholders from
continuing operations (3,713,233)
Net loss available to common stockholders from
discontinued operations (841,831)
-----------
Total net loss (4,555,064)
-----------
</TABLE>
<TABLE>
<CAPTION>
SHARES FRACTION OF WEIGHTED AVERAGE
DATES OUTSTANDING OUTSTANDING PERIOD SHARES
----------- ------ ------
<S> <C> <C> <C>
July 1, 1998 7,472,324 1.00 7,472,324
July 1 - September 30, 1998
Additional purchase price payments 242,684 0.67 162,085
Warrants converted to shares during the quarter 127,200 0.96 122,558
October 1 - December 31, 1998
Redemption of escrow shares during the quarter (1,583,059) 0.51 (1,057,299)
January 1 - March 31, 1999
Redemption of shares during the quarter (142,918) 0.33 (46,944)
Options converted to shares during the quarter 21,000 0.33 6,898
WEIGHTED AVERAGE SHARES 6,137,231 6,659,622
DILUTED LOSS PER SHARE FOR THE THREE MONTHS
ENDED MARCH 31, 2000
Net loss available to common stockholders (1,367,067)
Add impact of assumed conversions 401,832
----------
ADJUSTED NET INCOME (965,235)
----------
Weighted average shares 9,002,398
Warrants and options not yet exercised 1,795,774
9% convertible debentures 148,603
Increasing rate debentures 1,312,281
----------
ADJUSTED WEIGHTED AVERAGE SHARES 12,259,056
==========
</TABLE>
-13-
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
DILUTED LOSS PER SHARE FOR THE NINE MONTHS ENDED
MARCH 31, 2000
<S> <C>
Net loss available to common stockholders 341,669
Add impact of assumed conversions 1,628,401
---------
ADJUSTED NET INCOME 1,970,070
---------
Weighted average shares 7,343,185
Warrants and options not yet exercised 1,312,751
9% convertible debentures 522,282
Increasing rate debentures 1,491,356
---------
ADJUSTED WEIGHTED AVERAGE SHARES 10,669,574
==========
DILUTED LOSS PER SHARE FOR THE THREE MONTHS
ENDED MARCH 31, 1999
Net loss available to common stockholders from continuing
operations (2,549,148)
Add impact of assumed conversions 653,794
---------
(1,895,354)
Net income available to common stockholders from discontinued
operations 85,596
---------
ADJUSTED NET LOSS AVAILABLE TO COMMON
STOCKHOLDERS (1,809,938)
==========
Weighted average shares 6,137,231
Warrants and options not yet exercised 19,852
9% convertible debentures 921,666
Increasing rate debentures 1,578,947
---------
ADJUSTED WEIGHTED AVERAGE SHARES 8,657,696
==========
DILUTED LOSS PER SHARE FOR THE NINE MONTHS
ENDED MARCH 31, 1999
Net loss available to common stockholders from
continuing operations (3,713,233)
Add impact of assumed conversions 1,633,757
---------
(2,079,476)
Net loss available to common stockholders from
discontinued operations (841,831)
ADJUSTED NET LOSS AVAILABLE TO COMMON
STOCKHOLDERS (2,921,307)
==========
Weighted average shares 6,659,622
Warrants and options not yet exercised 6,617
9% convertible debentures 979,358
Increasing rate debentures 1,578,947
---------
ADJUSTED WEIGHTED AVERAGE SHARES 9,224,544
==========
</TABLE>
-14-
<PAGE>
6. SUBSEQUENT EVENTS
EMPLOYMENT AGREEMENT FOR CLIVE KABATZNIK
On April 12, 2000, the Company's Board of Directors approved a revised
Employment Agreement with Clive Kabatznik (the "Employment Agreement"). Pursuant
to the Employment Agreement, Mr. Kabatznik will serve as the Chief Executive
Officer, President and Chief Financial Officer of the Company beginning as of
February 1, 2000 and continuing through and until January 31, 2005. As
compensation for his services, Mr. Kabatznik will receive an annual base salary
of $300,000 (with five percent increases each year), and an annual bonus of five
percent of net realized capital gains upon the sale, liquidation or
distribution by the Company of any Portfolio Company (as defined in the
Employment Agreement). A Portfolio Company does not include any of the South
African entities currently owned by the Company. In the event of a Change in
Control (as defined in the Employment Agreement), Mr. Kabatznik may also be
entitled to a payment of five percent of any net unrealized capital gains on any
Portfolio Company, which gains may, at the option of the Company, be paid in
cash, stock of the Portfolio Company or any combination of the foregoing.
INVESTMENT IN MAGNOLIA BROADBAND
On April 14, 2000, the Company entered into a Securities Purchase Agreement
(the "Agreement") with Magnolia Broadband, Inc. ("Magnolia"). Magnolia is a
start-up company which plans to develop fixed wireless broadband solutions.
Magnolia is seeking to develop technology that provides residential and small
business users of the Internet with high speed access to Internet services at
lower capital costs and with faster deployment. Magnolia will initially target
its products in the United States and plans to later penetrate international
markets.
Pursuant to the Agreement, the Company invested $2,500,000 in Magnolia and
received shares of preferred stock in Magnolia. The Company also received
certain board representation rights and registration rights. The shares of
Magnolia preferred stock owned by the Company are convertible into common stock
of Magnolia, and the Company is entitled to voting rights (on an as-converted
basis) and certain preferred dividend, liquidation and anti-dilution rights. The
Company initially owns approximately 48% of Magnolia. Certain of the shares
owned by the founders of Magnolia are subject to repurchase by Magnolia if the
founders' employment with Magnolia terminates before October 15, 2002. Magnolia
has reserved additional shares of its common stock for issuance to founders,
employees, consultants, directors and other investors. Assuming full issuance of
such shares, the Company's ownership interest in Magnolia will be reduced to
33%.
-15-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BACKGROUND AND HISTORY
The Company was incorporated in September 1995 with the intention of actively
pursuing acquisitions fitting a pre-defined investment strategy. The broad
strategy followed in all investment decisions was as follows:
Revenue must be within the range of $5 million - $50 million.
Net income must yield a sustainable above average return on investment.
Growth in revenue must be above average growth rates and must be sustainable
over the medium term.
The industry in which the target operates must meet the pre-defined industry
sectors identified by management.
The Company holds, through its South African subsidiary, First South African
Holdings (Pty.) Ltd., nine South African subsidiaries that have met the
acquisition criteria identified above. In addition, the Company acquired an 81%
stake in LPI Limited, an Internet travel company, on January 1, 1999. The
Company currently owns approximately 57% of LPI Limited. Our subsidiaries are
listed below and are engaged in the following industry segments:
INTERNET AND E-COMMERCE RELATED BUSINESSES
LPI Limited
LIFESTYLE PRODUCTS
FOOD DIVISION
Piemans Pantry
Astoria Bakery
Seemann's Quality Meat Products
Gull Foods
Fifers Bakery
LEISURE DIVISION
SA Leisure
Galactex Outdoor
Republic Umbrella
Tradewinds
The Company also owns stakes in two other entities in the Internet and
e-commerce related segment, Magnolia Broadband, Inc. and hotelsupplygroup.com.
Each of these entities was inoperative during the quarter ended March 31, 2000.
-16-
<PAGE>
SOUTH AFRICAN OPERATIONS
As the Company's results are reported in US Dollars, but revenues are primarily
generated in South African Rand, the South African inflation rate and the
depreciation of the South African Rand against the US Dollar are important to
the understanding of the Company's results.
In broad terms, if the deterioration of the Rand is in excess of the South
African inflation rate, then the Company would need to generate South African
revenue in excess of the South African inflation rate to maintain US Dollar
parity.
The average rate for the South African Rand against the US Dollar for the period
presented in this report is as follows:
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 2000 MARCH 31, 1999
-------------- --------------
Rate of exchange vs $1 6.42 6.15
Depreciation 4.4%
NINE MONTHS NINE MONTHS
ENDED ENDED
MARCH 31, 2000 MARCH 31, 1999
-------------- --------------
Rate of exchange vs $1 6.22 6.03
Depreciation 3.15%
The annual rate of inflation in South Africa for the year ended March 31, 2000
was approximately 3.4%
The result reflected below is therefore greater than inflation adjusted South
African Rand for both revenue and earnings growth.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 AS COMPARED TO THREE MONTHS ENDED MARCH 31,
1999
Revenues
Revenues for the three months ended March 31, 2000 increased by $0.88 million or
4.4% to $21.1 million as compared to $20.2 million for the three months ended
March 31, 1999. For the three months ended March 31, 2000, revenues generated
from Internet and e-commerce related businesses totaled $100,000, while revenues
generated from the lifestyle products segment totaled $21.0 million.
Cost of goods sold
Cost of goods sold has increased as a percentage of revenues from 60% to 69.4%.
This is in line with the fiscal year ended June 30, 1999 percentage of 69%.
Generally, two operations in the
-17-
<PAGE>
Lifestyle enhancing business sector have experienced difficulties during the
current fiscal year, which resulted in lower than anticipated margins being
achieved. Corrective action is being taken to address the margin deficiencies.
Selling, general and administrative expenses
Selling, general and administrative expenses for the three months ended March
31, 2000 increased by $5.2 million or 73.4% to $12.2 million as compared to $7.0
million for the three months ended March 31, 1999. This increase takes into
account the operating expenses of our Internet travel related subsidiary that
was acquired on January 1, 1999.
Loss on sale of investment in First SA Lifestyle Holdings limited
Loss realized on the disposal of the Leisure related companies to the food
related companies occurred in October 1998. This merger of the two operations
has given rise to First Lifestyle Holdings Limited, the lifestyle enhancing
company.
Amortization of intangibles
Amortization of intangibles decreased from $0.7 million for the three months
ended March 31, 1999 to $0.4 million for the three months ended March 31, 2000.
This decrease is primarily due to the write off of intangibles arising on the
acquisition of the Company's various businesses, which intangibles were no
longer justifiable.
Depreciation
Depreciation increased from $0.5 million for the three months ended March 31,
1999 to $1.1 million for the three months ended March 31, 2000. This increase is
due to the amortization of computer equipment in the Internet travel related
business acquired in January 1999 and additional plant and machinery acquired in
the Lifestyle sector to grow the sector organically.
Other income
Other income for the three months ended March 31, 2000 totaled $2.67 million and
is primarily made up of unrealized gains on the Company's investment in LPI
Limited. These gains resulted from the issuance of new shares by LPI Limited to
new investors. These new investments were made at a higher valuation than the
investments made by the Company and carried on the Company's financial
statements.
Interest expense/(income)
Interest income of $0.4 million for the three months ended March 31, 2000 has
increased by $0.86 million from an interest expense of $0.45 million for the
three months ended March 31, 1999. This increase is primarily due to the
conversion of debentures to shares during the quarter and the resultant reversal
of a portion of the capital redemption reserve fund, which was being created for
future debenture redemptions.
-18-
<PAGE>
Provision for taxes on income
Our income tax provision decreased from $0.3 million for the three months ended
March 31, 1999 to a credit of $0.3 million for the three months ended March 31,
2000. This credit arose due to the incurring of losses in a quiet trading period
by some of the Lifestyle enhancing businesses, reversing some of the taxation
provision required.
South African tax law does not permit the losses incurred in the internet travel
related business and the corporate head office to be offset against the taxable
income of the Lifestyle enhancing business segment.
Loss from discontinued operations
The loss resulted from the discontinuance of our industrial products and
packaging business segments. We decided to discontinue these segments during the
fiscal year ended June 30, 1999, as their performance was below average and
these businesses were considered as non-core to the group.
Minority interest in consolidated subsidiary companies
The minority interest in our subsidiaries decreased from $0.9 million for the
three months ended March 31, 1999 to a credit of $2.4 million for the three
months ended March 31, 2000. This decrease is primarily due to the fact that
after the recent equity infusion into LPI Limited, the minority interest in this
company has assumed a positive balance, which results in these minorities
absorbing a portion of the losses generated by that company. LPI Limited is
primarily incurring marketing expenditure whilst it is still in its growth
phase. The percentage of LPI Limited's losses absorbed by minorities during the
current quarter was 43.3%.
Net (loss)/income
As a result of the above, the Company has achieved a loss of $1.37 million as
compared to a loss of $2.46 million for the comparative quarter in the prior
year.
The Internet travel related business is undergoing extensive development and
presently does not generate significant revenues, thereby contributing a
significant loss for the quarter. These losses are expected to continue for the
foreseeable future.
The Internet travel related business contributed a loss of $4.02 million to the
group after taking into account the minority interests. The remaining gain
represents profits from the Lifestyle enhancing business sector, corporate home
office expenses and unrealized gains on the Company's investment in LPI Limited.
-19-
<PAGE>
NINE MONTHS ENDED MARCH 31, 2000 AS COMPARED TO NINE MONTHS ENDED MARCH 31, 1999
Revenues
Revenues for the nine months ended March 31, 2000 increased by $8.34 million or
12.7% to $73.87 million as compared to $65.5 million for the nine months ended
March 31, 1999. For the nine months ended March 31, 2000, revenues generated
from Internet and e-commerce related businesses totaled $200,000, while revenues
generated from the lifestyle products segment totaled $73.67 million.
This growth in revenue was generated primarily from the Lifestyle enhancing
business segment which has improved revenue 17% in South African Rand terms
after factoring out the effects of the deterioration in the currency over the
respective quarters, which is significantly better than inflation. This growth
in revenue is attributable to increased market share in the South African market
as well as a significant improvement in exports to European destinations. The
current focus of the Lifestyle enhancing businesses is to improve export
revenues where significant future growth is expected.
Cost of goods sold
Cost of goods sold has increased as a percentage of revenues from 60.6% to
66.9%. This reflects a slight improvement over the fiscal year ended June 30,
1999 percentage of 69%. As mentioned previously, two operations in the Lifestyle
enhancing business sector have experienced difficulties during the current
fiscal year, which resulted in lower than anticipated margins being achieved.
Corrective action is being taken to address the margin deficiencies.
Selling, general and administrative expenses
Selling, general and administrative expenses for the nine months ended March 31,
2000 increased by $7.9 million or 36.6% to $29.6 million as compared to $21.7
million for the nine months ended March 31, 1999. This increase takes into
account the operating expenses of our Internet travel related subsidiary which
was acquired on January 1, 1999.
Loss on sale of investment in First SA Lifestyle Holdings limited
Loss realized on the disposal of the leisure related companies to the food
related companies occurred in October 1998. This merger of the two operations
has given rise to First Lifestyle Holdings Limited, the lifestyle enhancing
company, mentioned previously.
Amortization of intangibles
Amortization of intangibles increased from $1.32 million for the nine months
ended March 31, 1999 to $1.33 million for the nine months ended March 31, 2000.
Depreciation
Depreciation increased from $1.87 million for the nine months ended March 31,
1999 to $3.01 million for the nine months ended March 31, 2000. This increase is
due to the amortization of
-20-
<PAGE>
computer equipment in the Internet travel related business acquired in January
1999 as well as depreciation on plant and machinery required for organic
expansion.
Other income
Other income for the nine months ended March 31, 2000 totaled $9.8 million and
is primarily made up of unrealized gains on the Company's investment in LPI
Limited. These gains resulted from the issuance of new shares by LPI Limited to
new investors. These new investments were made at a higher valuation than the
investments made by the Company and carried on the Company's financial
statements.
Interest expense/(income)
Interest expense of $0.1 million for the nine months ended March 31, 2000 has
decreased by $0.03 million from an interest expense of $0.13 million for the
nine months ended March 31, 1999.
Provision for taxes on income
Our income tax provision decreased from $1.65 million for the nine months ended
March 31, 1999 to $1.6 million for the nine months ended March 31, 2000. This
increase is after accounting for the decrease in the South African tax rate from
35% to 30% during 1999. The taxation charge represents the taxation charge
incurred by the Lifestyle enhancing business segment, which has reflected
increased taxable income over the comparative period in the prior year.
South African tax law does not permit the losses incurred in the internet travel
related business and the corporate head office to be offset against the taxable
income of the Lifestyle enhancing business segment.
Loss from discontinued operations
The loss resulted from the operations of our currently discontinued industrial
products and packaging business segments. We decided to discontinue these
segments during the fiscal year ended June 30, 1999 year as their performance
was below average and these businesses were considered as non-core to the group.
Minority interest in consolidated subsidiary companies
The minority interest in our subsidiaries decreased from $2.4 million for the
nine months ended March 31, 1999 to a credit of $1.7 million for the nine months
ended March 31, 2000. This decrease is primarily due to the fact that after the
recent equity infusion into LPI Limited, the minority interest in this company
has assumed a positive balance, which resulted in these minorities absorbing a
portion of the losses generated by that company. LPI Limited is primarily
incurring marketing expenditure whilst it is still in its growth phase. The
percentage of LPI Limited's losses absorbed by minorities during the current
period was 43.3%.
-21-
<PAGE>
Net (loss)/income
As a result of the above, the Company has achieved a profit of $0.3 million as
compared to a loss of $4.6 million for the comparative period in the prior year.
The Internet travel related business is undergoing extensive development and
presently does not generate significant revenues, thereby contributing a
significant proportion of the quarter's loss. These losses are expected to
continue for the foreseeable future.
The Internet travel related business contributed a loss of $9.3 million to the
group after taking into account the minority interests. The remaining gain
represents profits from the Lifestyle enhancing business sector, corporate home
office expenses and unrealized gains on the Company's investment in LPI Limited.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash increased by $17.6 million from $20.8 million to $38.4 million. The
increase is primarily as a result of the additional $20 million injection of
capital by minorities into LPI Limited and an additional $20 million capital
injection into the Company by strategic equity partners. The Lifestyle enhancing
products segments utilized $1.052 million of cash, primarily due to a
significant dividend payment during the current year. The Internet travel
related business still requires significant cash resources as it incurs
primarily marketing expenditure in developing its future potential.
Working capital increased by $22.9 million to $51.2 million at March 31, 2000
from $28.278 million at June 30, 1999. This is primarily as a result of the
increase in cash resources due to capital injections from strategic equity
partners. Accounts receivable has increased by $1.7 million over June 30, 1999.
This has been partially funded by an increase in accounts payable by $1.25
million over June 30, 1999.
At March 31, 2000, the Company had borrowings of $19.98 million which has
decreased from $33.598 million. This includes the conversion from loan funds to
equity of $4.8 million of debt owing to the minority shareholders of LPI
Limited. The remaining reduction resulted from the conversion of convertible
debentures to equity.
Cash flow from operations for the nine months ended March 31 2000, excluding
non-cash charges, resulted in the utilization of $15.2 million, primarily
utilized to fund the losses in the Internet travel related business. Investing
activities undertaken by the group resulted in the generation of an additional
$15.8 million during the year. This included the funds received from the
minority shareholders in LPI Limited. The financing activities undertaken by the
group resulted in a net capital injection of $18.1 million, sourced primarily
from the capital injection into the Company by strategic equity partners.
FUTURE COMMITMENTS
Under its various acquisition agreements, the Company anticipates having to
spend approximately $1.0 million in cash for its contingent payments over the
next 12 months as well
-22-
<PAGE>
as approximately $0.8 million in stock. The Company anticipates that this cash
and operating cash flows will be sufficient to fully fund these payments as well
as fund the capital expenditures for its various operations. Excess cash will
also be utilized to fund additional acquisitions. The Company anticipates that
any longer term contingent acquisition payments will be funded out of operating
cash flows of the acquired entities.
The Company's operating subsidiaries generally collect their receivables within
65 days to 90 days and reserve approximately 3% for doubtful accounts.
Historically, the Company's operating and capital needs have been met by
internal cash flow and outside bank borrowing. It is management's belief that
capital expenditures for the foreseeable future can continue to be met by
internal cash flow and bank borrowing.
The Company will be required to incur additional indebtedness or equity
financing in connection with the funding of LPI Limited, until such time as that
company is able to sustain its own infrastructural costs as well as to fund
future acquisitions. There is no assurance that the Company will be able to
incur additional indebtedness or raise additional equity to fund LPI Limited or
to finance future acquisitions on terms acceptable to management, if at all.
LPI Limited currently incurs operational losses of approximately $2.2 million
per month with minimal revenues being realized, due to the nature and stage of
growth of the business and the Internet travel related industry. These costs are
expected to increase over the following few months. These operational losses
which are being generated by LPI Limited need to be funded by further injections
of capital. There is no assurance that the Company will be able to secure such
funding.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not ordinarily hold market risk sensitive instruments for
trading purposes. The Company does however recognize market risk from interest
rate, foreign currency exchange and commodity price exposure.
INTEREST RATE RISK
At March 31, 2000 approximately $2.2 million of the Company's long term debt,
specifically the borrowings in First Lifestyle Holdings Limited, bear interest
at variable rates. Similarly, the cash resources of the Company earn interest at
variable rates. Accordingly, the Company's net income and after tax cash flows
are affected by fluctuations in interest rates. Assuming the current level of
cash resources and borrowings at variable interest rates and assuming a two
percentage point decrease in the average interest rate under these borrowings
and cash resources, it is estimated that the net effect on interest would be a
reduction in interest earned of $330,000, resulting in a reduction in the
Company's net income and after tax cash flow of $231,000. Any adverse changes in
interest rates would likely result in management taking action to mitigate the
Company's exposure. However, due to the uncertainty of the actions that
management would take and their possible effects, this analysis assumes no
action is taken. There are also no assurances that decrease or increases in
interest rates will not exceed possible projections.
-23-
<PAGE>
FOREIGN CURRENCY RISK
The primary operations of the Company are based in South Africa and most of the
economic activity of the Company is denominated in South African Rand. This
exposes the Company to market risk with respect to fluctuations in the relative
value of the South African Rand against the US Dollar. Certain of this risk are
covered through the purchase of foreign exchange contracts.
COMMODITY PRICE RISK
The Lifestyle enhancing products segment of the Company makes use of several
commodity products.
PROCESSED FOODS
The main ingredient in many of the processed food products manufactured by the
Company includes raw produce such as meat, potatoes, vegetables and other staple
products. These food groups are commodities whose prices are largely dependent
on demand and supply. The supply of these products is also dependent on
environmental factors such as weather conditions and rainfall patterns. While
these price fluctuations will impact on the input cost of the products produced,
these are not expected to have a material impact on the profitability of the
Company due to the pass through of commodity price increases to customers.
LEISURE PRODUCTS
The Leisure products side of the Company makes use of processed raw materials
such as polypropylene, as well as natural resources such as timber. The price of
polypropylene is determined on an import parity basis in South Africa, which
means that worldwide surpluses and shortages are factored into the product
pricing. This results in fluctuations of the price of this material from time to
time. These price fluctuations impact on the per unit input cost of the products
produce. Management therefore mitigates this risk by entering into pricing
agreements with suppliers to limit the effects of any adverse movements in the
commodity price.
Timber as a natural resource is subject to sustainability requirements and is
also dependent on environmental factors such as weather conditions and rainfall
patterns. The price of timber may fluctuate depending on supply and demand,
which has an impact on the input price of our products produced. In order to
mitigate this risk, management enters into supply arrangements with suppliers
wherever possible, including pricing terms. In addition, raw material input
prices may be passed onto customers where the factors governing such price
fluctuations are outside of the control of the Company.
YEAR 2000
COSTS TO ADDRESS YEAR 2000 ISSUES
The costs incurred to date have typically been to replace aging hardware and to
upgrade the existing purchased software. Costs to replace aging hardware have
not amounted to material amounts and were already provided for in general
capital expenditure budgets. In addition, costs
-24-
<PAGE>
to upgrade software have not been material to date as upgrades have typically
been available from the software suppliers who certify Year 2000 compliance.
RISK ASSOCIATED WITH YEAR 2000 ISSUES
Based on risk assessments already carried out and assessments which are due to
take place, the Company feels that due to the level of IT sophistication within
the Company, the risk of ceasing production and distribution completely is
minimal.
CONTINGENCY PLANS
Where possible, alternative sources of supply have been identified should there
be a significant disruption from one of our suppliers. However, there are
significant suppliers within the group which are sole suppliers. We are unable
to cover this risk sufficiently. Therefore, we are attempting to the best of our
ability to assess the state of readiness of these suppliers.
-25-
<PAGE>
6. PART II - OTHER INFORMATION
ITEM 6: Exhibits and Reports on Form 8-K
(a) Exhibit
10.1 Employment Agreement dated as of April 12, 2000
between the Company and Clive Kabatznik
10.2 Securities Purchase Agreement dated as of April 14,
2000 between Magnolia Broadband, Inc. and the Company
27.1 Financial Data Schedule
(b) Reports on Form 8-K filed during quarter ended March 31, 2000:
None
-26-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned duly authorized.
Date: May 12, 2000
LEISUREPLANET HOLDINGS, LTD.
/s/ Clive Kabatznik
----------------------------------
Clive Kabatznik
Chief Executive Officer, President
and Chief Financial Officer
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
--------------------
EMPLOYMENT AGREEMENT dated as of April 12, 2000, between Clive
Kabatznik (the "Employee") and First South Africa Management Corp., a Delaware
corporation (the "Company").
WHEREAS, the Company desires to employ the Employee, and the
Employee desires to be employed by the Company, all upon the terms and
provisions and subject to the conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the foregoing and the
mutual covenants and agreements contained herein, and other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, the
parties hereto hereby agree as follows:
1. Employment and Term.
-----------------------
The Company hereby employs the Employee as the Chief Executive
Officer, President, Chief Financial Officer of the Company and the Employee
hereby accepts such employment, upon the terms and provisions and subject to the
conditions set forth below for a term commencing on February 1, 2000 (the
"Commencement Date") and terminating on January 31, 2005, unless sooner
terminated as herein provided (the "Employment Term").
2. Employee's Duties.
---------------------
(a) The Employee shall perform all duties and services
incident to and not inconsistent with Employee's positions with the Company,
including, but not limited to, those duties as are assigned to such offices in
the Company's by-laws, and such other duties as may from time to time be
assigned to him by the Board of Directors of the Company and/or the Board
<PAGE>
of Directors of Leisureplanet Holdings, Ltd., the owner of 100% of the capital
stock of the Company ("LPHL"), subject in all cases to the authority and
supervision of the Board of Directors of the Company and LPHL.
(b) The Employee agrees to abide by all policies promulgated
from time to time by the Company. (c) The Employee shall devote substantially
all of his business time, effort and attention to the business and affairs of
the Company, and to the furtherance of the interests of the business of the
Company. The Employee shall diligently and faithfully perform his duties and
services hereunder to the best of his ability and with the highest of
professional standards and integrity.
3. Compensation for Employee's Services.
----------------------------------------
(a) For the full, prompt and faithful performance of the
duties and services to be performed by the Employee pursuant to Sections 1 and 2
hereof, the Company agrees to pay, and the Employee agrees to accept, an annual
base salary (the "Base Salary") of $300,000 for the period from February 1, 2000
through January 31, 2001, $315,000 for the period from February 1, 2001 through
January 31, 2002, $330,750 for the period from February 1, 2002 through January
31, 2003, $347,287.50 for the period from February 1, 2003 through January 31,
2004, and $364,651.87 for the period from February 1, 2004 through January 31,
2005. All amounts paid hereunder shall be reduced by all necessary and required
federal, state and local payroll deductions. The Base Salary shall be paid in
accordance with the usual payroll practices of the Company.
-2-
<PAGE>
(b) The Employee shall be entitled to four (4) weeks vacation
in each calendar year. The Employee shall take such vacation at such time or
times as shall be mutually agreed upon with the Company. (c) During the
Employment Term, the Employee shall be entitled to such insurance, and health
and medical benefits as are from time to time in effect pursuant to the policies
of the Company and/or LPHL (or any subsidiaries of either of the foregoing);
provided, however, that the Employee shall be required to comply with the
conditions attendant to coverage and shall comply with and be entitled to
benefits only in accordance with the terms and conditions of such coverage. The
Company may withhold from any benefits payable to the Employee all federal,
state, local or other taxes and amounts as shall be permitted or required
pursuant to law, rule or regulation.
(d) During the Employment Term, the Employee shall be eligible
to participate in the pension, compensation and bonus plans or programs that
from time to time are made available to other employees of the Company and/or
LPHL (or any subsidiaries of either of the foregoing), subject to any applicable
waiting periods, all in accordance with the terms and provisions of such plans
or programs.
(e) During the Employment Term, the Company shall pay all
expenses incurred by Employee in connection with the lease or ownership of an
automobile to be used primarily for Company business, and for all related
expenses.
(f) During the Employment Term, the Employee shall be entitled
to an annual bonus (the "Bonus") of five percent (5%) of net realized capital
gains upon the sale, liquidation or distribution by LPHL of any Portfolio
Company (as defined herein) (other than any realized
-3-
<PAGE>
capital gains or losses through the ownership of First South African Holdings
(Pty.) Ltd., First Lifestyle Holdings, Ltd. or any of their respective
subsidiaries (the "Excluded Companies")). A Portfolio Company means any company
which LPHL acquires through an initial investment of two percent (2%) or more of
the outstanding stock (or stock equivalent).
4. Expenses.
------------
The Employee shall be entitled to reimbursement for his
ordinary and necessary reasonable business expenses actually incurred during the
Employment Term in the performance of his duties under Section 2 of this
Agreement, if and to the extent supported by such reasonable documentation as
may be requested by the Company.
5. Termination of Employment Term.
----------------------------------
(a) In the event of the death, or the permanent mental or
physical disability (as determined in good faith by the Company on the basis of
the factors set forth in Section 5(b)(iii) hereto), of the Employee during the
term of his employment, the Employee's employment under Sections 1 and 2 hereof
shall terminate and this Agreement shall terminate on the date of such death or
termination resulting from such disability; provided, however, that the
Employee, his estate or legal representative, as the case may be, shall be
entitled to receive, and the Company shall pay, any unpaid Base Salary and Bonus
and other benefits and reimbursable expenses accrued and owing to the Employee
with respect to his employment prior to his death or termination resulting from
disability.
(b) The Company shall have the right to terminate the
Employee's employment under Sections 1 and 2 hereof and to terminate this
Agreement, in the event: (i) the Employee fails to substantially perform or
repeatedly neglects his duties assigned in accordance
-4-
<PAGE>
with this Agreement in any continuing manner after notice from the Company of
such failure or neglect; (ii) the Employee willfully fails or refuses to
substantially follow or comply with the directions of the Board of Directors of
the Company or LPHL or the policies or work rules of the Company; (iii) the
Employee shall be unable (as determined in good faith by the Company) to
substantially perform his duties under this Agreement for a period of forty-five
(45) consecutive days, or ninety (90) days in total in any six-month period,
whether because of illness or mental or physical disability; (iv) the Employee
through his intentional action or inaction has subjected the Company or LPHL or
any of their respective subsidiaries to any criminal or civil liability under
any applicable law; (v) the Employee is convicted for any misdemeanor involving
moral turpitude or any felony; (vi) the Employee has misappropriated any asset
or property of the Company or LPHL or any of their respective subsidiaries,
including (without limitation) any theft or embezzlement or any diversion of any
corporate opportunity; or (vii) the Employee has breached any of his covenants
and agreements contained in this Agreement, including (without limitation) those
contained in Section 7 hereof, provided, however, that the Company shall be
entitled to terminate this Agreement under this Section 5(b) only if the
Employee shall have failed to cure any of the above events within 30 days of the
Employee's receipt of the Company's written notice stating its intent to
terminate this Agreement and setting forth its reasons therefor. The Employee
acknowledges and agrees that any of the foregoing reasons constitute adequate
and sufficient cause for termination, and if the Company elects such
termination, the Employee shall be entitled to receive only such Base Salary,
Bonus, benefits and reimbursable expenses accrued and owing to the Employee at
the date of such termination (which, however, shall be subject to offset by the
Company with respect to all amounts then owing to the Company or
-5-
<PAGE>
LPHL or any of their respective subsidiaries by the Employee, including amounts
respecting misappropriated assets and properties).
(c) Any termination under this Section or termination of
Employee's duties under Sections 1 and 2 of this Agreement, whether by the
Employee (pursuant to Section 6 hereof) or by the Company, shall be communicated
by a notice of termination to the other party hereto, which shall set forth the
facts and circumstances respecting such termination; provided, however, that no
notice of termination need be given in the event of the death of the Employee.
(d) The Employee acknowledges and agrees that any termination
under this Section is not intended, and shall not be deemed or construed, in any
way to affect any of the Employee's other covenants and obligations contained in
this Agreement, including (without limitation) those contained in Section 7
hereof, which other covenants and agreements shall continue in full force and
effect.
6. Change in Control, Termination of Employment and
--------------------------------------------------------------
Compensation in Event of Termination.
- --------------------------------------
(a) After a direct or indirect Change in Control (as such term
is hereinafter defined) of the Company has occurred, if either the Employee
terminates his employment within six months after he has obtained actual
knowledge of the direct or indirect Change in Control of the Company (or any
successor thereto) or the Employee's employment with the Company is terminated
by a party other than the Employee within one year after the direct or indirect
Change in Control, the Employee (i) shall be entitled to his Base Salary, Bonus,
benefits and reimbursable expenses, accrued through the date the Employee's
employment with the Company is terminated (the "Termination Date") and, in
addition thereto, and (ii) shall be entitled to be
-6-
<PAGE>
paid in a lump-sum, on the Termination Date, an amount equal to five percent
(5%) of net unrealized capital gains of LPHL on any Portfolio Company other than
unrealized capital gains or losses on an Excluded Company, as determined by the
independent certified accountants regularly employed by the Company, whose
computation shall be conclusive and binding upon the Employee and the Company;
provided, however, that any unrealized capital gains to which the Employee is
entitled under this subsection 6(a)(ii) may, at the option of the Company, be
paid in cash, stock of the Portfolio Company, or any combination of the
foregoing.
(b) For purposes hereof, a Change in Control shall be deemed
to have occurred if there has occurred a change in control as the term "control"
is defined in Rule 12b-2 promulgated under the Securities Exchange Act of 1934,
as amended (the "Act"): (i) when any "person" (as such term is defined in
Sections 3(a)(9) and 13(d)(3) of the Act), except for an employee stock
ownership trust (or any of the trustees thereof), after the date hereof,
directly or indirectly, acquires securities of LPHL representing twenty percent
(20%) or more of LPHL's then outstanding Common Stock, $.01 value per share;
(ii) if the stockholders of the Company or LPHL approve a plan of complete
liquidation of the Company or LPHL, as the case may be; or (iii) if the
stockholders of LPHL or the Company approve an agreement for the sale or
disposition of all or substantially all of LPHL's or the Company's assets.
Notwithstanding the foregoing, no Change in Control shall be deemed to have
occurred as a result of any event specified in clauses (i)-(iii) of this
paragraph 6(b) if a majority of the Board of Directors of LPHL or the Company
approve such transaction prior to its occurrence.
7. Restrictions Respecting Confidential Information.
----------------------------------------------------
-7-
<PAGE>
(a) The Employee has entered into the covenants and agreements
contained in this Section (i) in recognition of the competitive and confidential
nature of the assets, properties, information and business of the Company and
LPHL, and (ii) in consideration of the compensation described in this Agreement.
(b) The Employee hereby covenants and agrees that, during the
Employment Term and thereafter, the Employee will not directly or indirectly,
under any circumstance without the prior written consent of an authorized
officer of the Company: (i) disclose or reveal in any way other than for the
benefit of LPHL and its affiliates, directly or indirectly, any Confidential
Information (as hereinafter defined) to any other person, firm or company; (ii)
use in any way, directly or indirectly, any Confidential Information for the
benefit of any other person or entity other than the Company or its affiliates,
or (iii) offer or agree to, or cause or assist in the initiation or continuation
of, any disclosure of any Confidential Information for the benefit of the
Employee or any third party. For the purposes of the foregoing, "Confidential
Information" shall mean any and all information pertaining to LPHL, the Company
or any of their respective subsidiaries or affiliates, or the business
activities and affairs thereof or of any officer, director or employee thereof
in such capacity, or any activities of, or any knowledge or information learned
by the Employee, provided, however, that Confidential Information shall exclude
any information that is or becomes publicly available (other than through any
disclosure in violation of this Section by the Employee or any persons or entity
acting on the Employee's behalf). Following the Termination Date, the Employee
shall immediately return to LPHL or the Company, as the case may be, all
documents and other tangible items containing any Confidential Information and
all other corporate books and records of LPHL or the Company, as
-8-
<PAGE>
the case may be, now or hereafter in its possession, custody or control or
provide a written accounting of the disposition of any such Confidential
Information that he shall have received and that shall not be returned to the
Company under this Section 7.
(c) Notwithstanding anything to the contrary in this
Agreement, the terms and provisions of this Section and Sections 8 through 18 of
this Agreement, together with any definitions used in such terms and provisions,
shall survive the termination or expiration of the Employee's employment under
Sections 1 and 2 hereof, irrespective of (i) the reason therefor, and (ii)
whether such termination was permitted hereunder or under applicable law, and
the Company will have the right to communicate with any future or prospective
employer concerning Employee's continuing obligations under this Agreement.
8. Enforcement.
---------------
The Company may proceed to exercise or enforce any right,
power, privilege, remedy or interest that the Company may have under this
Agreement or applicable law (at law, in equity, in rem or in any other forum
available under applicable law); without notice except as otherwise expressly
provided herein; without pursuing, exhausting or otherwise exercising or
enforcing any other right, power, privilege, remedy or interest that the Company
may have against or in respect of the Employee or any other person or thing; and
without regard to any act or omission of the Company or any other person. The
Company may institute one or more proceedings (which may be separate
proceedings) with respect to this Agreement in such order and at such times as
the Company may in its sole discretion elect.
-9-
<PAGE>
9. Equitable Relief.
--------------------
The Employee acknowledges and agrees that it will be
impossible to measure in money the damage to the Company in the event of a
breach of any of the terms and provisions of Section 7 of this Agreement, and
that, in the event of any such breach, the Company will not have an adequate
remedy at law, although the foregoing shall not constitute a waiver of any of
the Company's rights, powers, privileges and remedies against or in respect of a
breaching party or any other person or thing under this Agreement, or applicable
law. It is therefore agreed that the Company, in addition to all other such
rights, powers, privileges and remedies that they may have, shall be entitled to
injunctive relief, or such other equitable relief as the Company may request to
exercise or otherwise enforce. The Employee will not raise and hereby waives any
objection or defense that there is an adequate remedy available at law.
10. Representations and Warranties of Employee.
-----------------------------------------------
(a) In order to induce the Company to enter into this
Agreement, the Employee represents and warrants to the Company that: (i) the
execution and delivery of this Agreement by the Employee and the performance of
his obligations hereunder will not violate or be in conflict with any fiduciary
or other duty, instrument, agreement, document, arrangement or other
understanding to which the Employee is a party or by which he is or may be bound
or subject; and (ii) the Employee is not a party to any instrument, agreement,
document, arrangement or other understanding with any person (other than the
Company) requiring or restricting the use or disclosure of any confidential
information.
(b) The Employee hereby agrees to indemnify and hold harmless
the Company, from and against any and all losses, costs, damages and expenses
(including without
-10-
<PAGE>
limitation, their reasonable attorneys' fees) incurred or suffered by the
Company resulting from any breach by the Employee of any of his representations
or warranties set forth in Section 10(a) hereof.
11. Notice.
-----------
Except as otherwise expressly provided, any notice, request,
demand or other communication permitted or required to be given hereunder shall
be in writing, shall be sent by one of the following means to the addressee at
the address set forth below (or at such other address as shall be designated
hereunder by notice to the other party hereto, effective upon actual receipt)
and shall be deemed conclusively to have been given: (i) on the first business
day following the day timely deposited with Federal Express (or other equivalent
express overnight courier) or United States Express Mail, with the cost of
delivery prepaid or for the account of the sender; (ii) on the fifth business
day following the day duly sent by certified or registered mail, postage prepaid
and return receipt requested; or (iii) when otherwise actually received by the
addressee on a business day (or on the next business day if received after the
close of normal business hours or on any non-business day).
If to the Employee:
c/o First South Africa Management Corp.
6100 Glades Road
Suite 305
Boca Raton, Florida 33434
Facsimile No.: (561) 479-0757
If to the Company:
-11-
<PAGE>
First South Africa Management Corp.
6100 Glades Road
Suite 305
Boca Raton, Florida 33434
Facsimile No.: (561) 479-0757
with a copy to:
Henry I. Rothman, Esq.
Parker Chapin LLP
The Chrysler Building
405 Lexington Avenue
New York, New York 10174
Facsimile No.: (212) 704-6288
If a certificate, signed notice or other signed item is expressly required by
another provision of this Agreement, a manually signed original must be
delivered by the party giving it; any other notice, request, demand or other
communication also may be sent by telecopy, with the cost of transmission
prepaid or for the account of the sender, and shall (except as otherwise
specified in this Agreement) be deemed conclusively to have been given on the
first business day following the day duly sent.
12. Section and Other Headings.
-------------------------------
The section and other headings contained in this Agreement are
for reference purposes only and shall not affect the meaning or interpretation
of this Agreement.
13. Governing Law.
------------------
This Agreement shall be governed by and construed in
accordance with the applicable laws of the State of Delaware without reference
to the conflict of law principles thereof.
-12-
<PAGE>
14. Severability.
-----------------
In the event that any term or provision of this Agreement
shall be finally determined to be superseded, invalid, illegal or otherwise
unenforceable pursuant to applicable law by a governmental authority having
jurisdiction and venue, that determination shall not impair or otherwise affect
the validity, legality or enforceability, to the maximum extent permissible by
law, (a) by or before that authority of the remaining terms and provisions of
this Agreement, which shall be enforced as if the unenforceable term or
provision were deleted, or (b) by or before any other authority of any of the
terms and provisions of this Agreement. If any provision of Section 7 hereof is
held to be unenforceable because of the scope or duration of any such provision,
the parties agree that any court making such determination shall have the power
to reduce the scope or duration of such provision, and said provision shall be
enforceable in such reduced form.
15. Counterparts.
-----------------
This Agreement may be executed in a number of counterpart
copies of the entire document or of signature pages to the document, each of
which may be executed by one of the parties hereto, but all of which, when taken
together, shall constitute a single agreement binding upon each of the parties
hereto.
16. Successors and Assigns; Assignment.
---------------------------------------
Whenever in this Agreement reference is made to any party,
such reference shall be deemed to include the successors, assigns, heirs and
legal representatives of such party, and, without limiting the generality of the
foregoing, all representations, warranties, covenants and other agreements made
by or on behalf of the Employee in this Agreement shall inure to the
-13-
<PAGE>
benefit of the successors and assigns of the Company, as the case may be;
provided, however, that nothing herein shall be deemed to authorize or permit
the Employee to assign any of his rights or obligations under this Agreement to
any other person (whether or not a family member of the Employee), and the
Employee covenants and agrees that he shall not make any such assignment.
17. Modification, Amendment, Etc.
---------------------------------
Each and every modification and amendment of this Agreement
shall be in writing and signed by all of the parties hereto, and each and every
waiver of, or consent to any departure from, any representation, warranty,
covenant or other term or provision of this Agreement shall be in writing and
signed by each affected party hereto.
18. Entire Agreement.
---------------------
This Agreement contains the entire agreement of the parties
and supersedes all other representations, warranties, agreements and
understandings, oral or otherwise, among the parties with respect to the matters
contained herein. This Agreement supersedes and terminates that certain
Employment Agreement dated January 29, 1996 between the Employee and the
Company.
-14-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and
delivered this Agreement as of the date first above written.
/s/ Clive Kabatznik
--------------------------------
Clive Kabatznik
First South Africa Management Corp.
By: /s/ Michael Levy
--------------------------------
Name: Michael Levy
Title: Chairman
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<PAGE>
Payment to the Employee under
Section 6 of this Agreement
is hereby guaranteed by the
undersigned:
Leisureplanet Holdings, Ltd.
By: /s/ Michael Levy
-----------------------------
Name: Michael Levy
Title: Chairman
-16-
EXHIBIT 10.2
SECURITIES PURCHASE AGREEMENT
between
MAGNOLIA BROADBAND, INC.,
as Issuer
and
LEISUREPLANET HOLDINGS, LTD.
as Investor
April 14, 2000
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
SECTION 1. AUTHORIZATION OF SERIES A PREFERRED STOCK.............................................................1
SECTION 2. PURCHASE AND SALE OF SECURITIES.......................................................................1
2.1. Issuance of Series A Preferred Stock...........................................................1
SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.........................................................2
3.1. Corporate Organization.........................................................................2
3.2. Subsidiaries...................................................................................2
3.3. Capitalization.................................................................................3
3.4. Corporate Proceedings, etc.....................................................................3
3.5. Consents and Approvals.........................................................................4
3.6. Absence of Defaults, Conflicts, etc............................................................4
3.7. Absence of Certain Developments................................................................4
3.8. Compliance with Law............................................................................5
3.9. Litigation.....................................................................................5
3.10. Material Contracts.............................................................................5
3.11. Loan to Founder, Absence of Undisclosed Liabilities............................................5
3.12. Labor Agreements and Actions...................................................................6
3.13. Tax Matters....................................................................................7
3.14. Employee Benefit Plans.........................................................................7
3.15. Patents, Licenses, etc.........................................................................7
3.16. Title to Tangible Assets.......................................................................7
3.17. Condition of Properties........................................................................7
3.18. Insurance......................................................................................8
3.19. Transactions with Related Parties..............................................................8
3.20. Interest in Competitors........................................................................8
3.21. Registration Rights............................................................................8
3.22. Brokerage......................................................................................9
3.23. Illegal or Unauthorized Payments; Political Contributions......................................9
3.24. Year 2000 Compliance...........................................................................9
3.25. Material Supplier/Customer Contracts...........................................................9
3.26. Indebtedness..................................................................................10
3.27. Material Facts................................................................................10
SECTION 4. REPRESENTATIONS AND WARRANTIES OF THE INVESTOR.......................................................10
4.1. Authorization.................................................................................10
4.2. Investment Intent; Certain Restrictions.......................................................10
4.3. Disclosure of Information.....................................................................11
4.4. Status........................................................................................12
4.5. Broker's Fees.................................................................................12
4.6. Restrictive Legend............................................................................12
4.7. Restricted Securities.........................................................................12
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
SECTION 5. ADDITIONAL COVENANTS OF THE PARTIES..................................................................13
5.1. Covenants Pending Closing.....................................................................13
5.2. Further Assurance.............................................................................13
5.3. Employee Confidential Information and Inventions Agreements...................................13
SECTION 6. INVESTOR'S CLOSING CONDITIONS........................................................................13
6.1. Representations, Warranties and Covenants.....................................................13
6.2. No Actions; Laws..............................................................................13
6.3. Legal Opinion.................................................................................14
6.4. Officer's Certificate.........................................................................14
6.5. Transaction Documents.........................................................................14
6.6. No Material Adverse Effect....................................................................14
6.7. Certificate of Designation....................................................................14
6.8. Employment Agreements.........................................................................14
6.9. Delivery of Stock Certificate.................................................................15
SECTION 7. COMPANY CLOSING CONDITIONS...........................................................................15
7.1. Representations, Warranties and Covenants.....................................................15
7.2. No Actions; Laws..............................................................................15
7.3. Transaction Documents.........................................................................15
7.4. Consents and Approvals........................................................................16
7.5. Payment of Purchase Price.....................................................................16
SECTION 8. COVENANTS............................................................................................16
8.1. Financial and Business Information............................................................16
8.2. Proceeds......................................................................................17
8.3. Inspection....................................................................................17
8.4. Confidentiality...............................................................................18
8.5. Conduct of Business and Maintenance of Existence..............................................18
8.6. Compliance with Laws..........................................................................19
8.7. Insurance.....................................................................................19
8.8. Keeping of Books..............................................................................19
8.9. Lost, etc. Certificates Evidencing Shares (or Shares of Common Stock); Exchange...............19
8.10. Termination...................................................................................19
SECTION 9. INTERPRETATION OF THIS AGREEMENT.....................................................................20
9.1. Terms Defined.................................................................................20
9.2. Accounting Principles.........................................................................20
9.3. Directly or Indirectly........................................................................21
9.4. Governing Law.................................................................................21
9.5. Paragraph and Section Headings................................................................21
SECTION 10. MISCELLANEOUS.......................................................................................21
10.1. Notices.......................................................................................21
10.2. Expenses and Taxes............................................................................22
10.3. Reproduction of Documents.....................................................................22
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10.4. Survival......................................................................................22
10.5. Successors and Assigns........................................................................23
10.6. Entire Agreement; Amendment and Waiver........................................................23
10.7. Severability..................................................................................23
10.8. Arbitration...................................................................................23
10.9. Facsimile Signatures and Counterparts.........................................................24
</TABLE>
iii
<PAGE>
SECURITIES PURCHASE AGREEMENT, dated as of April 14, 2000,
between MAGNOLIA BROADBAND, INC., a corporation organized and existing under the
laws of the State of Delaware (the "COMPANY"), as issuer, and LEISUREPLANET
HOLDINGS, LTD., a corporation organized and existing under the laws of Bermuda
("INVESTOR").
In consideration of the respective agreements, covenants,
representations, and warranties hereinafter set forth and other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, and intending to be legally bound hereby, the parties hereto
hereby agree as follows:
SECTION 1. AUTHORIZATION OF SERIES A PREFERRED STOCK
The Company has authorized and created a series of its
preferred stock consisting of 3,447,774 shares, $0.0001 par value per share,
designated as its Series A Convertible Preferred Stock (the "Series A Preferred
Stock"). The terms, limitations, and relative rights and preferences of the
Series A Preferred Stock are set forth in the certificate of designation
attached hereto as Exhibit A (the "Certificate of Designation").
SECTION 2. PURCHASE AND SALE OF SECURITIES
2.1. Issuance of Series A Preferred Stock
(a) Subject to the terms and conditions set forth in this Agreement and in
reliance upon the Company's and the Investor's representations set forth below,
on the Closing Date (as defined below) the Company shall sell to the Investor,
and the Investor shall purchase from the Company, 3,447,774 shares of Series A
Preferred Stock (the "SHARES"), for an aggregate purchase price of $2,500,000
(the "PURCHASE PRICE"). Such sale and purchase shall be effected on the Closing
Date by the Company executing and delivering to the Investor, duly registered in
the Investor's name, a duly executed stock certificate evidencing the Shares, in
consideration of the payment by the Investor to the Company of the Purchase
Price by wire transfer of immediately available funds to such account as the
Company shall designate.
(b) The closing (the "CLOSING") of the transactions contemplated hereby shall
take place at 10:00 a.m., New York City time, on April 18, 2000, or at such
other time or on such other date as the Investor and the Company may agree in
writing (the "CLOSING DATE"), at the offices of Parker Chapin LLP, The Chrysler
Building, 405 Lexington Avenue, New York, New York, or such other location as
the Investor and the Company shall mutually select (or by such other means,
including a remote closing wherein the relevant documents are delivered by means
of facsimile, mail or courier).
<PAGE>
SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the Investor that,
except as set forth on a correspondingly numbered section of the disclosure
schedule hereto (the "DISCLOSURE SCHEDULE"):
3.1. Corporate Organization
(a) The Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware. Attached
hereto as Exhibits B and C, respectively, are true and complete copies of the
Certificate of Incorporation and the bylaws of the Company, as amended through
the date hereof (together, the "ORGANIZATIONAL DOCUMENTS").
(b) The Company and each of the Company Subsidiaries have all
requisite power and authority and has all necessary approvals, licenses, permits
and authorization to own their respective properties and to carry on their
respective businesses as now conducted and as proposed to be conducted. The
Company has all requisite power and authority to execute and deliver the
Transaction Documents and to perform its obligations hereunder and thereunder.
(c) The Company and each of the Company Subsidiaries have
filed all necessary documents to qualify to do business as foreign corporations
in, and the Company and each of the Company Subsidiaries are in good standing
under the laws of, each jurisdiction in which the conduct of the their
respective businesses as now conducted or as proposed to be conducted or the
nature of their respective property now owned or proposed to be owned requires
such qualification, except where the failure to so qualify would not have a
material adverse effect on the business, properties, assets, liabilities,
prospects, profits, or condition (financial or otherwise) of the Company and the
Company Subsidiaries taken as a whole (a "MATERIAL ADVERSE EFFECT").
3.2. Subsidiaries
Set forth on Schedule 3.2 of the Disclosure Schedule is a
complete and accurate list of each Company Subsidiary: (i) its jurisdiction of
incorporation or organization, (ii) its authorized capital stock or share
capital, (iii) the number of issued and outstanding shares of its capital stock
or share capital and (iv) the holder or holders of such shares. Except for the
ownership of the Company Subsidiaries, none of the Company or the Company
Subsidiaries owns beneficially or otherwise, directly or indirectly, any capital
stock of, or other securities, equity or ownership interest in, or has any
obligation to form or participate in, any corporation, partnership of other
Person. The Company has good and marketable title to, and is the record and
beneficial owner of, the shares of capital stock of the Company Subsidiaries and
equity interests in other entities owned by it, in each case, free and clear of
any liens. All of the outstanding shares of each of the Company Subsidiaries are
duly authorized, validly issued, fully paid and nonassessable and none of such
shares were issued in violation of, or are subject to, any preemptive rights.
There are no outstanding options, warrants, calls, demands, contracts or other
rights of any nature to purchase, obtain or acquire, or any outstanding
securities or obligations convertible into or exchangeable for, or any voting
agreements with respect to, any shares of capital stock of
2
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any Company Subsidiary or any other securities of any Company Subsidiary.
Neither the Company nor any of the Company Subsidiaries is obligated, pursuant
to any securities, options, warrants, calls, demands, contracts or other rights
or otherwise, now or in the future, contingently or otherwise, to issue,
deliver, sell, purchase, redeem any capital stock of any Company Subsidiary or
any other securities of any Company Subsidiary to or from any Person.
3.3. Capitalization
(a) Schedule 3.3 sets forth the authorized, issued and
outstanding capital stock of the Company and a list of the holders of such
capital stock as of the date of this Agreement. The authorized capital stock of
the Company consists only of 20,000,000 shares of common stock, $0.0001 par
value (the "COMMON STOCK"), of which 0 shares are issued and outstanding, and
7,000,000 shares of preferred stock, $0.0001 par value, of which 3,447,774 have
been designated Series A Preferred Stock and of which 3,447,774 shares of Series
A Preferred Stock will be issued and outstanding upon the consummation of the
Closing. The Company has not issued and, is not obligated to issue any warrants,
options or other rights to purchase or acquire any shares of its capital stock,
or any securities convertible into such shares or any warrants, options or other
rights to acquire any such convertible securities.
(b) All of the outstanding shares of capital stock of the Company are, and as of
the Closing, all of the then outstanding shares of Series A Preferred Stock will
be, duly authorized, validly issued, fully paid and nonassessable. All of the
outstanding capital stock of the Company has been, and the Series A Preferred
Stock will be, offered, issued, sold and delivered in compliance with applicable
federal and state securities laws, and none of such securities are or were at
the time of issuance subject to any preemptive rights. The shares of Common
Stock issuable upon conversion of the Series A Preferred Stock have been duly
authorized and reserved for issuance and, when issued upon conversion of the
Series A Preferred Stock, will be validly issued, fully paid and nonassessable,
and assuming the accuracy of the Investor's representations and warranties
contained in Section 4, will have been offered, issued, sold and delivered in
compliance with applicable federal and state securities laws, and will not be
subject to any preemptive rights.
(c) There are no preemptive rights, rights of first refusal, put or call rights
or obligations, or anti-dilution rights with respect to the issuance, sale or
redemption of the Series A Preferred Stock or the Common Stock issuable upon
conversion thereof. The Company is not a party to any agreements relating to the
voting of the Company's voting securities, and there are no restrictions on the
transfer of the Company's capital stock.
3.4. Corporate Proceedings, etc.
The Company has authorized the execution, delivery, and
performance of each of the Transaction Documents and each of the transactions
and agreements contemplated hereby and thereby. No other corporate action
(including stockholder approval) is necessary to authorize such execution,
delivery, and performance of the Transaction Documents, and upon such execution
and delivery, each of the Transaction Documents shall constitute a valid and
binding obligation of the Company, enforceable against the Company in accordance
with its
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terms, except (i) as limited by applicable bankruptcy, insolvency,
reorganization, moratorium, and other laws of general application affecting
enforcement of creditors' rights generally, and (ii) as limited by laws relating
to the availability of specific performance, injunctive relief, or other
equitable remedies. The Company has authorized the issuance and delivery of the
Shares in accordance with this Agreement and, subject to the issuance of the
Shares, the Company has reserved for issuance shares of Common Stock issuable
upon conversion of the Shares.
3.5. Consents and Approvals
The execution and delivery by the Company of the Transaction
Documents, the performance by the Company of its obligations hereunder and
thereunder and the consummation by the Company of the transactions contemplated
hereby and thereby do not require the Company or any Company Subsidiary to
obtain any consent, approval or action of, or make any filing with or give any
notice to, any corporation, person, or firm, or any public, governmental, or
judicial authority.
3.6. Absence of Defaults, Conflicts, etc.
The execution and delivery of the Transaction Documents and
the adoption by the Board of Directors of the Company of the Certificate of
Designation do not, and the fulfillment of the terms hereof and thereof by the
Company, and the issuance of the Shares, and the Common Stock issuable upon
conversion of the Shares, will not, result in a breach of any of the terms,
conditions, or provisions of, or constitute a default under, or permit the
acceleration of rights under or termination of, any indenture, mortgage, deed of
trust, credit agreement, note, or other evidence of indebtedness, or other
agreement of the Company or any Company Subsidiary (collectively the "AGREEMENTS
AND INSTRUMENTS"), or the Organizational Documents or any organizational
document of a Company Subsidiary, or any rule or regulation of any court or
federal, state, or foreign regulatory board or body or administrative agency
having jurisdiction over the Company or any Company Subsidiary or over their
respective properties or businesses. No event has occurred and no condition
exists which, upon notice or the passage of time (or both), would constitute a
default under any such Agreements and Instruments or in any license, permit, or
authorization to which the Company or any Company Subsidiary is a party or by
which each may be bound.
3.7. Absence of Certain Developments
Since the date of incorporation of the Company, there has been
no (i) Material Adverse Effect with respect to the Company or any Company
Subsidiary, (ii) declaration, setting aside, or payment of any dividend or other
distribution with respect to the capital stock of the Company or any Company
Subsidiary, (iii) material loss, destruction, or damage to any property of the
Company or any Company Subsidiary, whether or not insured, (iv) acceleration or
prepayment of any indebtedness for borrowed money or the refunding of any such
indebtedness, (v) labor trouble involving the Company or any Company Subsidiary
or any material change in their respective personnel or the terms and conditions
of employment, (vi) waiver by the Company or any Company Subsidiary of any
valuable right, (vii) loan or extension of credit to any officer or employee of
the Company or any Company Subsidiary, or (viii) acquisition or disposition of
any material assets (or any contract or arrangement therefor), or any other
material
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transaction, by the Company or any Company Subsidiary otherwise than for fair
value in the ordinary course of business.
3.8. Compliance with Law
(a) Neither the Company nor any Company Subsidiary is in
material violation of any laws, ordinances, or governmental rules or regulations
to which it is subject, including, without limitation, laws or regulations
relating to the environment or to occupational health and safety, and no
material expenditures are or will be required in order to cause its current or
proposed operations or properties to comply with any such law, ordinances,
governmental rules or regulations.
(b) The Company and each Company Subsidiary has all licenses,
permits, franchises, or other governmental authorizations necessary to the
ownership of its property or to the current or proposed conduct of their
respective businesses. Neither the Company nor any Company Subsidiary has been
denied any application for any such licenses, permits, franchises or other
governmental authorizations necessary to its business.
3.9. Litigation
There is no legal action, suit, arbitration, or other legal,
administrative, or other governmental investigation, inquiry, or proceeding
(whether federal, state, local, or foreign) pending, or, to the best of the
Company's knowledge, threatened against or affecting the Company or any Company
Subsidiary or any of their respective current or proposed properties, assets, or
business. Neither the Company nor any Company Subsidiary is subject to any
order, writ, judgment, injunction, decree, determination, or award of any court,
or of any governmental agency or instrumentality (whether federal, state, local,
or foreign).
3.10. Material Contracts
Schedule 3.10 sets forth a true and complete list of each
material contract, agreement, instrument, commitment, and other arrangement to
which the Company or any Company Subsidiary is a party or otherwise relating to
or affecting any of their respective assets, including, without limitation,
employment, severance, or consulting agreements; loan, credit, or security
agreements; joint venture agreements and distribution agreements (each, a
"CONTRACT"). Each Contract is valid, binding, and enforceable against the
Company or the Company Subsidiary, as applicable, and, to the Company's best
knowledge, the other parties thereto, in accordance with its terms, and in full
force and effect on the date hereof.
3.11. Loan to Founder, Absence of Undisclosed Liabilities
(a) Schedule 3.11(a) sets forth the total amount due to Haim
Harel from the Company or any Company Subsidiary as of the date hereof (the
"HAREL LOAN"). All such amounts represent expenses incurred by Haim Harel on
behalf of the Company or a Company Subsidiary and were incurred in the ordinary
course of business of the Company or such Company Subsidiary, as the case may
be. Upon reasonable request of the Company, any Company Subsidiary or the
Investor, Haim Harel agrees to produce reasonable evidence of such expenses.
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(b) Neither the Company nor any Company Subsidiary has
liabilities or obligations of any nature (whether absolute, accrued, contingent
or otherwise and whether due or to become due) other than the Harel Loan and
ordinary expenses incurred in connection with the transaction contemplated by
this Agreement.
3.12. Labor Agreements and Actions
(a) The Company and each of the Company Subsidiaries is in
full compliance with all laws regarding employment, wages, hours, equal
opportunity, collective bargaining, and payment of social security and other
taxes. Neither the Company nor any Company Subsidiary is engaged in any unfair
labor practice or discriminatory employment practice, and no complaint of any
such practice against the Company or any Company Subsidiary is filed or, to the
best of the Company's knowledge, threatened to be filed with or by the National
Labor Relations Board, the Equal Employment Opportunity Commission or any other
administrative agency, federal or state, that regulates labor or employment
practices, nor is any grievance filed or, to the best of the Company's
knowledge, threatened to be filed, against the Company or any Company Subsidiary
by any employee pursuant to any collective bargaining or other employment
agreement to which the Company or any Company Subsidiary is a party or is bound.
The Company and each of the Company Subsidiaries are in compliance with all
applicable foreign, federal, state, and local laws and regulations regarding
occupational safety and health standards except to the extent that noncompliance
will not have a Material Adverse Effect, and have received no complaints from
any foreign, federal, state, or local agency or regulatory body alleging
violations of any such laws and regulations.
(b) The employment of all Persons employed by the Company or
any Company Subsidiary is terminable at will without any penalty or severance
obligation of any kind on the part of the employer. All sums due for employee
compensation and benefits and all vacation time owing to any employees of the
Company or any Company Subsidiary have been duly and adequately accrued on the
books and records of the Company or the respective Company Subsidiary.
(c) The Company is not aware that any of its employees or any
employees of any Company Subsidiary is obligated under any contract (including
licenses, covenants, or commitments of any nature) or other agreement, or
subject to any judgment, decree, or order of any court or administrative agency,
that would interfere with the use of such employee's best efforts to promote the
interests of the Company or the Company Subsidiaries, as applicable, or that
would conflict with the Company's or any of the Company Subsidiary's businesses
as proposed to be conducted.
(d) To the Company's knowledge, no officer or key employee, or
any group of key employees, currently intends to terminate their employment with
the Company or any Company Subsidiary, as applicable, nor does the Company or
any Company Subsidiary have a present intention to terminate the employment of
any of the foregoing.
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3.13. Tax Matters
There are no foreign, federal, state, county, or local taxes
due and payable by the Company which have not been paid. The Company has duly
filed all foreign, federal, state, county, and local tax returns required to
have been filed by it and there are in effect no waivers of applicable statutes
of limitations with respect to taxes for any year. The Company has not been
subject to a foreign, federal, state or local tax audit of any kind.
3.14. Employee Benefit Plans.
Neither the Company nor any Company Subsidiary has any
employee benefit plans (as defined in Section 3(3) of the Employee Retirement
Income Security Act of 1974) covering former or current employees of the Company
or any Company Subsidiary, or under which the Company or any Company Subsidiary
has any obligation or liability. Schedule 3.14 lists all material plans,
contracts, bonuses, commissions, profit-sharing, savings, stock options,
insurance, deferred compensation, or other similar fringe or employee benefits
covering former or current employees of the Company or any Company Subsidiary or
under which the Company or any Company Subsidiary has any obligation or
liability (each, a "BENEFIT ARRANGEMENT"). True and complete copies of all
Benefit Arrangements have been provided or made available to the Investor prior
to the date hereof. The Benefit Arrangements are and have been administered in
compliance with their terms and with the requirements of applicable law. The
Company's and each Company Subsidiary's payments to current or former employees
pursuant to the Benefit Arrangements are and have been fully deductible under
the Code.
3.15. Patents, Licenses, etc.
Neither the Company nor any Company Subsidiary owns or
licenses any patents, patent applications, trademarks, trademark applications,
trade names, logos, URLs, internet domain names, service marks, copyrights,
copyright applications, franchises, trade secrets, computer programs (in object
or source code form), software and software tools, databases and data
collections, economic and other rights of authors and inventors or other
intangible or proprietary property or assets (collectively, "INTELLECTUAL
PROPERTY") which are individually or in the aggregate material to the conduct of
the business of the Company or any Company Subsidiary as presently conducted or
as proposed to be conducted.
3.16. Title to Tangible Assets
The Company and each Company Subsidiary has good title to
their respective properties and assets and good title to all of their respective
leasehold estates, in each case subject to no mortgage, pledge, lien, lease,
encumbrance, or charge, other than or resulting from taxes which have not yet
become delinquent and minor liens and encumbrances which do not in any case
materially detract from the value of the property subject thereto.
3.17. Condition of Properties
All facilities, machinery, equipment, fixtures, vehicles, and
other properties now or proposed to be owned, leased, or used by the Company or
any Company Subsidiary are in good operating condition and repair, are
reasonably fit and useable for the purposes for which
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they are now or proposed to be used, are adequate and sufficient for the
Company's and each of the Company Subsidiary's respective businesses and conform
in all material respects with all applicable ordinances, regulations, and laws.
3.18. Insurance
The Company, each Company Subsidiary and each of their
respective properties are insured in such amounts, against such losses and with
such insurers as are prudent when considered in light of the nature of the
current and proposed properties and businesses of the Company and the Company
Subsidiaries. Schedule 3.18 sets forth a true and complete listing of the
insurance policies of the Company and each Company Subsidiary as in effect on
the date hereof, including in each case the applicable coverage limits,
deductibles, and the policy expiration dates. No notice of any termination or
threatened termination of any of such policies has been received and such
policies are in full force and effect.
3.19. Transactions with Related Parties
Neither the Company nor any Company Subsidiary is a party to
any agreement with any of their respective directors, officers, or stockholders,
or any Affiliate or family member of any of the foregoing, under which it: (i)
leases any real or personal property (either to or from such Person), (ii)
licenses technology (either to or from such Person), (iii) is obligated to
purchase any tangible or intangible asset from or sell such asset to such
Person, (iv) purchases products or services from such Person, or (v) has
borrowed money from or lent money to such Person. Neither the Company nor any
Company Subsidiary employs as an employee or engages as a consultant any family
member of any of the Company's or any Company Subsidiary's directors, officers,
or stockholders.
3.20. Interest in Competitors
Neither the Company nor any Company Subsidiary nor any of
their respective directors or officers has any interest, either by way of
contract or by way of investment (other than as holder of not more than 2% of
the outstanding capital stock of a publicly traded Person) or otherwise,
directly or indirectly, in any Person that (i) provides any services or designs,
produces, or sells any product or product lines or engages in any activity
similar to or competitive with any activity now conducted or proposed to be
conducted by the Company or any of the Company Subsidiaries or (ii) has any
direct or indirect interest in any asset or property, real or personal, tangible
or intangible, of the Company or any Company Subsidiary.
3.21. Registration Rights
Except as provided by the Investor's Rights Agreement (as
defined herein) by and between the Company and the Investor, neither the Company
nor any Company Subsidiary will, as of the Closing Date, be under any obligation
to register any of their respective securities under the Securities Act.
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3.22. Brokerage
There are no claims for brokerage commissions or finder's fees
or similar compensation in connection with the transactions contemplated by this
Agreement based on any arrangement made by or on behalf of the Company or any
Company Subsidiary and the Company agrees to indemnify and hold the Investor
harmless against any costs or damages incurred as a result of any such claim.
3.23. Illegal or Unauthorized Payments; Political
Contributions
Neither the Company, nor any of the Company Subsidiaries nor,
to the best knowledge of the Company (after reasonable inquiry of its officers
and directors), any of their respective officers, directors, employees, agents,
or other representatives or any other business entity or enterprise with which
they respectively have been affiliated or associated, has, directly or
indirectly, made or authorized any payment, contribution, or gift of money,
property, or services, whether or not in contravention of applicable law, (a) as
a kickback or bribe to any Person or (b) to any political organization, or to
the holder of or to any aspirant to any elective or appointive public office,
except for personal political contributions not involving the direct or indirect
use of funds of the Company or any Company Subsidiary.
3.24. Year 2000 Compliance
All of the computer and other hardware and software currently
or proposed to be owned or used in the conduct of the Company's and each of the
Company Subsidiary's current or proposed businesses: (a) will not malfunction,
cease to function, generate incorrect date dependent or related data, or produce
incorrect results, regardless of the particular date, year, century, or other
chronological variable; (b) applies formulae, calculates, displays, exports,
imports, manages, manipulates, operates, provides, processes, recognizes, sorts,
and stores all dates and date dependent or related user or interface data,
fields, functionalities, and values: (i) in four-digit year date format (whether
"date" or "year" field or otherwise); (ii) that properly, fully, and correctly
identifies any year (including, without limitation, the century thereof), and
computes any period, value, or result (including, without limitation, those
spanning the end of any century or millennium); and (iii) without any error; in
each case: (A) without the necessity of any human intervention or system
modification; and (B), regardless of the particular date, year, century or other
chronological variable; and (C) will properly interface with other hardware and
software of the Company and each Company Subsidiary without rendering any of
them less functional in any material respect.
3.25. Material Supplier/Customer Contracts
No material supplier to or material customer of the Company or
any Company Subsidiary has terminated or substantially altered, or has notified
the Company or any Company Subsidiary of an intention to terminate or
substantially alter, its existing business relationship with the Company or any
Company Subsidiary.
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3.26. Indebtedness
Neither the Company nor any Company Subsidiary is indebted to
any person, whether or not contingent, for borrowed money.
3.27. Material Facts
This Agreement, the disclosure schedules furnished
contemporaneously herewith, and the other agreements, documents, certificates,
or written statements furnished or to be furnished to the Investor through the
Closing Date by or on behalf of the Company in connection with the transactions
contemplated hereby taken as a whole, do not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
contained therein or herein, in light of the circumstances in which they were
made, not misleading.
SECTION 4. REPRESENTATIONS AND WARRANTIES OF THE INVESTOR
Except as otherwise specifically disclosed in writing to the
Company, the Investor represents and warrants to the Company as follows:
4.1. Authorization.
The Investor has full power and legal right to execute and
deliver this Agreement and to perform its obligations hereunder. The Investor
has taken all action necessary for the authorization, execution, delivery, and
performance of this Agreement and its obligations hereunder, and, upon execution
and delivery by the Company, this Agreement shall constitute the valid and
binding obligation of the Investor, enforceable against the Investor in
accordance with its terms, except (i) as limited by applicable bankruptcy,
insolvency, reorganization, moratorium, and other laws of general application
affecting enforcement of creditors' rights generally, and (ii) as limited by
laws relating to the availability of specific performance, injunctive relief, or
other equitable remedies.
4.2. Investment Intent; Certain Restrictions.
(a) The Investor is acquiring the Shares, and will acquire the
Common Stock issuable upon conversion of the Shares, for its own account for
investment and not with a view towards the resale, transfer, or distribution
thereof, nor with any present intention of distributing the Shares or the Common
Stock acquired upon conversion of the Shares. The Investor understands that the
Shares have not been registered under the Securities Act or state securities
laws by reason of specific exemptions from the registration provisions of the
Securities Act and applicable state securities laws that depend upon, among
other things, the bona fide nature of the Investor's investment intent and the
accuracy of the Investor's representations as set forth in this Section 4. The
Investor has not been formed for the specific purpose of acquiring the Shares.
The Investor further understands that, other than any rights of the Investor
pursuant to the Investor's Rights Agreement, the Company shall have no
obligation to register the Shares under the Securities Act or any state
securities laws or to take any action that would make available any exemption
from the registration requirements of such laws. The Investor hereby
acknowledges
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that because of the restrictions on transfer and assignment of the Shares, the
Investor may have to bear the economic risk of the investment in the Shares for
an indefinite period of time.
(b) The Investor understands that there is no established
trading market for the Shares and that no public market for the Shares may
develop in the future. The Investor understands that the Shares must be held
indefinitely unless they are subsequently registered under the Securities Act or
an exemption from such registration requirement is available.
(c) The Investor will observe and comply with the Securities
Act and the rules and regulations promulgated thereunder, as now in effect and
as from time to time amended, in connection with any offer, sale, pledge,
transfer or other disposition of the Shares. In furtherance of the foregoing,
and in addition to the other restrictions contained in this Section 4, the
Investor will not offer to sell, exchange, transfer, pledge, or otherwise
dispose of any of the Shares unless at such time at least one of the following
conditions is satisfied:
(i) a registration statement under the Securities Act covering
the Shares proposed to be sold, transferred or otherwise disposed of,
describing the manner and terms of the proposed sale, transfer, pledge
or other disposition, and containing a current prospectus, shall have
been filed with the SEC and which has become effective under the
Securities Act;
(ii) such transaction shall be permitted pursuant to the
provisions of Rule 144 promulgated under the Securities Act;
(iii) such transaction shall be permitted pursuant to the
provisions of Regulation S promulgated under the Securities Act;
(iv) counsel representing the Investor, reasonably
satisfactory to the Company and its counsel (with the Company hereby
agreeing that Parker Chapin LLP shall be satisfactory), shall have
advised the Company in a written opinion letter, upon which the Company
and its counsel may rely, that no registration under the Securities Act
is required in connection with the proposed sale, transfer or other
disposition; or
(v) an authorized representative of the SEC shall have
rendered written advice to the Investor (sought by the Investor or
counsel to the Investor, with a copy thereof and of all other related
communications delivered to the Company and its counsel) to the effect
that the SEC would take no action, or that the Staff of the SEC would
not recommend that the SEC take action, with respect to the proposed
sale, transfer or other disposition.
4.3. Disclosure of Information.
The Investor further represents that it has had an opportunity
to ask questions and receive answers from the Company regarding the terms and
conditions of the offering of the Shares and the business, properties, prospects
and financial condition of the Company. Neither such inquiries nor any other due
diligence investigations conducted by the Investor or its advisors, if any, or
its representatives, shall modify, amend or affect the Investor's right to rely
on the representations and warranties contained in Section 3 of this Agreement.
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4.4. Status.
(a) The Investor is an "accredited investor" as that term is
defined in Rule 501(a) of Regulation D of the Securities Act.
(b) The Investor, by reason of its business and financial
experience has such knowledge, sophistication and experience in financial and
business matters and in making investment decisions of this type that it is
capable of (i) evaluating the merits and risks of an investment in the Shares
making an informed investment decision, (ii) protecting its own interest and
(iii) bearing the economic risk of such investment for an indefinite period of
time.
4.5. Broker's Fees.
There are no claims for brokerage commissions or finder's fees
or similar compensation in connection with the transactions contemplated by this
Agreement based on any arrangement made by or on behalf of the Investor and the
Investor agrees to indemnify and hold the Company harmless against any costs or
damages incurred as a result of any such claim.
4.6. Restrictive Legend.
All certificates representing the Shares deliverable to the
Investor pursuant to this Agreement, and any certificates subsequently issued
with respect thereto or in substitution therefor, shall bear the following
legend:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT BE SOLD,
TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS THERE IS AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE ACT COVERING SUCH SECURITIES, THE SALE IS MADE IN ACCORDANCE
WITH RULE 144 OR ITS SUCCESSOR RULE UNDER THE ACT, THE SALE IS MADE IN
ACCORDANCE WITH REGULATION S PROMULGATED UNDER THE ACT, OR THE CONDITIONS
SPECIFIED IN THAT CERTAIN SECURITIES PURCHASE AGREEMENT, INVESTOR'S RIGHTS
AGREEMENT AND SHAREHOLDERS AGREEMENT DATED AS OF APRIL 14, 2000 HAVE BEEN
SATISFIED. A COPY OF SUCH AGREEMENTS MAY BE OBTAINED FROM MAGNOLIA BROADBAND,
INC. WITHOUT CHARGE, BY THE HOLDER OF THIS CERTIFICATE UPON WRITTEN REQUEST
THEREFOR.
4.7. Restricted Securities
The Investor understands that the Shares it is purchasing are
characterized as "restricted securities" under the federal securities laws
inasmuch as they are being acquired from the Company in a transaction not
involving a public offering and that under such laws and applicable regulations
such securities may be resold without registration under the Securities Act only
in certain limited circumstances. In this connection, the Investor represents
that it is familiar with Rule 144, as presently in effect, and understands the
resale limitations imposed hereby and by the Securities Act.
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SECTION 5. ADDITIONAL COVENANTS OF THE PARTIES
5.1. Covenants Pending Closing
From the date hereof through the Closing, the Company will
not, without the Investor's prior written consent, take any action which would
result in any of the representations or warranties contained in this Agreement
not being true at and as of the time immediately after such action, or in any of
the covenants contained in this Agreement becoming incapable of performance. The
Company will promptly advise the Investor of any action or event of which it
becomes aware which has the effect of making incorrect any of such
representations or warranties or which has the effect of rendering any of such
covenants incapable of performance.
5.2. Further Assurance
Each of the parties shall execute such documents and other
papers and take such further actions as may be reasonably required or desirable
to carry out the provisions hereof and the transactions contemplated hereby.
Each such party shall use its reasonable efforts to fulfill or obtain the
fulfillment of the conditions to the Closing as promptly as practicable.
5.3. Employee Confidential Information and Inventions
Agreements
On or prior to the Closing, each of Haim Harel and Evan Chaim
Goldman shall execute an Employee Confidential Information and Inventions
Agreement in the form attached hereto as Exhibit F (the "Inventions Agreement").
SECTION 6. INVESTOR'S CLOSING CONDITIONS
The obligation of the Investor to purchase and pay for the
Shares on the Closing Date, as provided in Section 2.1 hereof, shall be subject
to the performance by the Company of its agreements theretofore to be performed
hereunder and to the satisfaction, prior thereto or concurrently therewith, of
each of the conditions set forth in this Section 6.
6.1. Representations, Warranties and Covenants
The representations and warranties of the Company contained
herein shall have been true and complete when made and shall be true and
complete as of the Closing Date, with the same force and effect as if made as of
the Closing Date, other than such representations and warranties as are made as
of another date, which shall remain true and complete as of such other date, and
the covenants and agreements contained herein to be performed, observed, or
complied with by the Company at or prior to the Closing shall have been
performed, observed, or complied with.
6.2. No Actions; Laws
No action, suit, or proceeding shall have been commenced or
threatened by or before any governmental authority against the Company or any
Investor, and no law shall have been enacted, issued, promulgated, enforced, or
entered, that could reasonably be expected to restrain, prohibit, invalidate,
render impossible or unlawful, or otherwise materially and
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adversely affect the transactions contemplated hereby and the other Transaction
Documents, or have a Material Adverse Effect; provided, however, that the
provisions of this Section 6.2 shall not apply to the Investor if the Investor
shall have solicited or encouraged, directly or indirectly, any such action,
suit, proceeding, or law.
6.3. Legal Opinion
The Investor shall have received from Heller Ehrman, a legal
opinion, addressed to the Investor and dated the Closing Date in form and
substance reasonably satisfactory to the Investor.
6.4. Officer's Certificate
The Investor shall have received from the president of the
Company an executed certificate dated the Closing Date, certifying that the
conditions specified in the foregoing Sections 6.1 and 6.2 hereof have been
fulfilled.
6.5. Transaction Documents
Each Transaction Document shall have been executed and
delivered by the parties thereto at or prior to the Closing and shall be in full
force and effect as of the Closing, and there shall exist no facts,
circumstances, or conditions that constitute or, with the giving of notice or
lapse of time or both, could reasonably be expect to constitute a default
thereunder or breach thereof or could reasonably be expect to give any party
thereto the right to terminate such agreement; provided, however, that the
provisions of this Section 6.5 shall not apply to the Investor if the Investor
shall have failed to execute and deliver any Transaction Document to which it is
to be a party or shall have defaulted under or breached any Transaction
Document, or caused, directly or indirectly, any Transaction Document not to be
in full force and effect as of the Closing.
6.6. No Material Adverse Effect
No event or events shall have occurred, or shall be reasonably
likely to occur, which in the reasonable opinion of the Investor, individually
or in the aggregate, have had, or could be expected to have, a Material Adverse
Effect.
6.7. Certificate of Designation
The Company shall have filed the Certificate of Designation
for the Series A Preferred Stock with the Secretary of State of the State of
Delaware.
6.8. Employment Agreements
Haim Harel shall have entered into an employment agreement
with the Company or a Company Subsidiary in a form satisfactory to the Investor.
14
<PAGE>
6.9. Delivery of Stock Certificate
The Company shall have delivered to the Investor a stock
certificate representing the Shares.
SECTION 7. COMPANY CLOSING CONDITIONS
The obligation of the Company to issue and deliver the Shares
on the Closing Date, as provided in Section 2 hereof, shall be subject to the
performance by the Investor of its agreements theretofore to be performed
hereunder and to the satisfaction, prior thereto or concurrently therewith, of
the following further conditions:
7.1. Representations, Warranties and Covenants
The representations and warranties of the Investor contained
herein shall have been true and complete when made and shall be true and
complete as of the Closing Date, with the same force and effect as if made as of
the Closing Date, other than such representations and warranties as are made as
of another date, which shall remain true and complete as of such other date, and
the covenants and agreements contained herein to be performed, observed, or
complied with by the Investor at or prior to the Closing shall have been
performed, observed, or complied with.
7.2. No Actions; Laws
No action, suit, or proceeding shall have been commenced or
threatened by or before any governmental authority against the Company or any
Investor, and no law shall have been enacted, issued, promulgated, enforced, or
entered, that could reasonably be expected to restrain, prohibit, invalidate,
render impossible or unlawful, or otherwise materially and adversely affect the
transactions contemplated hereby and the other Transaction Documents, or have a
Material Adverse Effect; provided, however, that the provisions of this Section
7.2 shall not apply to the Company if the Company shall have solicited or
encouraged, directly or indirectly, any such action, suit, proceeding, or law.
7.3. Transaction Documents
Each Transaction Document shall have been executed and
delivered by the parties thereto at or prior to the Closing and shall be in full
force and effect as of the Closing, and there shall exist no facts,
circumstances, or conditions that constitute or, with the giving of notice or
lapse of time or both, could reasonably be expect to constitute a default
thereunder or breach thereof or could reasonably be expect to give any party
thereto the right to terminate such agreement; provided, however, that the
provisions of this Section 7.3 shall not apply to the Company if the Company
shall have failed to execute and deliver any Transaction Document to which it is
to be a party or shall have defaulted under or breached any Transaction
Document, or caused, directly or indirectly, any Transaction Document not to be
in full force and effect as of the Closing.
15
<PAGE>
7.4. Consents and Approvals
The Investor shall have received, each in form and substance
reasonably satisfactory to the Company, all authorizations, consents, orders,
and approvals of all governmental authorities and officials and all third party
consents and estoppel certificates which the Company reasonably deem necessary,
appropriate, or desirable for the consummation by the Investor of the
transactions contemplated hereby.
7.5. Payment of Purchase Price
The Investor shall have delivered the Purchase Price to the
Company.
SECTION 8. COVENANTS
8.1. Financial and Business Information
From and after the date hereof, the Company shall deliver to
the Investor so long as the Investor owns beneficially (within the meaning of
Rule 13d-3 under the Exchange Act) at least 172,388 Shares, or at least 172,388
shares of Common Stock issued upon conversion of such Shares:
(a) Monthly and Quarterly Statements--as soon as practicable,
and in any event within 30 days after the close of each month of each fiscal
year of the Company in the case of monthly statements and 45 days after the
close of each of the first three fiscal quarters of each fiscal year of the
Company in the case of quarterly statements, a consolidated balance sheet,
statement of income, and statement of cash flows of the Company and any
subsidiaries as at the close of such month or quarter and covering operations
for such month or quarter, as the case may be, and the portion of the Company's
fiscal year ending on the last day of such month or quarter, all in reasonable
detail and prepared in accordance with GAAP, subject to audit and year-end
adjustments, setting forth in each case in comparative form the figures for the
comparable period of the previous fiscal year. The Company shall also provide
comparisons of each pertinent item to the budget referred to in subsection (c)
below.
(b) Annual Statements--as soon as practicable after the end of
each fiscal year of the Company, and in any event within 90 days thereafter,
duplicate copies of: (i) consolidated and consolidating balance sheets of the
Company and any subsidiaries at the end of such year; and (ii) consolidated and
consolidating statements of income, stockholders' equity and cash flows of the
Company and any subsidiaries for such year, setting forth in each case in
comparative form the figures for the previous fiscal year, all in reasonable
detail and accompanied by an opinion thereon of independent certified public
accountants selected by the Company, which opinion shall state that such
financial statements fairly present the financial position of the Company and
any subsidiaries on a consolidated basis and have been prepared in accordance
with GAAP and that the examination of such accountants in connection with such
financial statements has been made in accordance with generally accepted
auditing standards, and accordingly included such tests of the accounting
records and such other auditing procedures as were considered necessary in the
circumstances, and the Company shall also provide comparisons of each pertinent
item to the budget referred to in subsection (c) below.
16
<PAGE>
(c) Business Plan; Projections--no later than 30 days prior to
the commencement of each fiscal year of the Company, an annual business plan of
the Company and projections of operating results.
(d) Audit Reports--promptly upon receipt thereof, one copy of
each other financial report and internal control letter submitted to the Company
by independent accountants in connection with any annual, interim or special
audit made by them of the books of the Company.
(e) Other Reports--promptly upon their becoming available, one
copy of each financial statement, report, notice, or proxy statement sent by the
Company to stockholders generally, of each financial statement, report, notice
or proxy statement sent by the Company or any of its subsidiaries to the SEC or
any successor agency, if applicable, of each regular or periodic report and any
registration statement, prospectus, or written communication (other than
transmittal letters) in respect thereof filed by the Company or any subsidiary
with, or received by such Person in connection therewith from, any domestic or
foreign securities exchange, the SEC or any successor agency or any foreign
regulatory authority performing functions similar to the SEC, of any press
release issued by the Company or any subsidiary, and of any material of any
nature whatsoever prepared by the SEC or any successor agency thereto or any
state blue sky or securities law commission which relates to or affects in any
way the Company or any subsidiary.
(f) Requested Information--with reasonable promptness, the
Company shall furnish the Investor with such other data and information as from
time to time may be reasonably requested.
8.2. Proceeds
The Company shall use the proceeds from the issuance and sale
to the Investor of the Series A Preferred Stock for research and development and
other general corporate purposes pursuant to the plans and budgets presented by
management of the Company and approved by the Board of Directors of the Company.
8.3. Inspection
As long as the Investor owns beneficially (within the meaning
of Rule 13d-3 under the Exchange Act) at least 172,388 Shares, or at least
172,388 shares of Common Stock issued upon conversion of such Shares, the
Company shall, to the fullest extent permitted by law and the Company's
contractual obligations to third parties, permit the Investor, its nominee,
assignee, and its representative, provided, that each such person agrees to be
bound by a nondisclosure agreement reasonably acceptable to the Company and such
other party, to visit and inspect any of the properties of the Company, to
examine all its books of account, records, reports and other papers, to make
copies and extracts therefrom, and to discuss its affairs, finances and accounts
with its officers, directors, key employees and independent public accountants
or any of them (and by this provision the Company authorizes said accountants to
discuss with the Investor, its nominees, assignees and representatives the
finances and affairs of the Company and any subsidiaries), all at such
reasonable times and as often as may be reasonably requested. The Company shall
use all reasonable efforts to obtain a waiver of any
17
<PAGE>
contractual confidentiality obligations it may have to third parties in order to
allow the Investor the greatest practicable access to the contracts and other
documents of the Company.
8.4. Confidentiality
As to so much of the information and other material furnished
under or in connection with this Agreement (whether furnished before, on or
after the date hereof, including, without limitation, information furnished
pursuant to Sections 8.1 and 8.3 hereof) as constitutes or contains confidential
business, financial or other information of the Company or any subsidiary, the
Investor covenants for itself and its directors, officers and partners that it
will not use (except in connection with its investment hereunder) or disclose
any such information and will enter into, and cause its directors, officers and
partners who receive information under or in connection with this Agreement to
enter into any additional nondisclosure agreements reasonably requested by the
Company or required by any contracts to which the Company is a party and to use
reasonable efforts to prevent its officers, directors, partners, employees,
counsel, accountants and other representatives from disclosing such information
to Persons other than their respective authorized employees, counsel,
accountants, stockholders, partners, limited partners and other authorized
representatives who have a need to know such information and have agreed to
bound by the relevant nondisclosure agreement; provided, however, that the
Investor may disclose or deliver any information or other material disclosed to
or received by it should the Investor be advised by its counsel that such
disclosure or delivery is required by law, regulation or judicial or
administrative order; provided further that this Section 8.4 shall not apply to
information which: (i) is or becomes generally available or known to the public,
other than a result of any disclosure by the Investor or any of its
representatives in violation hereof; (ii) is or becomes available to the
Investor on a nonconfidential basis from any source other than the Company or
any representative thereof, other than any such source that the Investor or any
of its representatives knows is prohibited by a legal, contractual, or fiduciary
obligation to the Company from disclosing such information; or (iii) is
independently developed by the Investor. In the event of any termination of this
Agreement prior to the Closing Date, the Investor shall return to the Company
all confidential material previously furnished to the Investor or its officers,
directors, partners, employees, counsel, accountants and other representatives
in connection with this transaction. For purposes of this Section 8.4, "due
care" means at least the same level of care that the Investor would use to
protect the confidentiality of its own sensitive or proprietary information, and
this obligation shall survive termination of this Agreement.
8.5. Conduct of Business and Maintenance of Existence
The Company will continue to engage in business of the same
general type as now or as proposed to be conducted by it, and preserve, renew
and keep in full force and effect its corporate existence and take all
reasonable action to maintain all rights, privileges and franchises necessary or
desirable in the normal conduct of its business. The Company shall require all
of its current and future employees or consultants to enter into Invention
Agreements.
18
<PAGE>
8.6. Compliance with Laws
The Company will comply in all respects with all applicable
laws, rules, regulations and orders except where the failure to comply would not
have a Material Adverse Effect.
8.7. Insurance
The Company will maintain insurance with responsible and
reputable insurance companies or associations in such amounts and covering such
risks as is usually carried by companies of similar size and credit standing
engaged in similar business and owning similar properties. In addition to the
foregoing, the Company and the Investor agree that, within 60 days of the
Closing, the Company will obtain key man life insurance on the lives of Haim
Harel and such other individuals as is determined by the Board of Directors,
naming the Company as beneficiary and in an amount reasonably acceptable to the
Company and the Investor.
8.8. Keeping of Books
The Company will keep proper books of record and account, in
which full and correct entries shall be made of all financial transactions and
the assets and business of the Company in accordance with GAAP.
8.9. Lost, etc. Certificates Evidencing Shares (or Shares of
Common Stock); Exchange
Upon receipt by the Company of evidence reasonably
satisfactory to it of the loss, theft, destruction or mutilation of any
certificate evidencing any Shares, or shares of Common Stock issuable upon
conversion of such Shares, owned by the Investor, and (in the case of loss,
theft or destruction) of an unsecured indemnity satisfactory to it, and upon
reimbursement to the Company of all reasonable expenses incidental thereto, and
upon surrender and cancellation of such certificate, if mutilated, the Company
will make and deliver in lieu of such certificate a new certificate of like
tenor and for the number of shares evidenced by such certificate which remain
outstanding. The Investor's agreement of indemnity shall constitute indemnity
satisfactory to the Company for purposes of this Section 8.9. Upon surrender of
any certificate representing any Shares, or shares of Common Stock issuable upon
conversion of such Shares, for exchange at the office of the Company, the
Company at its expense will cause to be issued in exchange therefor new
certificates in such denomination or denominations as may be requested for the
same aggregate number of Shares, or shares of Common Stock, as the case may be,
represented by the certificate so surrendered and registered as such holder may
request. The Company will also pay the cost of all deliveries of certificates
for such shares to the office of the Investor (including the cost of insurance
against loss or theft in an amount satisfactory to the holders) upon any
exchange provided for in this Section 8.9.
8.10. Termination
The provisions of this Section 8 shall remain in effect until
the closing of the Qualified Public Offering at which time they shall terminate
and thereafter be of no force or effect.
19
<PAGE>
SECTION 9. INTERPRETATION OF THIS AGREEMENT
9.1. Terms Defined
As used in this Agreement, the following terms have the
respective meanings set forth below:
"AFFILIATE" means any Person or entity, directly or indirectly
controlling, controlled by, or under common control with such Person or entity.
"BUSINESS DAY" shall mean a day other than a Saturday, Sunday,
or other day on which banks in the State of New York are required or authorized
to close.
"CODE" shall mean the Internal Revenue Code of 1986, as
amended.
"COMPANY SUBSIDIARY" shall mean any corporation, or other
entity of which the Company owns, directly or indirectly, more than 50% of the
stock or other equity interests or voting power entitled to elect a majority of
the board of directors or other persons performing similar functions.
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934,
as amended.
"GAAP" shall mean U.S. generally accepted accounting
principles, consistently applied.
"PERSON" shall mean an individual, partnership, joint-stock
company, corporation, limited liability company, trust, or unincorporated
organization, and a government or agency or political subdivision thereof.
"QUALIFIED PUBLIC OFFERING" shall have the meaning set forth
in the Certificate of Designation.
"INVESTOR'S RIGHTS AGREEMENT" shall mean the investor's rights
agreement between the Company and the Investor, substantially in the form
attached hereto as Exhibit D.
"SEC" shall mean the Securities and Exchange Commission.
"SECURITIES ACT" shall mean the Securities Act of 1933, as
amended.
"SHAREHOLDERS AGREEMENT" shall mean the shareholders agreement
between the Company, Haim Harel and the Investor, substantially in the form
attached hereto as Exhibit E.
"TRANSACTION DOCUMENTS" shall mean this Agreement, the
Certificate of Designation, the Investor's Rights Agreement and the Shareholders
Agreement.
9.2. Accounting Principles
Where the character or amount of any asset or liability or
item of income or expense is required to be determined or any consolidation or
other accounting computation is
20
<PAGE>
required to be made for the purposes of this Agreement, this shall be done in
accordance with GAAP at the time in effect, to the extent applicable, except
where such principles are inconsistent with the requirements of this Agreement.
9.3. Directly or Indirectly
Where any provision in this Agreement refers to action to be
taken by any Person, or which such Person is prohibited from taking, such
provision shall be applicable whether such action is taken directly or
indirectly by such Person.
9.4. Governing Law
This Agreement shall be governed by and construed in
accordance with the laws of the State of New York applicable to contracts made
and to be performed entirely within such State.
9.5. Paragraph and Section Headings
The headings of the sections and subsections of this Agreement
are inserted for convenience only and shall not be deemed to constitute a part
thereof.
SECTION 10. MISCELLANEOUS
10.1. Notices
(a) All communications under this Agreement shall be in
writing and shall be delivered by hand, by facsimile, or mailed by overnight
courier or by registered mail or certified mail, postage prepaid:
(i) if to the Investor, at 6100 Glades Road, Suite 305, Boca
Raton, Florida 33434 (Facsimile: (561) 479-0757), with a copy to:
Parker Chapin LLP, The Chrysler Building, 405 Lexington Avenue, New
York, New York 10174, Attention: Henry I. Rothman, Esq. (Facsimile:
(212) 704-6288).
(ii) if to the Company, at Magnolia Broadband, Inc., c/o
Stephen M. Davis, Esq., Heller Ehrman White & McAuliffe, 711 Fifth
Avenue, 5th Floor, New York, New York 10022 (Facsimile: (212)
832-3353), marked for the attention of Haim Harel, or at such other
address as the Company may have furnished the Investor in writing in
accordance with the terms of this Section 10.1.
(b) Any notice so addressed shall be deemed to be given: if
delivered by hand or facsimile, on the date of such delivery; if mailed by
courier, on the first Business Day following the date of such mailing; and if
mailed by registered or certified mail, on the third Business Day after the date
of such mailing.
21
<PAGE>
10.2. Expenses and Taxes
(a) Except as set forth in subsection 10.2(b) and 10.2(c),
each party hereto shall pay the fees and disbursements incurred by it, including
consulting, accounting and legal expenses, in connection with the negotiation,
preparation, execution, and delivery of this Agreement, the other Transaction
Documents, and the other instruments and agreements entered into pursuant to
this Agreement.
(b) At the Closing, the Company will pay to the Investor (or
as directed by the Investor) up to $25,000 to reimburse for documented legal and
due diligence expenses and out-of-pocket expenses which were incurred by the
Investor or its agents in connection with the financing contemplated hereby.
(c) The Company will pay, and save and hold the Investor
harmless from any and all liabilities (including interest and penalties) with
respect to, or resulting from any delay or failure in paying, stamp and other
taxes (other than income taxes), if any, which may be payable or determined to
be payable on the execution and delivery or acquisition of the Shares, or the
shares of Common Stock issuable upon conversion of the Shares.
10.3. Reproduction of Documents
This Agreement and all documents relating thereto, including,
without limitation: (a) consents, waivers, and modifications which may hereafter
be executed, (b) documents received by the Investor on the Closing Date (except
for certificates evidencing the Shares of themselves), and (c) financial
statements, certificates and other information previously or hereafter furnished
to the Investor, may be reproduced by the Investor by any photographic,
photostatic, microfilm, micro-card, miniature photographic, or other similar
process and the Investor may destroy any original document so reproduced. All
parties hereto agree and stipulate that any such reproduction shall be
admissible in evidence as the original itself in any judicial or administrative
proceeding (whether or not the original is in existence and whether or not such
reproduction was made by the Investor in the regular course of business) and
that any enlargement, facsimile, or further reproduction of such reproduction
shall likewise be admissible in evidence.
10.4. Survival
All warranties, representations, and covenants made by the
Investor and the Company herein or in any certificate or other instrument
delivered by one of the Investor or the Company under this Agreement shall be
considered to have been relied upon by the Company or the Investor, as the case
may be, and shall survive all deliveries to the Investor of the Shares, or
payment to the Company for such Shares, regardless of any investigation made by
the Company or the Investor, as the case may be, or on the Company's or the
Investor's behalf. All statements in any such certificate or other instrument
shall constitute warranties and representation by the Company hereunder.
22
<PAGE>
10.5. Successors and Assigns
This Agreement shall inure to the benefit of and be binding
upon the successors and assigns of each of the parties.
10.6. Entire Agreement; Amendment and Waiver
This Agreement and the agreements attached as Exhibits hereto
constitute the entire understandings of the parties hereto and supersede all
prior agreements or understandings with respect to the subject matter hereof
among such parties. This Agreement may be amended or any provision of this
Agreement may be waived by the written consent of the Company and the Investor.
10.7. Severability
In the event that any part or parts of this Agreement shall be
held illegal or unenforceable by any court or administrative body of competent
jurisdiction, such determination shall not effect the remaining provisions of
this Agreement which shall remain in full force and effect.
10.8. Arbitration.
The parties shall arbitrate any dispute arising out of or
relating to this Agreement. Such arbitration shall be conducted in accordance
with the following:
(a) Each party to such dispute shall have five Business Days
after written notice by any such party of the commencement of arbitration
proceedings hereunder to appoint an arbitrator who is on the approved panel of
arbitrators of the American Arbitration Association. Each party to such dispute
shall immediately notify the other party thereto of such appointment. If any
such party shall fail to so appoint such an arbitrator within such five Business
Day period, the other party to such dispute may appoint such arbitrator and
shall so notify the party failing to appoint an arbitrator. The arbitrators so
appointed shall then select a third arbitrator within five Business Days after
the appointment of the second arbitrator to then constitute the Board of
Arbitration. The Board of Arbitration shall then proceed under the Commercial
Arbitration Rules of the American Arbitration Association.
(b) Following the designation of such Board of Arbitration,
the parties to such dispute, together with the members of the Board of
Arbitrators, shall promptly undertake appropriate informal efforts to mediate
and negotiate a solution to the matter covered by the original notice.
(c) If a negotiated solution cannot be achieved within
fourteen days after the date on which the Board of Arbitration is constituted,
then the Board of Arbitration shall notify the parties to such dispute. The
proceeding, upon such notification, will then become a compulsory arbitration to
be conducted under the Commercial Arbitration Rules of the American Arbitration
Association by the Board of Arbitration. These rules shall be subject to the
following modifications: (i) discovery shall be permitted under the same
standards provided for in the Federal Rules of Civil Procedure; (ii) the members
of the Board of Arbitration shall interpret and
23
<PAGE>
apply the provisions of this Agreement; (iii) the arbitration costs may be
charged to the losing party or allocated between the parties as may be
determined by the Board of Arbitration; and (iv) the proceedings will be held in
New York, New York, unless the parties to such dispute shall otherwise agree in
writing.
(d) In connection with the enforcement of the mediation and arbitration
provisions of this Section 10.8, any agreement, decision or award shall be
final, binding and conclusive as to any such claim.
10.9. Facsimile Signatures and Counterparts
This Agreement may be executed by facsimile and in one or more
counterparts, each of which shall be deemed an original and all of which
together shall be considered one and the same agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
24
<PAGE>
IN WITNESS WHEREOF, each party hereto, by its duly authorized
officer, has executed and delivered this Securities Purchase Agreement as of the
date first written above.
MAGNOLIA BROADBAND, INC.
By: /s/ Haim Harel
--------------------------------------
Name: Haim Harel
Title: Chief Executive Officer
and President
LEISUREPLANET HOLDINGS, LTD.
By: /s/ Clive Kabatznik
------------------------------------
Name: Clive Kabatznik
Title: Chief Executive Officer
and President
25
<PAGE>
LIST OF EXHIBITS
Exhibit A Certificate of Designation
Exhibit B Certificate of Incorporation
Exhibit C Bylaws
Exhibit D Investor's Rights Agreement
Exhibit E Shareholders Agreement
Exhibit F Inventions Agreement
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> MAR-31-2000
<CASH> 38,406,792
<SECURITIES> 0
<RECEIVABLES> 15,065,992
<ALLOWANCES> 388,599
<INVENTORY> 8,948,699
<CURRENT-ASSETS> 87,710,248
<PP&E> 31,681,481
<DEPRECIATION> 12,619,664
<TOTAL-ASSETS> 134,628,049
<CURRENT-LIABILITIES> 16,537,848
<BONDS> 21,187,469
0
23,224,530
<COMMON> 93,701
<OTHER-SE> 28,440,073
<TOTAL-LIABILITY-AND-EQUITY> 134,628,049
<SALES> 73,877,806
<TOTAL-REVENUES> 73,877,806
<CGS> 49,403,704
<TOTAL-COSTS> 83,283,645
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 95,440
<INCOME-PRETAX> 1,941,376
<INCOME-TAX> 1,599,707
<INCOME-CONTINUING> 341,669
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,905,140)
<EPS-BASIC> 0.05
<EPS-DILUTED> 0.18
</TABLE>
