-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MDFU1uNyrcQoLwUJuzyYg0X9SWL+Ry+ASpGNW24ZoV7sUYikSa+nSD5Eqd5K9IhZ 9h3Rw9yVaXl+ziXX8rmwVw== 0000950109-96-007858.txt : 19961125 0000950109-96-007858.hdr.sgml : 19961125 ACCESSION NUMBER: 0000950109-96-007858 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 26 FILED AS OF DATE: 19961122 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MAGINET CORP CENTRAL INDEX KEY: 0001001134 STANDARD INDUSTRIAL CLASSIFICATION: CABLE & OTHER PAY TELEVISION SERVICES [4841] IRS NUMBER: 770407677 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-12185 FILM NUMBER: 96671172 BUSINESS ADDRESS: STREET 1: 405 TASMAN DRIVE CITY: SUNNYVALE STATE: CA ZIP: 94089 BUSINESS PHONE: 4087521000 MAIL ADDRESS: STREET 1: 405 TASMAN DRIVE CITY: SUNNYVALE STATE: CA ZIP: 94089 S-1/A 1 AMENDMENT #2 TO FORM S-1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 22, 1996 REGISTRATION NO. 333-12185 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- AMENDMENT NO. 2 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ---------------- MAGINET CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ---------------- CALIFORNIA (PRIOR TO 4841 77-0407677 REINCORPORATION) (PRIMARY STANDARD (I.R.S. EMPLOYER DELAWARE (AFTER INDUSTRIAL IDENTIFICATION NUMBER) REINCORPORATION) CLASSIFICATION CODE NUMBER) (STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) 405 TASMAN DRIVE SUNNYVALE, CALIFORNIA 94089 (408) 752-1000 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ---------------- KENNETH B. HAMLET PRESIDENT AND CHIEF EXECUTIVE OFFICER MAGINET CORPORATION 405 TASMAN DRIVE SUNNYVALE, CALIFORNIA 94089 (408) 752-1000 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ---------------- COPIES TO: THOMAS C. DEFILIPPS, ESQ. EDWARD M. LEONARD, ESQ. WILSON SONSINI GOODRICH & ROSATI BROBECK, PHLEGER & HARRISON LLP PROFESSIONAL CORPORATION TWO EMBARCADERO PLACE 650 PAGE MILL ROAD 2200 GENG ROAD PALO ALTO, CA 94304 (415) 493-9300 PALO ALTO, CA 94303 (415) 424-0160 ---------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. ---------------- If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [_] If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] ---------------- CALCULATION OF REGISTRATION FEE - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM AGGREGATE AMOUNT OF TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(1)(2) FEE - -------------------------------------------------------------------------------------------------- Common Stock, $.001 par value... 6,325,000 $14.00 $88,550,000 $30,534.49(3)
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- (1) Includes shares that the Underwriters have the option to purchase to cover over-allotments, if any. (2) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(a) promulgated under the Securities Act of 1933, as amended. (3) $29,741.38 has been previously paid. ---------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR + +THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE + +UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF + +ANY SUCH STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subject to Completion, dated November 22, 1996 PROSPECTUS 5,500,000 SHARES LOGO COMMON STOCK ------------ Of the 5,500,000 shares of Common Stock, $.001 par value ("Common Stock"), of MagiNet Corporation ("MagiNet" or the "Company") being offered hereby, 4,400,000 shares are being offered initially in the United States and Canada by the U.S. Underwriters (the "U.S. Offering") and 1,100,000 shares are being offered initially outside the United States and Canada by the International Managers (the "International Offering"). Such offerings are referred to collectively as the "Offerings." Prior to the Offerings, there has been no public market for the Common Stock of the Company. It is currently estimated that the initial public offering price per share will be between $12.00 and $14.00 per share. See "Underwriting" for a discussion of factors to be considered in determining the initial public offering price. The Common Stock has been approved for listing on the Nasdaq National Market under the symbol "MGNT." ------------ THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 7. ------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
Underwriting Price to Discounts and Proceeds to Public Commissions(1) Company(2) - -------------------------------------------------------------------------------- Per Share.................................. $ $ $ - -------------------------------------------------------------------------------- Total(3)................................... $ $ $
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (1) The Company has agreed to indemnify the U.S. Underwriters and the International Managers against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting estimated expenses of the Offerings estimated at $1,400,000 payable by the Company. (3) The Company has granted to the U.S. Underwriters a 30-day option to purchase up to 660,000 additional shares of Common Stock on the same terms and conditions as set forth above solely to cover over-allotments, if any. The International Managers have been granted a similar option to purchase up to 165,000 additional shares of Common Stock solely to cover over- allotments, if any. If such options are exercised in full, the total Price to Public, Underwriting Discounts and Commissions and Proceeds to Company will be $ , $ and $ , respectively. See "Underwriting." ------------ The shares of Common Stock offered by this Prospectus are offered by the U.S. Underwriters, subject to prior sale, to withdrawal, cancellation or modification of the offer without notice, to delivery to and acceptance by the U.S. Underwriters and to certain other conditions. It is expected that delivery of such shares will be made at the offices of Lehman Brothers Inc., New York, New York, on or about , 1996. ------------ LEHMAN BROTHERS HAMBRECHT & QUIST , 1996 [INSIDE FRONT COVER] [MAGINET LOGO] [ARTWORK] ---------------- IN CONNECTION WITH THE OFFERINGS, THE U.S. UNDERWRITERS AND THE INTERNATIONAL MANAGERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. 2 [GATEFOLD--FIRST PAGE] MagiNet is the largest provider of in-room on-demand video entertainment and information systems outside North America. [Graphic: Underneath the above caption on both the first and second page of the gatefold is a map of the continents outside of North and South America America with the countries where there are MagiNet installations indicated] [Graphic: Two images of a television screen showing the Company's welcome channel.] MagiNet's full-service offices provide local support. Currently being tested in Australia, Maginet's new Welcome Channel introduces feature Hollywood movie trailers, advertising commercials, promotions and instructions in five languages - all with the quality of network television broadcasting. With the acquisition of Prodac, installed rooms will total 103,000 (63% on demand, 37% scheduled). [Graphic: One image of a television screen showing casino-style gaming, and two images of a television screen showing Bloomberg Information TV.] In an exclusive agreement with InterGame, MagiNet will be able to provide in-room, interactive casino-style gaming in hotel rooms worldwide where jurisdictions allow. MagiNet also expects to distribute Bloomberg Information Television, a 24-hour financial news program to hotels, starting with a test in Israel in late 1996. [GATEFOLD-SECOND PAGE] [Graphic: Three images of a television screen: one showing a welcome screen; one showing a movie menu; and one showing text describing a movie.] MagiNet's mainstay is on-demand entertainment, such as Hollywood blockbusters and adult theme movies. Plus, hotel information and guest services such as in-room check out and folio review. Providing guests as many choices as possible is MagiNet's formula for winning the world's leading hotels. MagiNet users are business and leisure guests at the world's leading hotels. 238% annualized growth in rooms since 1993 [Graphic: Three images of a television screen showing an information directory known as iLook.] iLook is an interactive information and resource directory for travelers that can provide hotel guests immediate and easy access to thousands of businesses, services, restaurants, shops and cultural information. iLook is expected to be launched in Thailand in early 1997, and is one of several products being developed as additional revenue sources. The world's best hotels have selected MagiNet for their interactive entertainment and information systems. Sheraton On The Park, Australia Yokohama Grand Inter-Continental Hotel, Japan Inter-Continental Sydney, Australia Regent Auckland, New Zealand Guam Hilton, Guam The Orchard Hotel, Singapore Mandarin Oriental, Hong Kong Sandton Sun & Towers, South Africa JW Marriott, Hong Kong Durban Crowne Plaza, South Africa Island Shangri-La, Hong Kong Hotel Lotte, South Korea Regent Hong Kong, Hong Kong Hotel Shilla, South Korea Hilton Tel Aviv, Israel Grand Formosa Regent, Taiwan Sheraton Tel Aviv, Israel Grand Hyatt Taipei, Taiwan Hotel Inter-Continental Tokyo Bay, Shangri-La Hotel, Thailand Japan Hotel Okura Tokyo, Japan Regent Bangkok, Thailand Grand Hyatt Fukuoka, Japan PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information, including "Risk Factors" and the Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Prospectus. THE COMPANY MagiNet is the leading supplier of on-demand interactive video entertainment and information services to the hospitality industry outside of North America. The Company installs integrated video systems that allow hotel guests to order pay-per-view movies on-demand. MagiNet has recently expanded these systems into entertainment and information gateways that offer an increasingly varied range of services, such as on-demand billing summaries, express checkout, personalized messaging, guest surveys and room service ordering. The Company expects to implement additional revenue enhancing services such as in-room casino-style gaming, advertising, video games, financial news, Internet access and in-room shopping in selected markets beginning in 1997. To date, the Company has focused principally on leading hotels in the Pacific Rim. Recently, the Pacific Rim has been experiencing a higher rate of economic expansion and hotel construction than any other region in the world. Leading hotels in this region are generally characterized by high occupancy and room rates. The Company currently has operations and installations in Thailand, Australia, Japan, South Korea, Taiwan, Hong Kong, South Africa, Guam/Saipan, Singapore, Israel, New Zealand and France, and plans to expand its presence in the Pacific Rim, Europe, the Middle East and Africa. MagiNet began installing its systems in 1993 and, between 1993 and 1995, increased its installed base of rooms from 2,087 to 39,122 and increased revenue from $395,000 to $8.7 million. As of September 30, 1996, MagiNet served 169 hotels having 59,529 rooms, with an additional 16,783 rooms in backlog. In November 1996, the Company entered into a definitive agreement to acquire Prodac Prozessdatentechnik GmbH, a German corporation ("Prodac"), which substantially expands the Company's geographic scope and immediately establishes the Company as a leading provider of in-room entertainment services in Europe, the world's largest hotel market. There are approximately two million hotel rooms in MagiNet's current and target markets. The Company's installed base includes certain hotels in the Hilton International, Hyatt International, Inter-Continental, Mandarin Oriental, Marriott, Okura, Regent/Four Seasons, Shangri-La, Sheraton, Southern Pacific Hotel Corporation, Westin and other hotel chains. The Company has preferred vendor status for future installations in hotels within the Hyatt International, Shangri-La and Southern Pacific Hotel Corporation chains. Prodac's installed base includes certain hotels in the Accor, Dorint and Maritim hotel chains, and Prodac has preferred vendor status with the Dorint, Maritim and Novotel hotel chains. In addition, the Company believes there is a substantial opportunity to penetrate the mid-market hotel sector in its target markets. The Company holds an exclusive license to provide the on-demand interactive video system developed by On Command Video Corporation in more than 30 countries outside of North America, and a license to provide the on-demand interactive video system developed by Guestserve Development Group to all countries outside of North America. MagiNet installs its systems in hotels at the Company's cost and receives revenue from guest usage pursuant to five-to- seven year contracts giving MagiNet the exclusive right to provide the hotel with in-room on-demand video entertainment and information services. To date, the Company's principal on-demand video entertainment services have provided a reasonably predictable stream of recurring revenue during the term of these exclusive contracts. The Company believes its new services will appeal to a broader group of hotel guests than traditional purchasers of in-room video entertainment and should increase revenue per installed room. Beginning in early 1996, the Company added several key members to its management team, including Kenneth B. Hamlet, its Chief Executive Officer, and Gordon E. (Ned) Druehl, Jr., its Chief Operating Officer, both having over twenty years of experience in the hospitality industry. Mr. Hamlet and Mr. Druehl, as part of 3 their executive responsibilities at Holiday Inns, Inc., managed a division known as HiNet which provided free-to-guest scheduled broadcast and on-demand video entertainment to Holiday Inns hotels. This management team has further defined the Company's strategy to expand its installed room base by (i) leveraging its strong market position to obtain contracts with other leading hotels, (ii) penetrating existing or new target markets, directly or through acquisition, and (iii) offering services to mid-market hotels in target regions. In addition, this management team was influential in establishing strategic relationships with Bloomberg for information and news television programming and InterGame for in-room casino-style gaming. The Company incorporated in California in July 1991, changed its name from Pacific Pay Video Limited to MagiNet Corporation in August 1995 and will reincorporate into Delaware prior to the completion of the Offerings. Unless the text otherwise requires, references in this Prospectus to "MagiNet" and the "Company" refer to MagiNet Corporation, a California corporation, and its Delaware successor, together with their subsidiaries. The Company's principal executive offices are located at 405 Tasman Drive, Sunnyvale, California 94089, and its telephone number at that address is (408) 752-1000. ACQUISITION OF PRODAC On November 6, 1996, the Company entered into a definitive Share Purchase and Transfer Agreement (the "Acquisition Agreement") to acquire all the outstanding shares of Prodac (the "Prodac Shares"), which is headquartered in Cologne, Germany. Prodac is one of the leading providers of video entertainment and information systems in Europe and develops, manufactures and installs its own proprietary scheduled broadcast and on-demand interactive video entertainment systems. The Company believes that the acquisition of Prodac will provide important competitive and strategic advantages to the Company. Europe represents the world's largest hotel market with approximately 5.5 million rooms, of which approximately 1.1 million represent rooms in the Company's target market of hotels with greater than 100 rooms. MagiNet's acquisition of Prodac will substantially expand the geographic scope of the Company's operations and establish the Company as an industry leader in Europe. In addition, the Company expects the acquisition to enhance its ability to pursue contracts with leading hotels and hotel chains in Europe. As of September 30, 1996, Prodac served 242 hotels with 43,657 installed rooms, the majority of which were located in Germany, and had 10,316 rooms in backlog. Scheduled broadcast equipment represents approximately 87% of Prodac's installations and 70% of its backlog, the balance of installations and backlog represents installations and backlog of Prodac's Videoquest on-demand system. Pursuant to the Acquisition Agreement, following the closings of the Offerings, the Company will pay the shareholders of Prodac an aggregate consideration of approximately $16.4 million, consisting of approximately $13.1 million in cash (plus interest at the rate of 6% per annum from November 6, 1996 through the date of the payment of the acquisition consideration) and shares of MagiNet Common Stock with an aggregate value of approximately $3.3 million (based on a 10% discount to the initial public offering price). The shareholders of Prodac are also entitled to a distribution of approximately $393,000 to be paid from Prodac's retained earnings, calculated in accordance with German generally accepted accounting principles ("German GAAP"). If the closing of the Offerings occurs after December 31, 1996, such shareholders shall be entitled to any additional retained earnings, calculated in accordance with German GAAP, in excess of such $393,000. In addition, the Company will pay up to an aggregate of approximately $9.8 million in cash and MagiNet Common Stock contingent upon Prodac achieving certain financial targets in fiscal 1997, 1998 and 1999. The cash portion of the acquisition consideration will be paid in Deutsche Marks out of the net proceeds of the Offerings based on the applicable exchange rate on the Frankfurt am Main exchange on the closing date of the Offerings. Any increase in the value of the Deutsche Mark relative to the U.S. Dollar will increase the portion of the net proceeds of the Offerings used in connection with the Prodac acquisition and will result in the Company's issuing a greater number of shares of MagiNet Common Stock to the shareholders of Prodac. See "Use of Proceeds," "Dilution," "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" and "Acquisition of Prodac." 4 THE OFFERINGS Common Stock initially offered in: The U.S. Offering................. 4,400,000 shares The International Offering........ 1,100,000 shares Total Common Stock offered....... 5,500,000 shares Common Stock to be outstanding 19,288,931 shares(1) after the Offerings............... Use of proceeds.................... System installations, the cash portion of the purchase price for the acquisition of Prodac, working capital and general corporate purposes. See "Use of Proceeds." Nasdaq National Market symbol...... MGNT
SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, --------------------------------------- ------------------------------ 1995 1996 ------------------- ------------------- PRO PRO 1993 1994 ACTUAL FORMA(2) 1995 ACTUAL FORMA(3) ------- ------- -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE AND OTHER DATA) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenue................ $ 395 $ 2,342 $ 8,689 $ 19,254 $ 5,655 $ 12,048 $ 23,941 Direct costs........... 294 1,156 3,731 9,903 2,586 6,232 11,792 Depreciation and amortization.......... 171 957 3,682 9,936 2,564 4,747 9,366 Operations expenses, selling, general and administrative........ 1,961 7,170 11,528 14,417 7,808 8,455 11,200 Research and development........... 1,320 856 1,247 1,247 890 1,599 1,599 ------- ------- -------- -------- -------- -------- -------- Operating loss......... (3,351) (7,797) (11,499) (16,249) (8,193) (8,985) (10,016) Interest expense, net.. (28) (253) (991) (2,355) (379) (2,083) (3,758) ------- ------- -------- -------- -------- -------- -------- Loss before income taxes and minority interest in net losses of consolidated subsidiaries.......... (3,379) (8,050) (12,490) (18,604) (8,572) (11,068) (13,774) Provision for income taxes ................ -- -- (554) (680) (423) (681) (1,123) Minority interest in net losses of consolidated subsidiaries.......... -- 124 248 248 204 215 215 ------- ------- -------- -------- -------- -------- -------- Net loss............... $(3,379) $(7,926) $(12,796) $(19,036) $ (8,791) $(11,534) $(14,682) ======= ======= ======== ======== ======== ======== ======== Pro forma net loss per share(4).............. $ (1.03) $ (1.50) $ (0.93) $ (1.16) ======== ======== ======== ======== Shares used in computation of pro forma net loss per share(4).............. 12,392 12,672 12,407 12,687 CONSOLIDATED STATEMENT OF CASH FLOWS DATA(5): Net cash used in operating activities.. $(1,753) $(6,137) $ (7,619) $ (6,680) $ (9,510) Net cash used in investing activities.. (3,091) (9,361) (14,897) (10,967) (16,451) Net cash provided by financing activities.. 5,082 25,715 30,656 23,034 14,540 OTHER DATA: EBITDA (In thousands)(6)......... $(3,180) $(6,840) $ (7,817) $ (6,313) $ (5,629) $ (4,238) $ (650) EBITDA margin.......... (805)% (292)% (90)% (33)% (100)% (35)% (3)% New rooms installed.... 2,087 10,929 26,106 37,702 18,075 20,407 33,054 Total rooms served(7).. 2,087 13,016 39,122 70,132 31,091 59,529 103,186 Rooms in backlog(8).... -- 10,941 12,194 15,156 16,783 27,099 Average monthly gross video revenue per room(5)............... -- $ 32.39 $ 29.18 $ 28.74 $ 28.84
SEPTEMBER 30, 1996 --------------------------------------- ACTUAL PRO FORMA(9) AS ADJUSTED(10) --------- ------------ --------------- (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Cash, cash equivalents and short-term investments.......................... $ 7,251 $ 1,278 $66,373 Working capital (deficit)............. 4,857 (15,879) 49,216 Total assets.......................... 49,484 74,424 139,519 Long-term debt........................ 25,829 40,142 40,142 Accumulated deficit................... (37,008) (49,208) (49,208) Total stockholders' equity............ 15,969 7,069 72,164
5 - -------- (1) Based on shares outstanding as of September 30, 1996. Excludes as of September 30, 1996, an aggregate of 1,702,080 shares of Common Stock issuable upon exercise of options outstanding under the Company's 1992 Key Personnel Stock Option Plan and 1992 Stock Option Plan at a weighted average exercise price of $2.17. Also excludes as of September 30, 1996 an additional 2,318,728 shares reserved for future issuance under the 1992 Key Personnel Stock Option Plan, the 1996 Director Stock Option Plan and the 1996 Employee Stock Purchase Plan. Includes 280,230 shares of Common Stock to be issued in connection with the Company's acquisition of Prodac within 10 business days after the closing of the Offerings. See "Management--Stock Plans," "Acquisition of Prodac" and Note 5 of Notes to Consolidated Financial Statements. (2) Pro forma to give effect to the Company's acquisition of Prodac following the closing of the Offerings as if such acquisition had taken place as of January 1, 1995. See "Acquisition of Prodac," the Unaudited Pro Forma Combined Condensed Financial Statements and Note 8 of Notes to Consolidated Financial Statements. (3) Pro forma to give effect to the Company's acquisition of Prodac following the closing of the Offerings as if such acquisition had taken place as of January 1, 1996. See "Acquisition of Prodac," the Unaudited Pro Forma Combined Condensed Financial Statements and Note 8 of Notes to Consolidated Financial Statements. (4) See Note 1 of Notes to Consolidated Financial Statements for a discussion of the computation of net loss per share. (5) Data not available on a pro forma basis. (6) Indicates earnings (loss) before interest expense, income taxes, depreciation and amortization, and minority interest in net losses of consolidated subsidiaries and is not intended to represent an alternative to net income (as determined in accordance with generally accepted accounting principles) as a measure of performance. Management of the Company believes that EBITDA provides an additional perspective on the Company's operating results and its ability to service its long-term debt and fund its operations. The primary differences between EBITDA and net cash used in operating activities are that net cash used in operating activities includes interest expense, income tax expense and changes in operating assets and liabilities, which items are excluded from EBITDA. See "Consolidated Statements of Cash Flows." (7) Includes all rooms installed with Company-owned systems, except for pro forma total rooms served, which also includes Prodac systems. A charge relating to the acquisition of in-process technology of approximately $12.2 million is included in the pro forma balance sheet as a charge to retained earnings. The Company expects to record this change in its financial results during the three month period ended December 31, 1996. (8) Data not available on a pro-forma basis for the year ended December 31, 1995. (9) Pro forma to give effect to the Company's acquisition of Prodac following the closing of the Offerings as if such acquisition had taken place as of September 30, 1996. (10) Adjusted to reflect the net proceeds of the sale of Common Stock offered by the Company hereby at an assumed initial public offering price of $13.00 per share and the application thereof. See "Use of Proceeds." ---------------- Except as set forth in the Consolidated Financial Statements or otherwise indicated herein, all information in this Prospectus (i) reflects the reincorporation of the Company into Delaware which will be effected prior to the effectiveness of the registration statement covering the Offerings, (ii) reflects the conversion of all the Company's outstanding shares of Preferred Stock into 10,908,878 shares of Common Stock, which will occur automatically upon the closing of the Offerings, (iii) reflects the filing, upon the closing of the Offerings, of the Company's Restated Certificate of Incorporation authorizing 5,000,000 shares of undesignated Preferred Stock, (iv) assumes the net exercise of warrants to acquire up to an aggregate maximum of 3,704,840 shares of Common Stock and Preferred Stock for 2,091,951 shares of Common Stock in connection with the Offerings at an assumed fair market value of $13.00 per share, (v) assumes the approval by the Company's Board of Directors of the acquisition of Prodac and the issuance of 280,230 shares of Common Stock in connection with such acquisition and (vi) assumes that the U.S. Underwriters' and International Managers' over-allotment options are not exercised. See "Description of Capital Stock," "Underwriting," "Acquisition of Prodac" and Note 5 of Notes to Consolidated Financial Statements. For purposes of calculating the U.S. Dollar cash consideration and number of shares issuable pursuant to the Acquisition Agreement in connection with the Prodac acquisition, an assumed exchange rate of DM 1.525 per U.S. Dollar, representing the closing price in New York trading on September 30, 1996, and an assumed initial public offering price of $13.00 per share less a ten percent discount have been used throughout this Prospectus. The exchange rate determined on the Frankfurt am Main Exchange on the date of the closing of the Offerings will be used to determine the actual number of shares initially issued in connection with the Prodac acquisition. See "Dilution" and "Acquisition of Prodac." ---------------- MagiNet and iLook are trademarks of the Company. Prodac and Videoquest are registered in Germany as trademarks of Prodac. This Prospectus also contains trademarks and tradenames of other companies. 6 RISK FACTORS This Prospectus contains forward-looking statements relating to future events or the future financial performance of the Company, which involve risks and uncertainties. The Company's actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in the following risk factors and elsewhere in this Prospectus. In addition to the other information contained in this Prospectus, the following factors should be carefully considered in evaluating the Company and its business before purchasing the Common Stock offered hereby. DEPENDENCE ON HOTEL INDUSTRY AND GUEST VIEWING PATTERNS MagiNet's business is closely linked to the performance of the hotel industry in the Company's targeted geographic markets. A decline in hotel occupancy from current levels or changes in the mix of hotel business and leisure guests as a result of general business, economic, seasonal or other factors could have a material adverse effect on the Company's business, financial condition and results of operations. MagiNet's performance is also dependent on the frequency with which hotel guests purchase its services ("buy rates"). Buy rates are subject to a variety of factors, including censorship of adult theme movies, pricing of the movies, availability of popular titles, general guest preferences and general economic conditions. MagiNet's performance is also dependent on the relative buy rates of major motion pictures to adult theme movies. For major motion pictures, the Company generally pays ongoing licensing royalties equal to a percentage of the film's gross revenue to the Company. For most adult theme movies, from which the Company currently derives a majority of its revenue, the Company generally pays either a comparatively small one-time fee or small flat-rate fee based on the number of rooms served. As a result, a shift in viewing patterns away from these movies, or any limitation imposed on the offering of such movies (including censorship by governmental authorities, unavailability of titles, or restrictions imposed by customer hotels), would adversely affect the Company's business, financial condition and results of operations. For example, the Company has experienced significantly lower buy rates in censored markets than in uncensored markets. The imposition of censorship of adult theme movies in currently uncensored markets where the Company has installations would have a material adverse effect on the Company's business, financial condition and results of operations. In addition, the imposition of censorship in target markets of the Company could deter the Company from entering those markets. Free-to-guest services such as HBO and other cable stations compete directly with the Company's services. Such alternative viewing choices available to hotel guests may reduce the buy rate in the rooms installed with MagiNet's systems. Any change in guest viewing patterns that reduces the buy rate of the Company's services could have a material adverse effect on the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." ACQUISITION OF PRODAC On November 6, 1996, MagiNet entered into the Acquisition Agreement to acquire Prodac, which is one of the leading providers in Europe of video entertainment and information systems to the hospitality industry. The Company has no history of acquiring companies, and there can be no assurance that the Company will be able to realize the anticipated benefits of the Prodac acquisition, or that the Company can be successful in integrating the operations and personnel of Prodac into its business, operating under the agreements in effect between Prodac and others, incorporating the Prodac products and any other acquired technologies and technologies under development into its product lines, establishing and maintaining uniform standards, controls, procedures and policies, avoiding the impairment of relationships with employees and customers as a result of changes in management, or overcoming other problems that may be encountered in connection with the integration of Prodac. Prodac's employees have established a workers' council, which represents the employees for purposes of negotiating certain terms and conditions & employment. In addition, certain of Prodac's employees are members of trade unions. Any future failure to reach agreements with its employees or their representatives could result in a work stoppage at Prodac, which could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, there can be no assurance that, even if Prodac is successfully integrated into the Company, the Company could successfully compete against Prodac's 7 competitors, including EMI Group plc ("EMI"), Video Management Services, Inc. ("VMS") and Granada Group Plc ("Granada") in the European or other markets. In October 1996, Prodac sold its United Kingdom operations to U.K. Consumer Electronics Limited ("UKCEL"), a division of Granada, and agreed to a non- competition provision for three years in the United Kingdom and Ireland that may be enforceable against both MagiNet and Prodac. This provision could prevent the Company from expanding installations into the United Kingdom and Ireland. The Company may be obligated under a contract with Hyatt International (Europe, Africa and Middle East) Ltd. to install rooms in the United Kingdom using the Company's licensed Guestserve technology, which could conflict with the non-competition provision of the UKCEL agreement. Any resulting breach of either the Company's agreement with Hyatt or the non- competition provision of the UKCEL agreement could have a material adverse effect on the Company's business, financial condition and results of operations. The Company is obligated to pay within 10 days after the closing of the Offerings DM 20 million for the cash portion of the consideration for the acquisition of Prodac (plus interest at the rate of six percent per annum from November 6, 1996 through the date of payment of the acquisition consideration) and to issue shares of MagiNet Common Stock with an aggregate value of DM 5 million based on a 10% discount to the initial public offering price. The Acquisition Agreement also provides that the shareholders of Prodac will be entitled to a cash distribution of DM 600,000 (approximately $393,000) from the retained earnings of Prodac, calculated based on generally accepted accounting principles in Germany ("German GAAP"). In addition, in the event the Offerings have not closed on or prior to December 31, 1996, Prodac's shareholders will be entitled to receive an additional cash payment equal to all retained earnings in excess of DM 600,000, calculated under German GAAP, as of December 31, 1996. As of September 30, 1996, Prodac's retained earnings, calculated on a German GAAP basis, totalled approximately DM 2,000,000 (approximately $1,300,000), which will be adjusted for the quarter ending December 31, 1996. The cash consideration payable in connection with the acquisition of Prodac, including the potential distributions from retained earnings, is payable in Deutsche Marks and any increase in value of the Deutsche Mark relative to the U.S. Dollar would increase the portion of the net proceeds of the Offerings used in connection with the acquisition of Prodac as well as the number of shares of MagiNet Common Stock to be issued to Prodac's shareholders. See "Acquisition of Prodac." HISTORY OF LOSSES; FUTURE CAPITAL NEEDS; ANTICIPATED FUTURE LOSSES MagiNet has recorded cumulative net losses of approximately $37,008,000 since its inception, including a loss of approximately $11,534,000 for the nine months ended September 30, 1996. Prodac has recorded cumulative net losses, calculated based on generally accepted accounting principles in the United States, of approximately $5,113,000 since its inception, including a loss of approximately $1,219,000 for the nine months ended September 30, 1996. The Company's business requires substantial investment on a continuing basis for the installation of the Company's systems in additional hotel rooms and the upgrading of existing installations. Capital expenditures expected to be incurred by the Company will likely exceed cash flows from its operating activities for the foreseeable future. The Company intends to use the net proceeds of the Offerings and may use other secured and/or unsecured borrowings to pay the cash portion of the consideration for the acquisition of Prodac and to expand its installed base of rooms and support its projected growth. If the Company cannot obtain sufficient funds to support installations of rooms, the Company may have to reduce the rate of room installations, which could have a material adverse effect on the Company's business, financial condition and results of operations. Whether or when the Company can achieve cash flow levels from operations sufficient to support its projected growth cannot be accurately predicted, and unless and until such cash flow levels are achieved, the Company may require additional borrowings or the sale of additional equity securities, or some combination thereof. There can be no assurance that the Company will be able to borrow additional amounts or sell additional equity on terms acceptable to the Company, or at all. See "Selected Consolidated Financial and Other Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." RELIANCE ON NEW HOTEL CONTRACTS AND INSTALLATIONS The Company's future growth will depend principally on its ability to obtain contracts with new hotels and to install systems in such hotels in a timely manner. The timing of obtaining new contracts is dependent upon the level of competition in a particular market, the length of the negotiating process with each individual hotel 8 and the amount of the Company's local personnel resources allocated to obtaining contracts as opposed to servicing existing hotel customers. To the extent new contracts are not obtained in future periods at the rate anticipated by the Company, there could be a significant shortfall in the Company's anticipated growth in installed rooms. The timing of system installations has historically been reasonably predictable after a contract has been executed, although, for certain prior installations, technical and other issues have delayed installations in specific hotels. Under MagiNet's master hotel contracts, MagiNet must install the interactive video entertainment and information system specified in the contract with the hotel chain. Pursuant to its hotel contracts, Prodac is required to install its scheduled broadcast or on-demand video systems. The inability to provide the particular system specified, including the inability of Prodac to manufacture sufficient quantities of its systems, could delay installations of such systems in the individual hotels within such chain, which could have a material adverse effect on the Company's business, financial condition and results of operations. The inability of the Company to obtain new contracts, to manufacture sufficient quantities of its systems or to install systems at the rate it currently anticipates for these or other reasons could have a material adverse effect on the Company's results of operations. MagiNet historically has obtained contracts and installed systems in large city-center hotel properties, primarily in Asia. With the acquisition of Prodac, the Company will be seeking to consistently obtain contracts and install systems in Europe. Many hotel properties in Europe are installed with either free-to-guest or scheduled broadcast systems, and European hotels tend to be smaller and older than the business and resort hotels in Asia in which the Company has historically installed its systems. Obtaining contracts and installing systems in Europe may require significant additional capital and personnel resources, which could have a material adverse effect on the Company's results of operations. The inability of the Company to obtain new contracts and install systems in Europe at the rate they currently anticipate for these or other reasons could have a material adverse effect on the Company's results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business--Installed Base and Backlog" and "Acquisition of Prodac." FLUCTUATIONS IN OPERATING RESULTS The Company's operating results have historically been, and will continue to be, subject to quarterly and annual fluctuations due to a variety of factors, including the time required to obtain new contracts and install systems; timely introduction, enhancement and market acceptance of new services; changes in the pricing policies by the Company or its competitors; increased competition; the gain or loss of contracts with hotels or hotel chains; the introduction of new products, product enhancements or new services by competitors; currency fluctuations and other uncertainties related to operating in multiple jurisdictions; hotel occupancy; buy rates; availability of programming and the ability to anticipate changing hotel or guest preferences. A large portion of MagiNet's installations are in tropical climates where occupancies are generally higher in the first and fourth quarters of the year, and buy rates are typically lower in the third quarter of each year. As a consequence, revenue per room is generally lowest in the third quarter. There can be no assurance that new contracts can be obtained in a timely manner, or at all, or that systems can be installed in a timely manner after contracts are obtained. The Company's operating results will also be affected by seasonality in the markets in which Prodac is operating, the timing of orders from UKCEL and shipments to UKCEL of Prodac systems, the ability of Prodac to manufacture its systems, general economic and other conditions affecting the timing of contracts and installations, capital spending, and order cancellations or rescheduling. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." SUBSTANTIAL FIXED COMMITMENTS Funds generated by MagiNet's and Prodac's existing operations are not sufficient to enable the Company to meet its debt service obligations on the Senior Secured Notes due 2000 (the "Notes") and Prodac's obligations under lease financing arrangements for Prodac systems, together with other fixed charges. Net proceeds from the Offerings will be used by the Company primarily to pay the cash portion of the consideration for the acquisition of Prodac and to install new systems. If sufficient revenue is not generated from these installations, the Company's ability to make necessary payments with respect to the Notes would be impaired, and the Company's 9 ability to service the Notes would then depend upon the Company's ability to secure additional funds from other sources. There can be no assurance that the Company will be able to obtain such additional funds on favorable terms, if at all. Further, the instruments governing the Company's debt obligations contain financial and other covenants, and no assurance can be given that the Company will comply with such covenants. During 1996, the Company failed to comply with certain financial covenants and obtained from the holders of the Notes amendments of the covenants in exchange for the Company issuing additional warrants to the holders of the Notes. Failure of the Company to comply with the covenants, or in the event of non-compliance, to obtain an amendment of the covenants, could result in acceleration of the maturity of the Company's borrowings, which would have a material adverse effect on the Company's business, financial condition and results of operations. The Company's debt obligations will be subject to acceleration in the event that the Company does not meet its principal and interest payments or comply with its covenants. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." IMPORTANCE OF POTENTIAL NEW SOURCES OF REVENUE; COMPATIBILITY MagiNet's strategy includes developing new applications and markets for its interactive entertainment and information systems. This strategy presents the risks inherent in assessing the value of development opportunities and committing capital to unproven markets. The Company expects that its future performance will be dependent on usage of additional services such as in-room casino-style gaming and advertising provided over the Company's systems to hotel guests. New services may require the Company to devote resources to software or other development to enable the new services to be provided over the Company's systems. There can be no assurance that the Company's new products or any products being developed by Prodac or MagiNet will generate additional revenue or earnings for the Company or that the Company will successfully penetrate these additional markets. In addition, any new services provided by the Company could induce guests to change their viewing patterns away from an existing service of the Company and toward a new service resulting in either no additional revenue or decreased actual revenue from the installed base of rooms, depending upon the pricing of the new services and the change in guest viewing patterns that may result. MagiNet will devote resources to developing such services through licensing agreements and other arrangements and marketing such services to hotels and to hotel guests. The Company's ability to provide in-room casino-style gaming is dependent upon obtaining the necessary licenses, approvals, findings of suitability and product approvals in all jurisdictions in which it intends to provide this service. The licensing and approval processes can involve significant expenditures of time and resources by the Company. There can be no assurance such approvals will be obtained. In addition, to the extent that new services introduced by MagiNet are not attractive to hotels and hotel guests, that hotel guests do not utilize such services to the extent necessary to generate a sufficient return on the Company's development and marketing expenditures or that governmental regulation prohibits the provision of these services, the Company's business, financial condition and results of operations would be adversely affected. The Company holds an exclusive license to provide an on-demand interactive video system developed by On Command Video Corporation ("OCV") to certain countries outside North America and a license to provide an on-demand interactive video system developed by Guestserve Development Group ("Guestserve") to all countries outside North America. The Company's OCV and Guestserve-based systems are not compatible with Prodac's scheduled broadcast or on-demand systems. Accordingly, additional development resources will be required to provide either the Company's existing or new products over Prodac's systems. EXPANSION OF BUSINESS THROUGH ACQUISITIONS Part of MagiNet's business strategy is to pursue additional acquisitions that will complement its existing business. The Company has had preliminary discussions with, or has evaluated the potential acquisition of, several companies in addition to Prodac. Although no transaction other than Prodac is being considered at this time, the Company is unable to predict whether or when any prospective acquisition candidates will become available or the likelihood of a material transaction being completed should any negotiations commence. There can be no assurance that any additional acquisitions will occur, that the Company can be successful in integrating 10 the operations and personnel of any acquired entity into the Company's business, incorporating any acquired product lines into the Company's business, establishing and maintaining uniform standards, controls, procedures and policies, avoiding the impairment of relationships with employees and management as a result of changes in management, or overcoming other problems that may be encountered in connection with the integration of acquired businesses. To the extent MagiNet proceeds with an additional transaction, and if such transaction is relatively large and consideration is in the form of cash, a substantial portion of the Company's available cash, including the net proceeds of the Offerings, could be used to consummate any such acquisition. The Company may also seek to finance any such acquisition through issuances of equity or debt financings, which could be dilutive to, or have an adverse impact on, the Company's earnings. There can be no assurance that any such financings will be available on acceptable terms or at all. SYSTEM RELIABILITY MagiNet has experienced and continues to experience problems with certain equipment, including converters and remote control units. MagiNet has replaced equipment at some hotels to correct problems that affected the delivery of the Company's services to the hotel guests. It is possible that the Company's systems, including Prodac's systems, may be found to be unreliable after installation at a hotel or hotels. Such occurrences could result in the Company devoting substantial resources to maintenance services for the systems, and could result in a substantial number of installed rooms not having the Company's services available for an extended period of time. Because a substantial majority of the Company's revenue is derived from video equipment installations, system unreliability could result in reduced revenue for the Company and dissatisfaction among hotels because of reduced commission revenue to the hotel and disruption of certain hotel operations, any of which could have a material adverse effect on the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business-- Manufacturing." DEPENDENCE ON LOCAL PARTNERS; INTERNATIONAL BUSINESS All of MagiNet's and Prodac's revenue is generated outside of the United States, subjecting the Company to a variety of risks that, individually or in the aggregate, may adversely affect the Company's business, financial prospects and results of operations. These risks include changes in political and economic conditions; the availability and reliability of local independent contractors for installation and maintenance services; differing legal and business practices, particularly in regard to interpretation and enforceability of contracts; changes in taxes, tariffs, freight rates and foreign exchange regulations; foreign currency fluctuations; censorship by governmental authorities or restrictions imposed by hotels and changes in the regulatory environment relating to the telecommunications and media industries in any of the Company's target markets. MagiNet and Prodac have each entered into joint ventures or similar arrangements in certain of its markets with local businesses and individuals believed by MagiNet or Prodac to be familiar with local laws, customs and practices and to be otherwise advantageous to the Company's business prospects in that market. The Company believes that its success in penetrating markets for its products depends in large part on its ability to maintain these relationships, to cultivate additional relationships and to cultivate alternative relationships if distribution channels change. Despite these efforts, there can be no assurance that the Company will be successful in avoiding or minimizing such risks or that such arrangements, if successful, will continue to provide significant benefits to the Company and will not expose the Company to potential liability as a consequence of actions taken by the Company's local joint venture partners. Most of the revenue of MagiNet and Prodac is denominated in foreign currencies. The Company has not historically attempted to reduce the risk of currency fluctuations by hedging except in certain limited circumstances. The Company may attempt to reduce these risks by hedging in the future. Changes in the exchange rates of foreign currencies or exchange controls may adversely affect the Company's results of operations. There can be no assurance that the Company's current or any future currency exchange strategy will be successful in avoiding exchange related losses or that any of the factors listed above will not have a material adverse effect on the Company's future international revenue and, consequently, on the Company's business, 11 financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." DEPENDENCE UPON SUPPLIERS; SOLE SOURCES OF SUPPLY MagiNet currently subcontracts the manufacture of its systems, including head-ends, converters and remote controls. The Company's remote controls for the OCV-based systems are manufactured by one company in Hong Kong, the remote controls for the Guestserve-based systems are manufactured by one company in China and the Company's converters are manufactured by three companies, one in each of Taiwan, Japan and Singapore. The OCV-based head-ends are currently available solely from OCV, and the Guestserve-based head-ends are available solely from Guestserve. OCV is a majority-owned subsidiary of Ascent Entertainment Group, Inc., which has recently acquired the assets of SpectraVision, Inc. ("SpectraVision"), a competitor of the Company in the Pacific Rim. MagiNet believes that similar contract manufacturing can be obtained from other vendors, including those located in the Pacific Rim, although no assurance can be given that such manufacturing resources will continue to be available on reasonable terms, or at all. The Company will pursue such alternative manufacturing arrangements when and if it appears likely that significant cost savings or quality improvements can be achieved. At present, the Company has no plans for alternative sourcing of the system or major system sub-assemblies. Prodac manufactures its scheduled broadcast and on-demand systems at its manufacturing facility in Cologne, Germany. The manufacturing process involves the integration of Prodac-produced components with commercially-sourced parts such as modulators, video players, racks and wiring. Certain of these components are currently available from single or limited supply sources. Although Prodac has not experienced any difficulty obtaining such components to date, there can be no assurance that Prodac will not face shortages of one or more necessary components in the future. Any failure to obtain components on a timely basis could have a material adverse effect on the Company's business, financial condition and results of operations. Prodac also relies on Philips N.V. ("Philips") to produce televisions incorporating the Prodac television control module ("TCM"). The arrangement with Philips is the only arrangement Prodac has established for the production of the TCM-equipped televisions that Prodac installs in hotels. Any disruption of the supply of components for the TCMs or disruption in Philips' manufacturing process could have a material adverse effect on the Company's business, financial condition and results of operations. See "Acquisition of Prodac." The Company has experienced delays in receiving converters for installations planned for the Guestserve-based systems, and these delays caused an approximately three to four month delay in installing certain hotels. Delays in receiving products could delay a large number of planned room installations. There can be no assurance that the Company will not face such difficulties or delays in the future. An inability of the Company to obtain sole-sourced or other components in a timely manner could significantly delay installations of systems, which could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, any increase in cost to manufacture the system components from existing or alternative sources could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business--Manufacturing." DEPENDENCE ON KEY PERSONNEL The Company's success depends upon the continued contributions of certain senior corporate managers and key employees, including those of Prodac, the loss of whose services could have a material adverse effect on the Company. The Company also depends on its continued ability to attract and retain other highly skilled and qualified personnel, and there can be no assurance that the Company will be successful in attracting and retaining such personnel. See "Management." COMPETITION MagiNet competes with a number of companies, including SpectraVision, Movielink Corporation Limited ("Movielink") and LodgeNet Entertainment Corporation ("LodgeNet"), that specialize in providing in-room 12 video services. Certain of these competitors have greater financial, technical, sales and marketing resources to devote to the development, promotion and sale of their products, and may have longer operating histories, greater name recognition, and greater market acceptance for their products and services compared to those of the Company. SpectraVision was one of the earliest entrants into the hotel entertainment market, and has developed its GuestChoice technology, which allows guests to choose movies to watch on demand. Movielink, a privately-held Australian company, represents the Company's primary competition in the Pacific Rim. Movielink, which recently introduced an on-demand system, has a large base of free-to-guest systems in Australia and in Singapore and has a small number of installations in Hong Kong and Thailand. Although LodgeNet markets its systems primarily in the United States, LodgeNet has recently entered certain of the Company's markets. The Company also experiences separate competition in certain specific countries. For example, in Japan certain large international corporations, such as Toshiba Corporation, Pioneer Electronic Corp., Hitachi, Ltd., and Matsushita Electric Industrial Co., Ltd., which supply the Japanese hospitality industry with master antenna television systems, sometimes offer a scheduled broadcast, pay-per-view movie capability. In addition, Gosoh, Ltd. competes in Hong Kong with a scheduled broadcast, pay-per-view system. In Europe, the Company faces competition from EMI, VMS and Granada, and Granada has a supply agreement with Prodac pursuant to which Prodac must supply Granada with Prodac's on-demand systems. The Company may be precluded from competing in the United Kingdom and Ireland by a non-competition provision in an asset sale agreement executed by Prodac in connection with Prodac's sale of its U.K. operations to UKCEL, a division of Granada. The Company could also face competition in the future from existing and emerging cable, direct broadcast satellite and other communications companies providing entertainment and other in-room services to hotels and hotel guests. Certain of these potential competitors have greater financial, managerial and marketing resources than the Company. There can be no assurance that the Company will continue its current level of success in obtaining new contracts with hotels or that the Company will be able to retain contracts with the hotels it serves when those contracts expire. The loss of one or more of its major hotel chains could have a material adverse impact on the Company's business, financial condition and results of operations. As competition increases, the Company anticipates that system life cycles may shorten and hotel commissions may increase resulting in reduced operating margins for the Company. The Company's ability to compete successfully depends on many factors, including the success of competitors' systems and services, the ability to interface directly with hotel property management systems, the ability to provide appropriate programming for an international audience, obtaining leading hotel contracts and name recognition among hotels, the quality of its programming and services, the reliability of its systems, general economic conditions and protection of Company and third-party licensor products by effective utilization of intellectual property laws. In particular, competitive pressures from existing or new competitors who offer lower prices or other incentives or introduce new systems could result in price reductions which would adversely affect the Company's profitability. There can be no assurance that the Company's current or other new competitors will not develop enhancements to, or future generations of, competitive systems and services that offer superior price or performance features, that the Company will be able to compete successfully in the future or that the Company will not be required to incur substantial additional investment costs in connection with its development, marketing and customer service efforts in order to meet any competitive threat. The Company expects competition in its markets to intensify. See "Business--Competition." RISK OF OBSOLESCENCE The markets for MagiNet's systems and services are characterized by changing technologies, varying customer requirements in different markets, significant new system designs, frequent new service introductions and changes in customer requirements. The Company believes that its future success will depend upon its ability to license technology on commercially acceptable terms and market services that meet changing user needs, to continue to enhance its systems and services and to develop and introduce in a timely manner new systems and services that take advantage of technological advances, keep pace with emerging industry standards and address the increasingly sophisticated needs of its customers. There can be no assurance that the Company will be 13 successful in developing, licensing and marketing, on a timely basis, new systems and services that respond to technological change or evolving industry standards, that the Company will not experience difficulties that could delay or prevent the successful installation and introduction of these systems or services, or that any such enhancements will adequately meet the requirements of the marketplace and achieve market acceptance. The Company's failure or inability to license new technology, adapt its systems and services to technological changes or to develop new products and services successfully would have a material adverse effect on the Company's business, financial condition and results of operations. In addition, there can be no assurance that the introduction or announcement of new systems and services by the Company or one or more of its competitors will not cause hotels to defer installation of systems or that the Company will successfully manage the transition from older systems to new or enhanced systems in order to minimize disruption in customer installations. Such deferment of installations or inability to manage the transition of installations could have a material adverse effect on the Company's business, financial condition and results of operations. TECHNOLOGY AND PROPRIETARY RIGHTS MagiNet's success and ability to compete is dependent in part upon its own proprietary technology. The Company relies primarily on a combination of patent, copyright and trademark laws, trade secrets, software security measures, and nondisclosure agreements to protect its proprietary technology. There can be no assurance, however, that such protection will be adequate to deter misappropriation of or deter unauthorized third parties from copying aspects of, or otherwise obtaining and using, the Company's proprietary technology. Moreover, the Company licenses from OCV and Guestserve the right to install and operate on-demand video systems incorporating proprietary technology of such companies. If for any reason the Company's rights, under its Guestserve or OCV license agreements or otherwise, were to be successfully challenged by these or other companies, the Company's business, financial condition and results of operations could be materially adversely affected. As a result of the Company's acquisition of Prodac, the Company has obtained Prodac's technologies and technologies under development, including digital server technology related to Prodac's Videoquest product and Prodac's television-enabled personal computer technology. The laws of some foreign countries do not protect the Company's proprietary technology to the same extent as do the laws of the United States. There can be no assurance that third parties will not claim infringement by the Company with respect to Prodac's or MagiNet's proprietary technology. The loss or the inability of the Company to maintain any of the Company's licenses could result in delays or reductions in system installations until equivalent technology could be identified, tested, licensed, and integrated. Any such delays or reductions in installations would materially adversely affect the Company's business financial condition, and results of operations. Furthermore, there can be no assurance that any confidentiality agreements between the Company and its employees or any agreements with third parties will provide meaningful protection for the Company's proprietary information or the technology licensed from others in the event of any unauthorized use or disclosure of such proprietary information. A substantial amount of the Company's sales are in international markets, and the laws of the other countries may afford the Company little or no effective protection of its intellectual property or the intellectual property of its licensors. While MagiNet believes that its products and trademarks do not infringe upon the proprietary rights of third parties, there can be no assurance that the Company will not receive future communication from third parties asserting that the Company's products infringe, or may infringe, on the proprietary rights of third parties. The Company's trademark registration of the name "MagiNet" has been initially refused by the U.S. Patent and Trademark Office as likely to be confused with "ImagiNet," a mark for which a prior application was made, if "ImagiNet" is ultimately registered. The registration of ImagiNet is being opposed by three parties. In addition, the right to use the name "Prodac" in the United Kingdom was granted to UKCEL in connection with the sale by Prodac of its operations in the United Kingdom. Any infringement claims, with or without merit, could be time consuming, result in costly litigation and diversion of technical and management personnel and require the Company to develop non-infringing technology, enter into royalty or licensing agreements or cease the marketing or use of certain products, any of which could have a material adverse effect on the Company's business, financial condition and results of operations. Such royalty or licensing agreements, if required, may not be available on terms acceptable to the Company or at all. See "Business--Technology and Proprietary Rights." 14 ENVIRONMENTAL REGULATION Prodac's facility in Cologne, Germany serves as an administrative and manufacturing facility and, as a result, may contain hazardous substances. Prodac is subject to a variety of environmental regulations relating to the use, storage, handling and disposal of certain hazardous substances used in the manufacturing and assembly of its products. The Company believes that Prodac is currently in compliance with all material environmental regulations in connection with its manufacturing operations and that it has obtained all necessary environmental permits to conduct its business. Any failure by Prodac to comply with present or future regulations could subject the Company and/or Prodac to the imposition of substantial fines, suspension of production, alteration of manufacturing processes or cessation of operations, any of which could have a material adverse effect on the Company's business, financial condition and results of operations. Compliance with such regulations could require Prodac and/or the Company to acquire expensive remediation equipment or to incur substantial expenses. Any failure of Prodac to control the use, disposal, removal or storage of, or to adequately restrict or discharge of, or assist in the cleanup of hazardous or toxic substances, could subject the Company to significant liabilities. The imposition of such liabilities could have a material adverse effect on the Company's business, financial condition and results of operations. See "Acquisition of Prodac." CONTROL BY CURRENT STOCKHOLDERS MagiNet's officers, directors and principal stockholders and their affiliates, totaling 12 stockholders, will in the aggregate beneficially own approximately 45.2% of the Company's outstanding shares of Common Stock after the Offerings. As a result, these stockholders, acting together, would be able to effectively control most matters requiring approval by the stockholders of the Company, including the election of directors and any merger, consolidation or sale of all the Company's assets. See "Principal Stockholders" and "Description of Capital Stock." SHARES ELIGIBLE FOR FUTURE SALE Future sales of shares by existing stockholders could adversely affect the prevailing market price of the Common Stock. Upon completion of the Offerings, approximately 5,505,000 shares of Common Stock, including the 5,500,000 shares offered hereby, will be eligible for immediate sale in the public market without restriction. Beginning 90 days after the date of this Prospectus, approximately 31,000 additional shares will become eligible for sale in the public market pursuant to Rule 144 or Rule 701 under the Securities Act of 1933, as amended. Beginning 180 days after the date of this Prospectus, approximately 9,409,000 additional shares subject to lock-up agreements will become available for sale in the public market. Of the approximately 9,409,000 shares that will become available for sale in the public market beginning 180 days after the date of this Prospectus, approximately 7,411,000 shares will be subject to certain volume limitations and other resale restrictions pursuant to Rule 144. Thereafter, approximately 4,065,000 shares held by existing stockholders will become eligible for sale at various times over a period of less than two years and could be sold earlier if the holders exercise registration rights. In addition, the shares of Common Stock to be issued in connection with the acquisition of Prodac will be subject to certain registration rights beginning one year after the closing of the Offerings. See "Description of Capital Stock--Registration Rights," "Shares Eligible for Future Sale" and "Underwriting." NO PRIOR PUBLIC MARKET Prior to the Offerings, there has been no public market for MagiNet's Common Stock. There can be no assurance that an active trading market will develop and continue upon the completion of the Offerings or that the market price of the Common Stock will not decline below the initial public offering price. The initial public offering price of the Common Stock will be determined by negotiations between the Company and the Underwriters, in conformity with Rule 2720 of the Conduct Rules of the National Association of Securities Dealers, Inc. As such, the initial public offering price is not necessarily related to the Company's net worth or any other established criteria of value and may not bear any relationship to the market price of the Common Stock following the completion of the Offerings. See "Underwriting." 15 MARKET VOLATILITY The market prices for securities of companies such as the Company have historically been highly volatile. Announcements of technological innovations or new products by the Company or its competitors, developments concerning proprietary rights, including patents and litigation matters, and publicity regarding actual or potential results with respect to products under development by the Company or others may have a significant impact on the market price of the Common Stock. Further, it is likely that in some future quarters the Company's revenue or operating results will be below the expectations of public market analysts and investors. In such event, the price of the Company's Common Stock would likely be materially adversely affected. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." ANTITAKEOVER PROVISIONS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND DELAWARE LAW Certain provisions of MagiNet's Certificate of Incorporation and Bylaws may have the effect of making it more difficult for a third party to acquire, or discouraging a third party from attempting to acquire, control of the Company. Such provisions could limit the price that certain investors might be willing to pay in the future for shares of the Company's Common Stock. Certain of these provisions eliminate the right of stockholders to act by written consent without a meeting and specify procedures for director nominations by stockholders and submission of other proposals for consideration at stockholder meetings. In addition, the Company's Board of Directors has the authority to issue up to 5,000,000 shares of Preferred Stock and to determine the price, rights, preferences, privileges and restrictions of those shares without any further vote or action by the stockholders. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any Preferred Stock that may be issued in the future. The Company has no present plans to issue shares of Preferred Stock. Certain provisions of Delaware law applicable to the Company could also delay or make more difficult a merger, tender offer or proxy contest involving the Company, including Section 203 of the Delaware General Corporation Law, which prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years unless certain conditions are met. Additionally, the issuance of Preferred Stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, may have the effect of delaying, deferring or preventing a change in control of the Company, may discourage bids for the Common Stock at a premium over the market price of the Common Stock and may adversely affect the market price of and the voting and other rights of the holders of the Common Stock. Such provisions could have the effect of delaying, deferring or preventing a change in control of the Company, including without limitation, discouraging a proxy contest or making more difficult the acquisition of a substantial block of the Company's Common Stock. These provisions could also limit the price that investors might be willing to pay in the future for shares of the Company's Common Stock. See "Description of Capital Stock--Preferred Stock," "--Antitakeover Effects of Provisions of Certificate of Incorporation and Bylaws" and "--Effect of Delaware Antitakeover Statute." DILUTION Purchasers of the Common Stock offered hereby will experience immediate, substantial dilution in the net tangible book value per share of the Common Stock from the initial public offering price. The Company is obligated to deliver to the shareholders of Prodac Common Stock of the Company worth DM 5 million at a discount of 10% to the initial public offering price in the Offerings. The number of such shares to be issued in connection with the acquisition of Prodac will depend on applicable exchange rates on the date of the closing of the Offerings. Any increase in the value of the Deutsche Mark relative to the U.S. Dollar would cause the Company to issue additional shares of Common Stock, thereby resulting in additional dilution to existing shareholders. See "Dilution" and "Acquisition of Prodac." 16 USE OF PROCEEDS The net proceeds to the Company from the sale of the shares of Common Stock in the Offerings are estimated to be approximately $65,095,000 (approximately $75,069,250 if the U.S. Underwriters' and International Managers' over- allotment options are exercised in full) assuming an initial public offering price of $13.00 per share and after deducting the estimated underwriting discounts and commissions and estimated offering expenses. The Company currently anticipates that approximately $13.1 million of the net proceeds of the Offerings will be used to pay the cash portion of the consideration for the acquisition of Prodac. The cash consideration of DM 20 million (plus interest at the rate of 6% per annum from November 6, 1996 through the date of the payment of the acquisition consideration) is payable in Deutsche Marks, however, and any increase in the value of the Deutsche Mark relative to the U.S. Dollar would increase the portion of the net proceeds of the Offerings used in connection with the Prodac acquisition. The balance of the net proceeds of the Offering will be used for system installations by the Company and Prodac, working capital and for general corporate purposes, including the possible repayment of future indebtedness, if any. The Board of Directors has broad discretion in determining how the net proceeds of the Offerings will be applied. In the event opportunities arise, net proceeds of the Offerings also may be used to acquire, in addition to Prodac, businesses, technologies or products that complement MagiNet's business. However, the Company is not currently in negotiations regarding any such acquisitions. Although the Company believes the net proceeds of the Offerings, together with its existing resources will be adequate to satisfy its capital needs until at least December 1997, the timing and amount of spending of such capital resources cannot be accurately determined at this time and will depend upon several factors, including the availability of acquisition candidates, installation costs, costs associated with penetrating new markets, competing technological and market developments and market acceptance and demand for the Company's products. See "Acquisition of Prodac" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." Pending such uses, the Company intends to invest the net proceeds in short- term, interest-bearing investment grade securities. DIVIDEND POLICY The Company has never declared or paid cash dividends on its capital stock. The Company currently expects to retain future earnings, if any, for use in the operation and expansion of its business and does not anticipate paying any cash dividends in the foreseeable future. A note agreement entered in connection with the issuance of the Company's Senior Secured Notes due 2000 contains a restrictive covenant which limits the Company's ability to pay cash dividends or make stock repurchases. See Note 3 of Notes to Consolidated Financial Statements. 17 CAPITALIZATION The following table sets forth as of September 30, 1996 (a) the total capitalization of the Company, (b) the pro forma total capitalization to reflect (i) the reincorporation of the Company into Delaware, which will be effected prior to the effectiveness of the registration statement covering the Offerings, (ii) the conversion of all the Company's outstanding shares of Preferred Stock into 10,908,878 shares of Common Stock, which will occur automatically upon the closing of the Offerings, (iii) the filing, upon the closing of the Offerings, of the Company's Restated Certificate of Incorporation authorizing 5,000,000 shares of undesignated Preferred Stock and 45,000,000 shares of Common Stock and (iv) the net exercise of warrants to acquire up to an aggregate maximum of 3,704,840 shares of Common Stock and Preferred Stock into 2,091,951 shares of Common Stock in connection with the Offerings, at an assumed fair market value of $13.00 per share, and (c) the pro forma total capitalization adjusted to reflect (i) the sale by the Company of 5,500,000 shares of Common Stock in the Offerings at an assumed offering price of $13.00 per share and the application of the net proceeds therefrom assuming that the U.S. Underwriters' and International Managers' over- allotment options are not exercised, (ii) the assumed issuance of 280,230 shares of Common Stock in connection with the Company's acquisition of Prodac and (iii) an increase in long-term debt of $14,313,000 and an increase of $12,200,000 in accumulated deficit (decrease in total stockholders' equity) due to the completion of the Prodac acquisition and the estimated related charge for acquired in-process technology. See "Unaudited Pro Forma Condensed Combined Financial Statements." The capitalization information set forth in the table below is qualified by, and should be read in conjunction with, the more detailed Consolidated Financial Statements and Notes thereto appearing elsewhere in this Prospectus.
SEPTEMBER 30, 1996 -------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED -------- --------- ----------- (IN THOUSANDS, EXCEPT SHARE DATA) Long-term debt(1).............................. $ 25,829 $ 25,829 $ 40,142 Stockholders' equity: Preferred Stock, no par value; 12,121,788 shares authorized, 10,908,878 shares issued and outstanding, actual; $.001 par value, 5,000,000 shares authorized, no shares issued and outstanding, pro forma and pro forma as adjusted..................................... 53,241 -- -- Common Stock, no par value; 20,000,000 shares authorized, 507,872 shares issued and outstanding, actual; $.001 par value, and 45,000,000 shares authorized, pro forma and pro forma as adjusted, 13,508,701 and 19,288,931 shares issued and outstanding, pro forma and pro forma as adjusted, respectively(2).............................. 286 14 19 Additional paid in capital.................... -- 53,614 122,004 Warrants to purchase Common Stock............. 101 -- -- Accumulated deficit........................... (37,008) (37,008) (49,208) Cumulative translation adjustment............. (651) (651) (651) -------- -------- -------- Total stockholders' equity................... 15,969 15,969 72,164 -------- -------- -------- Total capitalization......................... $ 41,798 $ 41,798 $112,306 ======== ======== ========
- -------- (1) See Note 3 of Notes to Consolidated Financial Statements. (2) Excludes an aggregate of 1,702,080 shares of Common Stock issuable upon exercise of options outstanding under the Company's 1992 Key Personnel Stock Option Plan and 1992 Stock Option Plan as of September 30, 1996 at a weighted average exercise price of $2.17. Also excludes as of September 30, 1996 an additional 2,318,728 shares reserved for future issuance under the 1992 Key Personnel Stock Option Plan, the 1992 Stock Option Plan, the 1996 Director Stock Option Plan and the 1996 Employee Stock Purchase Plan. See "Management--Stock Plans" and Note 5 of Notes to Consolidated Financial Statements. 18 DILUTION The pro forma net tangible book value (deficit) of the Company as of September 30, 1996, assuming the acquisition of Prodac on such date, was approximately $(3,305,000) or $(0.24) per share of Common Stock. Pro forma net tangible book value per share represents the Company's pro forma total tangible assets less total liabilities, divided by the number of outstanding shares of Common Stock then outstanding assuming (i) the conversion of all then outstanding Preferred Stock into Common Stock and the net exercise of certain warrants to acquire an aggregate of 3,704,840 shares of Common Stock into 2,091,951 shares of Common Stock and Preferred Stock assuming, for purposes of such net exercises, a fair market value of $13.00 per share of Common Stock and (ii) the issuance of 280,230 shares of Common Stock in connection with the Company's acquisition of Prodac. See "Unaudited Pro Forma Condensed Combined Financial Statements." Dilution per share represents the difference between the amount per share paid by investors in the Offerings and the net tangible book value per share after the Offerings. After giving effect to the sale of 5,500,000 shares in the Offerings (at an assumed initial public offering price of $13.00 per share and after deducting the estimated underwriting discounts and commissions and offering expenses payable by the Company), the Company's pro forma net tangible book value as of September 30, 1996 would have been $61,790,000 or $3.20 per share of Common Stock. This represents an immediate increase in pro forma net tangible book value of $3.44 per share to existing stockholders and an immediate dilution in pro forma net tangible book value of $9.80 per share to new investors. The following table illustrates this per share dilution: Assumed initial public offering price per share................. $13.00 Pro forma net tangible book value (deficit) per share as of September 30, 1996........................................... $(0.24) Increase in pro forma net tangible book value per share attributable to new investors................................ 3.44 ------ Pro forma net tangible book value per share after offering...... 3.20 ------ Dilution per share to new investors............................. $ 9.80 ======
The following table summarizes, on a pro forma basis as of September 30, 1996, the number of shares of Common Stock purchased from the Company, including Common Stock issuable upon the net exercise of warrants and the shares into which the outstanding Preferred Stock (including the Preferred Stock issuable upon net exercise of the warrants) will convert, and the shares issued in connection with the Company's acquisition of Prodac, the total consideration paid and the average price per share paid by the existing stockholders and by new investors purchasing shares in the Offerings (at an assumed initial public offering price of $13.00 per share and before deducting underwriting discounts and commissions and estimated offering expenses payable by the Company).
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE ------------------ -------------------- PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ---------- ------- ------------ ------- --------- Existing stockholders......... 13,788,931 71.5% $ 56,789,000 44.3% $4.12 New investors................. 5,500,000 28.5 71,500,000 55.7 13.00 ---------- ----- ------------ ----- Total....................... 19,288,931 100.0% $128,289,000 100.0% ========== ===== ============ =====
The foregoing computations assume no exercise of stock options after September 30, 1996, the issuance of 280,230 shares of Common Stock in connection with the Company's acquisition of Prodac and the net exercise of outstanding warrants to acquire up to an aggregate of 3,704,840 shares of Common Stock and Preferred Stock into 2,091,951 shares of Common Stock, assuming, for purposes of such net exercises, a fair market value of $13.00 per share of Common Stock. The foregoing net exercises are anticipated to occur upon either the effectiveness of the registration statement covering the Offerings, the closing of the Offerings, or the tenth business day following such closing as set forth in the applicable warrant agreement. As of September 30, 1996, there were outstanding options to purchase 1,702,080 shares of Common Stock under the Company's 1992 Key Personnel Stock Option Plan and 1992 Stock Option Plan at a weighted average price of $2.17 per share. At September 30, 1996, an additional 2,318,728 shares were reserved for issuance under the Company's 1992 Key Personnel Stock Option Plan, the Company's 1996 Director Stock Option Plan and the Company's 1996 Employee Stock Purchase Plan. To the extent that any shares are issued upon exercise of options, warrants or rights that are presently outstanding or granted in the future, or reserved for future issuance under the Company's stock plans, there will be further dilution to new investors. The number of shares of Common Stock to be issued in connection with the acquisition of Prodac will depend on applicable currency exchange rates on the date of the Closing of the Offerings. Any increase in the value of the Deutsche Mark relative to the U.S. Dollar would cause the Company to issue additional shares of Common Stock, thereby resulting in additional dilution to new investors. See "Acquisition of Prodac," "Management--Stock Plans," "Description of Capital Stock" and Note 5 of Notes to Consolidated Financial Statements. 19 SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA The selected consolidated statement of operations, cash flows and balance sheet data presented below for, and as of the end of, each of the years in the five-year period ended December 31, 1995, are derived from the Consolidated Financial Statements of MagiNet Corporation and its subsidiaries, which financial statements have been audited by Ernst & Young LLP, independent auditors. The Consolidated Financial Statements as of December 31, 1995 and 1994, and for each of the years in the three-year period ended December 31, 1995, and the report thereon of Ernst & Young LLP, independent auditors, are included elsewhere in this Prospectus. The selected consolidated statement of operations, cash flows and balance sheet data set forth below for the nine months ended September 30, 1995 and 1996 were derived from unaudited consolidated financial statements, which are included elsewhere in this Prospectus, and include, in the opinion of the Company, all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the Company's financial position at that date and results of operations for those periods. The results for the nine months ended September 30, 1996 are not necessarily indicative of the results for any future period. The selected consolidated financial and other data set forth below is qualified by, and should be read in conjunction with, the Consolidated Financial Statements and Notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in the Prospectus. The Company has never declared or paid cash dividends on its capital stock. The pro forma financial information set forth below was derived from the Unaudited Pro Forma Condensed Combined Financial Statements, which are included elsewhere in this Prospectus.
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ------------------------------------------------------- ------------------------------ 1995 1996 ------------------- -------------------- PRO PRO 1991 1992 1993 1994 ACTUAL FORMA(1) 1995 ACTUAL FORMA (2) ----- ------- ------- ------- -------- -------- ------- -------- --------- (IN THOUSANDS, EXCEPT PER SHARE AND OTHER DATA) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenue................ $ -- $ -- $ 395 $ 2,342 $ 8,689 $ 19,254 $ 5,655 $ 12,048 $ 23,941 Direct costs........... -- -- 294 1,156 3,731 9,903 2,586 6,232 11,792 Depreciation and amortization.......... -- 2 171 957 3,682 9,936 2,564 4,747 9,366 Operations expenses, selling, general and administrative........ 149 514 1,961 7,170 11,528 14,417 7,808 8,455 11,200 Research and development........... -- 665 1,320 856 1,247 1,247 890 1,599 1,599 ----- ------- ------- ------- -------- -------- ------- -------- -------- Operating loss......... (149) (1,181) (3,351) (7,797) (11,499) (16,249) (8,193) (8,985) (10,016) Interest expense, net.. -- (43) (28) (253) (991) (2,355) (379) (2,083) (3,758) ----- ------- ------- ------- -------- -------- ------- -------- -------- Loss before income taxes and minority interest in net losses of consolidated subsidiaries.......... (149) (1,224) (3,379) (8,050) (12,490) (18,604) (8,572) (11,068) (13,774) Provision for income taxes................. -- -- -- -- (554) (680) (423) (681) (1,123) Minority interest in net losses of consolidated subsidiaries.......... -- -- -- 124 248 248 204 215 215 ----- ------- ------- ------- -------- -------- ------- -------- -------- Net loss............... $(149) $(1,224) $(3,379) $(7,926) $(12,796) $(19,036) $(8,791) $(11,534) $(14,682) ===== ======= ======= ======= ======== ======== ======= ======== ======== Pro forma net loss per share(3).............. $ (1.03) $ (1.50) $ (0.93) $ (1.16) ======== ======== ======== ======== Shares used in computation of pro forma net loss per share(3).............. 12,392 12,672 12,407 12,687 CONSOLIDATED STATEMENT OF CASH FLOWS DATA:(4) Net cash used in operating activities.. $(1,753) $(6,137) $ (7,619) $(6,680) $ (9,510) Net cash used in investing activities.. (3,091) (9,361) (14,897) (10,967) (16,451) Net cash provided by financing activities.. 5,082 25,715 30,656 23,034 14,540 OTHER DATA: EBITDA (In thousands)(5)......... $(149) $(1,179) $(3,180) $(6,840) $ (7,817) $ 6,313 $(5,629) $ (4,238) $ (650) EBITDA margin.......... -- -- (805)% (292)% (90)% (33)% (100)% (35)% (3)% New rooms installed.... -- -- 2,087 10,929 26,106 37,702 18,075 20,407 33,054 Total rooms served(6).. -- -- 2,087 13,016 39,122 70,132 31,091 59,529 103,186 Rooms in backlog(7).... -- -- -- 10,941 12,194 15,156 16,783 27,099 Average monthly gross video revenue per room(4)............... -- -- -- $ 32.39 $ 29.18 $ 28.74 $ 28.84
20
DECEMBER 31, SEPTEMBER 30, 1996 ---------------------------------------- ------------------------------------ 1991 1992 1993 1994 1995 ACTUAL PRO FORMA(8) AS ADJUSTED(9) ---- ------ ------ -------- -------- ------- ------------ -------------- (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Cash, cash equivalents and short-term investments........... $ 1 $ 77 $ 315 $ 10,961 $ 18,823 $ 7,251 $ 1,278 $66,373 Working capital (deficit)............. (24) (386) (1,652) 7,751 14,542 4,857 (15,879) 49,216 Total assets........... 2 1,458 4,711 23,999 46,540 49,484 74,424 139,519 Long-term debt......... 125 349 1,400 -- 24,900 25,829 40,142 40,142 Accumulated deficit.... (149) (1,373) (4,752) (12,678) (25,474) (37,008) (49,208) (49,208) Total stockholders' equity (net deficit).. (149) 648 1,208 19,924 14,611 15,969 7,069 72,164
- -------- (1) Pro forma to give effect to the Company's acquisition of Prodac following the closing of the Offerings as if such acquisition had taken place as of January 1, 1995. See "Acquisition of Prodac," the Unaudited Pro Forma Condensed Combined Financial Statements and Note 8 of Notes to Consolidated Financial Statements. (2) Pro forma to give effect to the Company's acquisition of Prodac following the closing of the Offerings as if such acquisition had taken place as of January 1, 1996. See "Acquisition of Prodac," the Unaudited Pro Forma Condensed Combined Financial Statements and Note 8 of Notes to Consolidated Financial Statements. (3) Reflects the assumed conversion of the Company's outstanding Preferred Stock into 10,908,878 shares of Common Stock upon the closing of the Offerings. See Note 1 of Notes to Consolidated Financial Statements for a discussion of the computation of net loss per share. (4) Data not available on a pro forma basis. (5) Indicates earnings (loss) before interest expense, income taxes, depreciation and amortization, and minority interest in net losses of consolidated subsidiaries and is not intended to represent an alternative to net income (as determined in accordance with generally accepted accounting principles) as a measure of performance. Management of the Company believes that EBITDA provides an additional perspective on the Company's operating results and its ability to service its long-term debt and fund its operations. The primary differences between EBITDA and net cash used in operating activities are that net cash used in operating activities includes interest expense, income tax expense, and changes in operating assets and liabilities, which items are excluded from EBITDA. See "Consolidated Statements of Cash Flows." (6) Includes all rooms installed with Company-owned systems, except for pro forma total rooms served which also includes Prodac systems. A charge relating to the acquisition of in-process technology of approximately $12.2 million is included in the pro forma balance sheet as a charge to retained earnings. The Company expects to record this charge in its financial results during the three month period ended December 31, 1996. (7) Data not available on a pro forma basis for the year ended December 31, 1995. (8) Pro forma to give effect to the Company's acquisition of Prodac following the closing of the Offerings as if such acquisition had taken place as of September 30, 1996. (9) Adjusted to reflect the net proceeds of the sale of Common Stock offered by the Company hereby at an assumed initial public offering price of $13.00 per share and the application thereof. 21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements relating to future events or the future financial performance of the Company, which involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward looking statements as a result of certain factors, including those set forth under "Risk Factors" and elsewhere in this Prospectus. OVERVIEW Since its inception in 1991, MagiNet has focused on developing its in-room on-demand video entertainment systems, signing contracts with hotels, installing systems and servicing its installed base of rooms. As of September 30, 1996, the Company had 59,529 rooms installed with its systems in 169 hotels and had an installation backlog of 16,783 rooms in 46 hotels. In addition, MagiNet has instituted a focused expansion plan that includes direct entry or acquisitions in attractive existing and new markets. The Company's revenue consists primarily of fees paid by guests for viewing MagiNet's on- demand video programming on a pay-per-view basis. On November 6, 1996, the Company entered into the Acquisition Agreement to acquire all of the outstanding shares of Prodac, which is headquartered in Cologne, Germany. Prodac develops, manufactures and installs scheduled broadcast and on-demand interactive video entertainment systems for use in hotels and also sells such systems to other in-room video service providers. Prior to 1991, Prodac exclusively sold its scheduled broadcast systems to distributors and hotels, and in 1991, began installing such systems in hotels under its own contracts. In 1994, Prodac introduced its Videoquest on-demand video system, and as of September 30, 1996, Prodac served 242 hotels with 43,657 installed rooms, including 5,891 rooms installed with on-demand video systems, and had an installation backlog of 10,316 rooms. The Company is actively developing, with its partners, several new in-room video services to be provided through its installed systems. These new interactive entertainment and information services include video games, casino-style gaming, financial news and advertising. In addition, MagiNet is exploring the possibility of providing other services, including in-room shopping, news and Internet access. MagiNet believes that these new services will appeal to a broader group of users than the traditional purchasers of in- room video entertainment and should increase monthly revenue per installed room. MagiNet operates according to a financial model similar to the cable television, cellular telephone and paging industries. Following an initial capital expenditure for system installation in hotels, the Company derives reasonably predictable, recurring revenue from system usage for the term of each hotel contract, which is on an exclusive basis typically for five-to- seven years. Since inception, the Company's capital costs associated with installed systems have averaged approximately $525 per room, including a video server in each hotel, in-room converter and remote control, upgrade of the hotel's master antenna television network, system installation costs, shipping, duties and taxes. Revenue generated from on-demand movies are dependent upon four factors at each hotel (i) the number of rooms in each hotel, (ii) the occupancy rate at the hotel, (iii) the "buy rate" or percentage of occupied rooms that buy movies and (iv) the price of the movie. Occupancy rates vary by hotel and region based on the hotel's competitive position within its marketplace, seasonal factors and general economic conditions. Buy rates generally reflect the hotel's guest mix profile, the popularity of the motion pictures available to the Company in each country and the availability of other entertainment alternatives. Buy rates also vary over time with general economic conditions. Costs and expenses include (i) direct costs such as royalties and fees paid for programming and licensed technology, hotel commissions, video materials, maintenance expenses and cost of equipment and systems sold, (ii) depreciation and amortization, (iii) operations activities such as purchasing, programming and headquarters 22 technical support, (iv) selling, general and administrative expenses consisting of headquarters and foreign office expenses and (v) research and development of the Company's systems. The Company currently has systems installed in twelve countries, all outside of North America. The Company operates through subsidiary offices in ten countries and through representatives in two countries. In addition, MagiNet sells systems directly to hotel owners and to distributors in certain other countries. Costs and expenses other than direct costs are expected to grow at a slower rate than revenue as the Company spreads its overhead costs over a larger installed base of rooms. See Note 7 of Notes to Consolidated Financial Statements for financial information concerning foreign and domestic operations. The Company has incurred net losses since inception as a result of (i) costs associated with establishing its headquarters and foreign subsidiaries infrastructure, (ii) depreciation and amortization associated with its investment in installed systems and acquired technology licenses and (iii) research and development costs associated with the Company's systems. All of the Company's systems are installed outside of North America. To date, MagiNet has not experienced material foreign exchange transaction gains or losses but has $651,000 in accumulated translation losses, which are reflected in stockholders' equity as of September 30, 1996. A significant change in exchange rates could give rise to material translation or transaction gains or losses in the future. RESULTS OF OPERATIONS The following table sets forth, as a percentage of revenue, items from the Company's consolidated statement of operations for the periods indicated.
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, --------------------------- ---------------- 1993 1994 1995 1995 1996 ------- ------- ------- ------- ------ Revenue...................... 100% 100% 100% 100% 100% Costs and expenses Direct costs................ 74 49 43 46 52 Depreciation and amortiza- tion....................... 43 41 42 45 39 Operations expenses......... 118 123 36 38 13 Selling, general and admin- istrative.................. 379 183 97 100 58 Research and development.... 334 37 14 16 13 ------- ------- ------- ------- ------ Total costs and expenses... 948% 433% 232% 245% 175% ------- ------- ------- ------- ------ Operating loss............... (848) (333) (132) (145) (75) Interest income (expense), net......................... (7) (11) (11) (7) (17) Provision for income taxes... -- -- (6) (7) (6) Minority interest in net losses of consolidated subsidiaries................ -- 5 3 4 2 ------- ------- ------- ------- ------ Net loss..................... (855)% (339)% (146)% (155)% (96)% ======= ======= ======= ======= ====== EBITDA....................... (805)% (292)% (90)% (100)% (35)% ======= ======= ======= ======= ======
23 NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 The following table sets forth information regarding revenue, average monthly gross video revenue per room, average movie price, average movie buy rate, average hotel occupancy and installed base of rooms for the nine months ended September 30, 1995 and 1996.
NINE MONTHS ENDED SEPTEMBER 30, --------------------------------- 1995(1) 1996(1) --------------- ---------------- Revenue.................................... $5,655,000 $12,048,000 Average monthly gross video revenue per room...................................... $ 28.74 $ 28.84 Average movie price........................ $ 11.03 $ 10.84 Average movie buy rate..................... 11.6% 12.1% Average hotel occupancy.................... 74% 73% Installed base of rooms.................... 31,091 59,529
- -------- (1) Other than revenue and installed base of rooms, the numbers in this table were derived in part from information that is reported to the Company by hotels installed with the Company's systems. The Company believes that such information is accurate. Revenue Analysis During the nine months ended September 30, 1996, the Company installed its systems in an additional 20,407 hotel rooms, bringing the total number of installed rooms to 59,529. The Company's revenue for the first nine months of 1996 increased 113% to $12,048,000 compared to $5,655,000 for the same period in 1995. The increase was principally attributed to the increase in the number of rooms receiving one or more of the Company's services in 1996. Average monthly gross video revenue per room has increased slightly during the nine months ended September 30, 1996, compared to that of the same period in 1995, partially due to increased movie buy rates which are principally a result of installations in new countries and improved buy rates in certain existing countries, offset by lower buy rates in other existing countries, slightly lower occupancy rates and average movie prices. Average monthly gross video revenue per room is the product of buy rates, movie price, occupancy and the number of days in the month. Expense Analysis The following table sets forth information regarding the Company's costs and expenses for the nine months ended September 30, 1995 and 1996.
NINE MONTHS ENDED SEPTEMBER 30, --------------------------------------------- 1995 1996 ---------------------- ---------------------- % OF % OF AMOUNT REVENUE AMOUNT REVENUE ----------- ---------- ----------- ---------- (IN THOUSANDS, EXCEPT PERCENTAGE DATA) Costs and expenses Direct costs.................... $ 2,586 46% $ 6,232 52% Depreciation and amortization... 2,564 45 4,747 39 Operations expenses............. 2,161 38 1,514 13 Selling, general and administrative................. 5,647 100 6,941 58 Research and development........ 890 16 1,599 13 ----------- ------- ----------- ------- Total costs and expenses......... $ 13,848 245% $ 21,033 175% =========== ======= =========== =======
Direct costs. Direct costs increased by $3,646,000 for the first nine months of 1996 compared to the same period in 1995, and also increased as a percentage of revenue. These increases are principally due to increased maintenance expenses associated with repairing or replacing faulty equipment installed in hotel rooms during 24 prior quarters and transitioning MagiNet's in-room converters and remote controls to higher quality devices. Although the failure rates experienced with this equipment have declined since the second quarter of 1996, there can be no assurance that the Company will not experience similar technical problems or equipment failures in the future, the occurrence of which could have a material adverse effect on the Company's results of operations. As a percentage of revenue, maintenance expenses have been partially offset by lower film royalties and licensing fees resulting from greater efficiencies achieved through expanded operations and direct management of film contracts. Prior to July 1995, the Company obtained substantially all of its programming through Comsat Corporation which charged the Company higher royalties and fees. Depreciation and amortization. Depreciation and amortization consists of depreciation of installed video systems, equipment and office furniture, and amortization of prepaid royalties related to licensed technologies. These expenses increased by $2,183,000 for the first nine months of 1996 compared to the same period in 1995 primarily as a result of additional video system installations in hotels. Depreciation and amortization expense represented a smaller percentage of revenue in 1996 as a result of lower cost of installed systems achieved in late 1995 and equipment and system sales in the 1996 period for which there was no depreciation expense. The lower installed costs were principally the result of using lower cost converters manufactured by a new supplier to the Company as well as lower average installation costs. The Company has taken a more direct role in managing hotel installation projects and performing certain installations using its own employees, resulting in lower costs and improved quality. In prior periods, most installations were performed by outside contractors. Operations expenses. Operations expenses decreased by $647,000 for the first nine months of 1996 compared to the same period in 1995 due to write-downs of certain video system equipment taken in the first nine months of 1995, partially offset by increased headquarters personnel expenses in 1996 necessary to provide programming services for expanded operations. Operations expenses, as a percentage of revenue, fell from 38% for the first nine months of 1995 to 13% for the same period in 1996 as the Company's investment in headquarters operational support was leveraged over a larger installed base of rooms. Selling, general and administrative. Selling, general and administrative expenses increased by $1,294,000 for the first nine months of 1996 compared to the same period in 1995 due primarily to significant increases in local country activities to support the Company's larger installed base of rooms and increases in headquarters administrative expenses to support expanded operations. A new office was opened in South Africa in 1996, and the offices in Israel and South Korea, which opened in 1995, were fully staffed in the 1996 period. Overall, employment in the Company's local country activities increased from 69 employees at September 30, 1995 to 114 employees at September 30, 1996. Headquarters administrative expenses in 1996 increased as a result of the hiring of new members of senior management and the expansion of the accounting and finance staff. Headquarters marketing expenses increased to support promotion and merchandising initiatives as well as to provide leadership for new product development. Selling, general and administrative expenses decreased as a percentage of revenue from 100% for the first nine months of 1995 to 58% for the same period in 1996. Selling, general and administrative expenses are expected to decline as a percentage of revenue in the future as a result of leveraging the Company's infrastructure over a larger installed base of rooms. Research and development. Research and development expenses increased by $709,000 for the first nine months of 1996 compared to the same period in 1995 due to increases in engineering personnel, materials and related expenses. Research and development expenses decreased as a percentage of revenue from 16% for the first nine months of 1995 to 13% for the same period in 1996. The new engineering personnel are focused on new product development and integration, enhancements to existing systems, including technology and products licensed from others, and quality improvements. All research and development personnel are located at the Company's headquarters. Interest income (expense), net. Interest expense, net increased by $1,704,000 for the first nine months of 1996 compared to the same period in 1995 as a result of the issuance in August 1995 of the Company's Senior Secured Notes due 2000 with an aggregate principal amount of $24.9 million. 25 Provision for income taxes. The Company has not incurred U.S. federal or state income taxes. However, most of the Company's foreign subsidiaries and branches are required to withhold local country income taxes relating to payments of royalties and inter-company charges. As a result, a provision for local country income taxes is accrued at the time the royalty or inter-company charge is accrued. Following the utilization of the parent company's net operating loss carryforward, the parent company may offset the withheld local country income taxes against any U.S. federal income taxes payable. However, there can be no assurance that the parent company will be able to fully utilize its loss carryforwards or to offset U.S. federal income taxes payable by the withheld local country income taxes. YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 Revenue Analysis The following table sets forth information regarding revenue, average monthly gross video revenue per room, average movie price, average movie buy rate, average hotel occupancy and the installed base of rooms for the years ended December 31, 1994 and 1995. Certain of this information was not available for the year ended December 31, 1993, as the Company's limited number of installed rooms during that year did not provide a meaningful year- to-year comparison.
YEAR ENDED DECEMBER 31, ------------------------ 1994(1) 1995(1) ----------- ----------- Revenue............................................... $ 2,342,000 $ 8,689,000 Average monthly gross video revenue per room.......... $ 32.39 $ 29.18 Average movie price................................... $ 11.74 $ 10.96 Average movie buy rate................................ 12.6% 11.7% Average hotel occupancy............................... 72% 75% Installed base of rooms............................... 13,016 39,122
- -------- (1) Other than revenue and installed base of rooms, the numbers in this table were derived in part from information that is reported to the Company by hotels installed with the Company's systems. The Company believes that such information is accurate. The Company's revenue for the years ended December 31, 1995, 1994 and 1993 were $8,689,000, $2,342,000, and $395,000 respectively, representing year-to- year increases of 271% between 1994 and 1995 and 493% between 1993 and 1994. The growth of revenue in each of these periods is attributable to increases in the Company's installed base of rooms and rooms installed in the prior period generating revenue for a complete fiscal year. Prior to 1994, the Company had installed its systems only in Guam. Average monthly gross video revenue per room and average movie price declined between 1994 and 1995 principally as a result of a broader mix of hotels and countries served in 1995 compared to the small installed base of rooms in 1994. On an individual country basis, average monthly gross video revenue per room increased between 1994 and 1995 in all countries except Hong Kong and Taiwan, where the limited number of installed rooms in 1994 compared to 1995 do not permit a meaningful comparison. Buy rates in Guam declined from 12.3% in 1994 to 10.5% in 1995 although gross revenue per room increased slightly because occupancy rates increased in Guam. Average movie prices in U.S. dollars increased between 1994 and 1995 in all countries except Australia and Taiwan. Australian prices have since recovered. However, the overall average movie price declined as a result of increased installations in countries with lower average movie prices. 26 Expense Analysis The following table sets forth information regarding the Company's costs and expenses for the years ended December 31, 1993, 1994 and 1995:
YEAR ENDED DECEMBER 31, ---------------------------------------------- 1993 1994 1995 -------------- --------------- --------------- % OF % OF % OF AMOUNT REVENUE AMOUNT REVENUE AMOUNT REVENUE ------ ------- ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PERCENTAGE DATA) Costs and expenses Direct costs................... $ 294 74% $ 1,156 49% $ 3,731 43% Depreciation and amortization.. 171 43 957 41 3,682 42 Operations expenses............ 464 118 2,876 123 3,108 36 Selling, general and administrative................ 1,497 379 4,294 183 8,420 97 Research and development....... 1,320 334 856 37 1,247 14 ------ --- ------- --- ------- --- Total costs and expenses........ $3,746 948% $10,139 433% $20,188 232% ====== === ======= === ======= ===
Direct costs. Direct costs increased by $2,575,000 in 1995 compared to 1994 and by $862,000 in 1994 compared to 1993 due to the increase in installed rooms. Direct costs as a percentage of revenue declined from 74% in 1993 to 49% in 1994 and 43% in 1995 principally due to lower programming costs, particularly in the second half of 1995, and greater efficiencies achieved by servicing the increasingly larger installed base of rooms. Depreciation and amortization. Depreciation and amortization increased by $2,725,000 in 1995 compared to 1994, due primarily to depreciation of video systems and other property and equipment added in 1995 as well as 1994 installations that were depreciated for a full year in 1995. Such increases were substantially in line with revenue growth achieved by the Company as lower depreciation resulting from lower per-room installation costs was offset by increased depreciation on office furniture and equipment and computer equipment. Between 1993 and 1994, depreciation and amortization increased by $786,000 due primarily to depreciation of video systems and other property and equipment added in 1994 and 1993 installations that were depreciated for a full year in 1994. Operations expenses. Operations expenses increased by $232,000 in 1995 compared to 1994, but declined as a percentage of revenue from 123% to 36% year-to-year. The modest increase in spending was attributed to additional personnel in technical services and video programming, offset by a reduction in operations management personnel and lower materials expenses. Between 1993 and 1994, operations expenses increased by $2,412,000 as a result of the creation of an installation support department and increased spending in customer support services and video programming to support the expanded number of rooms installed during 1994. Operations headcount increased from five employees at December 31, 1993, to 13 employees at December 31, 1994, and to 15 employees at December 31, 1995. As a percentage of revenue, operations expenses rose from 118% in 1993 to 123% in 1994. Prior to 1994, installation support was performed by research and development personnel. Selling, general and administrative. Selling, general and administrative expenses increased by $4,126,000 in 1995 compared to 1994 due to significant spending increases in foreign offices that resulted from the creation of new offices in Israel and South Korea and continuing selling, general and administrative costs incurred for a full fiscal year by country offices that opened in 1994. Foreign office headcount increased from 31 employees at December 31, 1994 to 81 employees at December 31, 1995. Selling, general and administrative expenses as a percentage of revenue decreased from 183% in 1994 to 97% in 1995, as the Company leveraged its expenses over the larger installed base of rooms. Selling, general and administrative expenses increased by $2,797,000 from 1993 to 1994 due to the establishment of new offices in Australia, Hong Kong, Japan, New Zealand, Singapore, Taiwan and Thailand 27 and an increase from seven to 12 employees in the Company's headquarters. Selling, general and administrative expenses as a percentage of revenue decreased from 379% in 1993 to 183% in 1994 as a result of economies of scale associated with an increasing installed base of rooms. Research and development. Research and development expenses increased by $391,000 in 1995 compared to 1994 due to increases in employee compensation and materials expenses. From December 1994 to December 1995, one additional employee was added to the department, but 1995 expenses reflect a full year of compensation expense for employees hired in 1994. Significant projects completed during 1995 included development of new versions of the Company's in-room converter and remote control unit and enhancing the system operating software and screens, including enhancements to support additional foreign languages. Research and development expenses decreased by $464,000 from 1993 to 1994, while engineering personnel increased from three employees to ten employees over the same period. The decrease in spending is the result of significant expenditures incurred in 1993 in connection with hiring outside contractors and consultants, which enabled the Company to complete the major portions of its development on the first generation of its proprietary room equipment and the conversion of licensed technology to meet local market conditions. In particular, the Company completed new versions of its in-room converter to allow installations in countries not using the video standard employed in the United States. Interest income (expense), net. Net interest expense increased by $738,000 in 1995 compared to 1994 and represented primarily interest accrued on $24.9 million of Senior Secured Notes due 2000, which the Company issued in August 1995. Between 1993 and 1994, net interest expense increased by $225,000 representing interest on bridge financing prior to the Company's issuance of Series C Preferred Stock in September 1994. Provision for Income Taxes. In 1995, the Company began accruing income tax expense relating principally to foreign withholding of taxes relating to inter-company charges for the provision of headquarters services and programming and system royalties due third parties. No provision for foreign or domestic income taxes was made during either 1994 or 1993. SEASONALITY The Company's quarterly operating results are subject to fluctuation depending upon hotel occupancy and buy rates, and foreign currency exchange rates as well as other factors. Although the Company generally believes that such fluctuations are partially mitigated by operations in both the Northern and Southern Hemispheres as well as by the breadth of its operations across multiple economies, revenue per room has historically been lowest in the third quarter because a significant portion of MagiNet's installations are in tropical climates where occupancies are generally higher in the first and fourth quarters of the year and buy rates are typically lower in the third quarter of each year. 28 QUARTERLY RESULTS OF OPERATIONS The following tables set forth certain unaudited consolidated financial information for the seven quarters ended September 30, 1996, as well as such data expressed as a percentage of the Company's total revenue for the periods indicated. This data has been derived from unaudited consolidated financial statements that, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of such information when read in conjunction with the Company's audited Consolidated Financial Statements and Notes thereto appearing elsewhere in this Prospectus. The results of operations for any quarter and any quarter-to-quarter trends are not necessarily indicative of the results to be expected for any future period.
QUARTER ENDED --------------------------------------------------------------------- MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, 1995 1995 1995 1995 1996 1996 1996 -------- -------- --------- -------- -------- -------- --------- (IN THOUSANDS) Revenue................. $ 1,287 $ 2,015 $ 2,353 $ 3,034 $ 3,549 $ 4,374 $ 4,125 Costs and expenses Direct costs........... 700 987 899 1,145 1,827 2,027 2,378 Depreciation and amortization.......... 646 864 1,054 1,118 1,388 1,761 1,598 Operations expenses.... 665 548 948 947 468 548 498 Selling, general and administrative........ 1,524 2,039 2,084 2,773 2,074 2,578 2,289 Research and development........... 314 257 319 357 421 516 662 ------- ------- ------- ------- ------- ------- ------- Total costs and expenses............... 3,849 4,695 5,304 6,340 6,178 7,430 7,425 ------- ------- ------- ------- ------- ------- ------- Operating loss.......... (2,562) (2,680) (2,951) (3,306) (2,629) (3,056) (3,300) Interest income (expense), net......... 77 (73) (383) (612) (667) (715) (701) Provision for income taxes.................. (148) (152) (123) (131) (213) (170) (298) Minority interest in net losses of consolidated subsidiaries........... 67 86 51 44 78 46 91 ------- ------- ------- ------- ------- ------- ------- Net loss................ $(2,566) $(2,819) $(3,406) $(4,005) $(3,431) $(3,895) $(4,208) ======= ======= ======= ======= ======= ======= ======= EBITDA.................. $(1,916) $(1,816) $(1,897) $(2,188) $(1,241) $(1,295) $(1,702) QUARTER ENDED --------------------------------------------------------------------- MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, 1995 1995 1995 1995 1996 1996 1996 -------- -------- --------- -------- -------- -------- --------- (AS A PERCENTAGE OF REVENUE) Revenue................. 100% 100% 100% 100% 100% 100% 100% Costs and expenses Direct costs........... 55 49 38 38 52 46 58 Depreciation and amortization.......... 50 43 45 37 39 40 39 Operations expenses.... 52 27 40 31 13 13 12 Selling, general and administrative........ 118 101 89 91 58 59 55 Research and development........... 24 13 14 12 12 12 16 ------- ------- ------- ------- ------- ------- ------- Total costs and expenses............... 299 233 226 209 174 170 180 ------- ------- ------- ------- ------- ------- ------- Operating loss.......... (199) (133) (126) (109) (74) (70) (80) Interest income (expense), net......... 6 (4) (16) (20) (19) (16) (17) Provision for income taxes.................. (12) (8) (5) (4) (6) (4) (7) Minority interest in net losses of consolidated subsidiaries........... 5 4 2 1 2 1 2 ------- ------- ------- ------- ------- ------- ------- Net loss................ (200)% (141)% (145)% (132)% (97)% (89)% (102)% ======= ======= ======= ======= ======= ======= ======= EBITDA.................. (149)% (90)% (81)% (72)% (35)% (30)% (41)% ======= ======= ======= ======= ======= ======= =======
29 Revenue Analysis The following table sets forth, for each of the quarterly periods presented, information regarding revenue, average monthly gross video revenue per room, average movie price, average movie buy rate and average hotel occupancy, and the installed base of rooms at the end of each of the quarterly periods presented.
QUARTER ENDED(1) --------------------------------------------------------------------- MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, 1995 1995 1995 1995 1996 1996 1996 -------- -------- --------- -------- -------- -------- --------- Revenue (in thousands).. $ 1,287 $ 2,015 $ 2,353 $ 3,034 $ 3,549 $ 4,374 $4,125 Average monthly gross video revenue per room................... $ 29.56 $ 30.16 $ 27.03 $ 30.08 $ 30.00 $ 29.24 $27.64 Average movie price..... $ 11.16 $ 11.18 $ 10.83 $ 10.83 $ 10.83 $ 10.87 $10.83 Average movie buy rate.. 11.6% 12.3% 11.0% 11.9% 12.0% 12.5% 11.7% Average hotel occupancy.............. 76% 72% 73% 75% 76% 71% 71% Installed base of rooms.................. 18,424 27,648 31,091 39,122 42,940 49,683 59,529
- -------- (1) Other than revenue and installed base of rooms, the numbers in this table were derived in part from information that is reported to the Company by hotels installed with the Company's systems. The Company believes that such information is accurate. During the seven quarters ended September 30, 1996, the Company installed an average of 6,645 rooms per quarter, with installations varying principally upon the rate at which new contracts have been signed with hotels. In addition to gross video revenue, revenue in the quarter ended June 30, 1996 included the sale of one of the Company's video systems in the approximate amount of $550,000. Average monthly gross video revenue per room has remained relatively constant as improvements in certain countries have been offset by declines in others. Increases in buy rates in the first three quarters of 1996, compared to the first three quarters of 1995, have been offset by modest declines in average hotel occupancy and/or average movie price in these same periods. Generally, occupancies in the tropical climates, which represent the majority of the Company's current installed base of rooms, are lower during the summer quarters and higher in the first and fourth quarters, except during holidays. Buy rates have been a function of the quality of movies available, the quality of installed equipment, alternative entertainment available to guests and other factors. The U.S. dollar equivalent of foreign denominated average movie prices declined for the last two quarters of 1995 principally as a result of an increasing proportion of installed rooms in countries with lower average movie prices than historical averages and the strengthening U.S. dollar as foreign currency denominated prices in most countries have remained relatively constant. The Company is instituting a program of multiple price points for movies installed in each hotel in an effort to increase overall prices and revenue in each country. Expense Analysis Direct costs. Direct costs, as a percentage of revenue, declined in 1995, from 55% to 38%, before increasing to 52% in the first quarter of 1996. The decline was principally the result of reductions in programming costs and greater efficiencies achieved by servicing the increasingly larger installed base of rooms. Starting in the fourth quarter of 1995, the Company began to experience significant quality problems resulting in increased maintenance expenses for labor and materials to fix in-room equipment. Direct costs were 46% and 58% of revenue in the second and third quarters of 1996, respectively, reflecting increases in maintenance expense. Depreciation and amortization. The Company amortized a larger portion of prepaid royalties during the first quarter of 1995 reflecting minimum annual royalties required to maintain an exclusive technology license. Depreciation expense has trended downwards, as a percentage of revenue, over the last seven quarters, reflecting marginally lower installed costs of rooms during these periods and a system sale in the second quarter of 1996 for which there was no depreciation expense, partially offset by seasonally lower average monthly gross video revenue per room in the third quarters of 1995 and 1996. 30 Operations expenses. Operations expenses, as a percentage of revenue, fluctuated from an average of 36% in 1995 to 13% in the first three quarters of 1996. The quarterly variances, as a percentage of revenue, are primarily attributed to reserves taken against video systems throughout 1995, and to a lesser extent, to other operations expenses spread over increased revenue. Selling, general and administrative. Selling, general and administrative expenses, as a percentage of revenue, declined from 118% in the first quarter of 1995 to 89% in the third quarter of 1995. These expenses, as a percentage of revenue, increased slightly to 91% in the fourth quarter of 1995 before decreasing to 58%, 59% and 55% in the first three quarters of 1996. The decreases as a percentage of revenue are primarily attributed to subsidiary and headquarters expenses spread over a larger revenue base. Research and development. Research and development expenses declined, as a percentage of revenue, from 24% in the first quarter of 1995 to 13% and 14% in the second and third quarters of 1995. The decrease, as a percentage of revenue, between the first and second quarter of 1995 is attributed to a combination of increased revenue and a decrease in research and development spending. Research and development, as a percentage of revenue, has stayed relatively constant over the four quarters ended September 30, 1996 as increases in research and development expenses were proportional to revenue increases. ACQUISITION OF PRODAC Prodac operates under a financial model similar to MagiNet, installing its systems with minimal cost to the hotels pursuant to exclusive contracts, and charging guests for usage of the system. Prodac's systems include a head-end computer and video storage module, a television with an integrated TCM and a hand-held remote control. Commencing in 1995, Prodac has generally provided television systems as part of its installations in larger hotels. Since inception, Prodac's cost per installed room has averaged approximately $530. Prodac's revenue is generated primarily from (i) fees paid by guests for viewing Prodac's scheduled broadcast and on-demand video programming, (ii) the sale of video systems to other in-room video service providers and (iii) the provision of programming services to purchasers of Prodac video systems. For the nine months ended September 30, 1996, Prodac generated revenue of $12.9 million, of which approximately $7.0 million related to in-room movie viewing, $4.0 million related to sales of video systems and $1.9 million related to programming and other services. Total costs and expenses include (i) direct costs such as royalties and fees paid for programming, hotel commissions, video materials, maintenance expenses and cost of equipment and systems sold, (ii) depreciation and amortization and (iii) operations, selling, general and administrative expenses. Prodac has recorded cumulative net losses of approximately $5.1 million since its inception, including a net loss of approximately $1.2 million for the nine months ended September 30, 1996. Prodac's operations in the United Kingdom produced a net loss of $228,000 for the nine months ended September 30, 1996. In October 1996, Prodac sold its United Kingdom operating assets to UKCEL. In connection with the sale of its United Kingdom operating assets, Prodac entered into a supply agreement to supply its Videoquest on-demand system to UKCEL for a period of three years. Prodac has financed its installed base of equipment principally through lease financing. To date, substantially all of Prodac's installed systems have been sold to one of three leasing companies and leased back to Prodac for a period of five years or less. The primary leasing company is affiliated with Philips N.V., from whom Prodac acquires televisions incorporating its TCMs. In accordance with United States generally accepted accounting principles, such leases have been accounted for as financing leases and the principal amount of the lease liability is reflected in the Prodac consolidated balance sheet as long-term debt. Such debt has been collateralized by various obligations of the two principals of Prodac aggregating approximately $5 million. In connection with the acquisition of Prodac, MagiNet will provide substitute collateral for such loans. The equipment financed by such leases is reflected as video systems on the Prodac consolidated balance sheet. 31 LIQUIDITY AND CAPITAL RESOURCES Since its inception, the Company has financed its operations and funded its capital expenditure requirements primarily through private issuances of Preferred Stock, bank lines of credit, debt securities and capital equipment leases. From inception through September 30, 1996, the Company raised an aggregate of $53.2 million from the sale of Preferred Stock, net of related expenses. In August 1995, the Company issued its Senior Secured Notes due 2000 (the "Notes") with an aggregate principal amount of $24.9 million to New York Life Insurance Company, Mutual Life Insurance Company of New York and two other investors. The Notes currently bear interest at an annual rate of 11.5%, subject to certain adjustments. In connection with the issuance of the Notes, the Company also issued to the purchasers of such Notes warrants to acquire up to an aggregate of 1,422,857 shares of Common Stock at an exercise price of $7.00 per share, subject to adjustments of the number of shares and exercise price as set forth in the applicable warrants. The Notes are secured by a pledge of the stock of each of the Company's subsidiaries. During 1996, the Company failed to comply with certain financial covenants of the Notes, although the Company obtained from the holders of the Notes amendments of the covenants in exchange for warrants to acquire up to an aggregate of 200,000 shares of Common Stock at an exercise price of $7.00 per share, subject to adjustments of the exercise price as set forth in the applicable warrants. Failure of the Company to comply with the covenants, or in the event of non- compliance, to obtain an amendment of the covenants, could result in acceleration of the maturity of the Company's borrowings, which would have a material adverse effect on the Company's business, financial condition and results of operations. The continued expansion of the Company's business will require significant capital investments to finance the installation of equipment in hotel rooms. Historically, cash flow generated from the Company's operations has not been sufficient to fund the costs associated with expanding the Company's business. The Company believes that the net proceeds from the Offerings, together with cash flow from operations, will be sufficient to support the Company's focused expansion plans and capital expenditures as well as working capital requirements until at least December 1997. Thereafter, if cash generated from operations is insufficient to satisfy the Company's capital requirements, the Company may be required to raise additional funds. No assurance can be given that additional financing will be available or that, if available, such financing could be obtained by the Company on terms favorable to the Company and its stockholders. The Company is negotiating with private lenders to borrow up to $10 million by issuing unsecured subordinated notes, which if issued, may be repaid with the net proceeds of the Offerings. If the Company cannot obtain sufficient funds to support installations of rooms, the Company may have to reduce the rate of room installations. To the extent the Company raises additional capital by issuing equity or convertible debt securities, ownership dilution to the Company's stockholders will result. The Company used cash from operating activities totaling $9,510,000 for the nine months ended September 30, 1996, $7,619,000 in 1995, $6,137,000 in 1994, and $1,753,000 in 1993. The increased use of cash in 1995 as compared to 1994 and 1993 was primarily attributable to expansion into new geographic markets and the expansion of its headquarters and local country offices. The Company used $15,697,000 for the nine months ended September 30, 1996, $14,477,000 in 1995, $8,932,000 in 1994 and $3,091,000 in 1993 to fund capital expenditures, consisting principally of video systems for hotels. For the nine months ended September 30, 1996, financing activities provided $14,540,000. Financing activities provided $30,656,000, $25,715,000 and $5,082,000 for 1995, 1994 and 1993, respectively. 32 BUSINESS The following Business section contains forward-looking statements relating to future events or the future financial performance of the Company, which involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Risk Factors" and elsewhere in this Prospectus. THE COMPANY MagiNet is the leading supplier of on-demand interactive video entertainment and information services to the hospitality industry outside of North America. The Company installs integrated video systems that allow hotel guests to order pay-per-view movies on-demand. MagiNet has recently expanded these systems into entertainment and information gateways that offer an increasingly varied range of services, such as on-demand billing summaries, express checkout, personalized messaging, guest surveys and room service ordering. To date, the Company's principal on-demand video entertainment services have provided a reasonably predictable stream of recurring revenue during the term of its exclusive five-to-seven year contract. The Company expects to implement additional revenue enhancing services such as in-room casino-style gaming, advertising, video games, financial news, Internet access and in-room shopping in selected markets beginning in 1997. To date, the Company has focused principally on leading hotels in the Pacific Rim, which has been experiencing a higher rate of economic expansion and hotel construction than any other region in the world. The Company currently has operations and installations in Thailand, Australia, Japan, Taiwan, Guam/Saipan, Hong Kong, Singapore, South Korea, South Africa, Israel, New Zealand and France, and plans to expand its presence in the Pacific Rim, Europe, the Middle East and Africa. MagiNet began installing its systems in 1993 and as of September 30, 1996 served 59,529 rooms in 169 hotels with an additional 16,783 rooms in backlog. Beginning in early 1996, the Company added several key members to its management team, including its current Chief Executive Officer and Chief Operating Officer, both having over twenty years of experience in the hospitality industry. This management team further defined the Company's strategy to expand its installed room base by (i) leveraging its strong market position to obtain contracts with other leading hotels, (ii) penetrating existing or new target markets, directly or through acquisition and (iii) offering services to mid-market hotels in target regions. In addition, this management team was influential in establishing strategic relationships with Bloomberg for information and news television programming and InterGame for in-room casino-style gaming. On November 6, 1996, the Company entered into the Acquisition Agreement to acquire Prodac, which substantially expands the Company's geographic scope and immediately establishes the Company as a leading provider of in-room entertainment services in Europe, the world's largest hotel market. As of September 30, 1996, Prodac served 43,657 rooms in 242 hotels in Europe with an additional 10,316 rooms in backlog. See "Acquisition of Prodac." INDUSTRY BACKGROUND Pacific Rim Hospitality Industry The Pacific Rim has recently been experiencing a higher rate of economic expansion and hotel construction than any other region in the world. As the number of business and leisure travelers visiting the region has grown, most of the leading hotel chains including Accor, Choice International, Conrad, Hilton International, Holiday Inn Worldwide, Hyatt International, Marriott, Regent/Four Seasons, Shangri-La, Sheraton, Southern Pacific Hotel Corporation and Westin have focused their efforts on expanding in the Pacific Rim. The growth in business and leisure travel has contributed to occupancy rates and average daily room rates higher than those in the United States. In addition, there has been a significant expansion of mid-market hotels, which offer less expensive rooms and fewer services than leading hotels. It is estimated that in 1996 the travel and tourism industry in the Pacific Rim will employ 169 million people and will generate $944 billion of personal, business and government expenditures, capital investment, both public and private, net exports and government operating expenditures to 33 support travellers and travel service providers, and is projected to employ 280 million people and generate $2.1 trillion in 2006. European Hospitality Industry Europe represents the largest hotel market in the world. Between 1985 and 1994, room growth in Europe outpaced growth in North America. Hotels in Europe tend to be smaller and older in comparison to the city-center hotels found in many Pacific Rim business centers. Nevertheless, in Europe there are approximately 1.1 million rooms in the Company's target market of hotels with 100 or more rooms. Europe's major hotel chains include Accor, Forte Hotels, Hilton International, Holiday Inns, Novotel and Sheraton International. Video Entertainment and Information Services Leading hotels throughout the Pacific Rim and Europe have become increasingly focused on providing the same high caliber of guest amenities typically found in leading hotels in the United States including on-demand video entertainment and information services. Mid-market hotels are also increasingly providing on-demand video entertainment and information services as guests in these hotels are becoming accustomed to such hotel amenities. Video entertainment services first appeared in the U.S. hospitality industry over 20 years ago. Originally, "free-to-guest" video entertainment was provided by broadcasting a limited selection of movies to every room in a hotel on fixed schedules for a fee paid by the hotel. In the 1980s, a new service was developed that offered a limited selection of movies available at scheduled intervals on a pay-per-view basis, transferring the expense of the offerings to hotel guests and generally providing hotel operators with a commission based on revenue from these pay-per-view services. Typically, four to eight movies would be offered, each of which would be shown once every two to four hours. The subsequent development of on-demand video technology enabled providers of in-room services to offer scheduling flexibility to guests for movie viewing on a pay-per-view basis. The convenience of on-demand video technology increased average buy rates significantly, increased revenue and related hotel commissions and made on-demand video entertainment the leading segment of the hotel interactive video market. Technological advances have allowed providers of video entertainment and information services to offer other interactive services to hotels and hotel guests, including room billing summaries, express checkout, personalized messaging, interactive guest surveys and room service ordering. New guest pay services such as in-room video games, shopping, advertising, news, Internet access and casino-style gaming are under development in order to provide new amenities to guests and offer additional revenue sources per installation to the system providers and hotels. Today, free-to-guest services and on-demand video entertainment services have become standard amenities offered by most U.S. hotels serving all but the budget hotel market. Leading hotels internationally are now adopting new interactive video technologies. Hotels in the Pacific Rim are installing new on-demand video entertainment and information systems at a rapid rate, and the new international hotels being constructed in this region are expected to install the most current on-demand systems available. In Europe, interactive video systems have been installed in only a few leading hotels, and a number of major hotel chains are beginning to convert to interactive video technology. Some leading hotels in South Africa and Israel have free-to-guest systems, and a number of these hotels are now converting to the Company's in- room interactive on-demand video systems. The remainder of the rooms in Africa and the Middle East are largely unpenetrated. 34 The Company targets high-growth markets outside of North America. The following table illustrates the size and the growth of the Company's target markets:
REGION TOTAL MARKET(1) HOTELS WITH 100+ ROOMS(2) ------ ------------------------- ----------------------------- # OF ROOMS 9-YEAR CAGR(3) # OF ROOMS # OF HOTELS ---------- -------------- -------------- ------------- Pacific Rim............. 1,700,000 7.1% 670,000 2,412 Europe.................. 5,500,000 4.0% 1,108,000 5,637 Middle East and Africa.. 600,000 3.9% 288,000 1,272
-------- (1) Hotel Magazine, May 1996. Includes all travel accommodations. (2) Central hotel database, Reed Travel Group, a division of Reed Elsevier, Inc. (3) Compound Annual Growth Rate, 1985-1994. MAGINET'S OPPORTUNITIES MagiNet provides in-room interactive video entertainment and information services to leading business and resort hotels located in underpenetrated and underserved international markets. The Company installs integrated video systems that allow hotel guests to order pay-per-view movies on demand. MagiNet has recently expanded these systems into entertainment and information gateways that offer an increasingly varied range of services, such as on- demand billing summaries, express checkout, personalized messaging, guest surveys and room service ordering. The Company expects to implement additional revenue-enhancing services such as in-room casino-style gaming, advertising, video games, financial news, Internet access and in-room shopping in selected markets beginning in 1997. The Company believes that by continuing to partner with leading international hotels in each of its targeted markets and subsequently focusing on mid-market hotels in these markets, it can further exploit its leadership position. STRATEGY The Company's objective is to be the leading provider of in-room video entertainment and information services to hotels in its target international markets. Key elements of the Company's strategy to achieve this objective are as follows: Expand Installed Base of Rooms. The Company, which already has the largest number of installed on-demand video rooms in the Pacific Rim believes there is a significant opportunity to expand its installed base of rooms in the underpenetrated Pacific Rim, European and other target international markets through the following three-pronged approach: . Leverage industry leading position. The Company has entered into anchor contracts with leading hotels in each of its target markets and leverages the success of these installations to encourage installations in competing hotels in those markets. The Company intends to continue to capitalize on its strong market position by aggressively marketing the breadth of its programming, new interactive entertainment and information services and high-level of local customer service to leading business and resort hotels in the Company's target international markets. . Penetrate target markets directly or through acquisition. The Company has instituted a focused expansion plan that includes direct entry or acquisition in attractive existing and new markets. Historically, the Company has entered target markets in the Pacific Rim, Africa, and the Middle East directly. Prior to acquiring Prodac, the Company had installed a limited number of rooms in France and determined that acquiring Prodac represented an attractive opportunity to establish an immediate leading position in Europe. The Company intends to continue to evaluate potential acquisitions in order to further penetrate its target markets. . Offer services to mid-market hotel sector. Mid-market hotels, which have lower room rates and fewer services than leading hotels, represent an opportunity for the Company to expand its installed base of 35 rooms in its target markets by leveraging the reputation it has established with leading hotels. To date, penetration of on-demand video systems in mid-market hotels has been limited. The Company believes that mid-market hotels represent an attractive additional source of revenue. Implement New Interactive Entertainment and Information Revenue Sources. The Company's current system provides a full range of interactive video entertainment and information services including movies, on-demand billing summaries, express check-out services, personalized messaging, guest surveys and room service ordering. Currently, the Company is in the process of enabling hotels to further maximize guest revenue and differentiate hotel services by offering new interactive entertainment and information services, including in-room casino-style gaming, video advertising, video games, financial news, Internet access and in-room shopping. The Company believes that these new services will appeal to a broader group of users than the traditional purchaser of in-room videos and will serve to increase revenue per installed room. Increase Revenue Per Room by Effectively Merchandising Available Services. The Company is promoting the MagiNet brand name and awareness of the Company's product and service offerings. A key element to the Company's marketing strategy is to work closely with hotels to develop an effective campaign for increasing the use of video-based services. These strategies include in-room advertising and entertainment packages that highlight the Company's services and feature films. The Company also assists hotels in marketing hotel services to their guests through the Company's systems. Employ Cost-Effective, Proven Technology. The Company seeks to minimize technology risk and rapidly incorporate technological enhancements by licensing and purchasing cost-effective, leading-edge equipment and software in addition to developing equipment and software in-house. Currently, the Company utilizes the successful on-demand video technologies developed by OCV and Guestserve. The Company has also developed its own proprietary technology that enables its systems to operate with a number of different television standards that exist in its target markets and to increase functionality and reduce the cost of existing systems. The Company is continuously evaluating new technologies to enable the provision of a wide variety of services at a cost-effective price. For example, the Company is evaluating the use of digital server technology to increase system capacity and allow for the provision of additional interactive services. Utilize Relationships with Local Partners. To facilitate the marketing, installation and maintenance of the Company's systems in certain of its markets, the Company has entered into joint ventures or similar arrangements with local businesses and individuals believed by the Company to be familiar with local customs and practices and to be otherwise advantageous to the Company's business prospects in such markets. The Company has established such joint ventures in South Korea, Taiwan and Thailand and expects to establish further ventures with local partners as and when the need and opportunity arise. Establish Strategic Relationships. The Company establishes strategic relationships to facilitate the introduction of new interactive entertainment and information services. The Company has signed a license agreement with InterGame, Ltd. to provide in-room casino-style gaming in certain countries where such services are permitted. The Company has also entered into an agreement with Bloomberg L.P. to distribute Bloomberg Information Television, a 24-hour financial news program, to hotels in the Pacific Rim, Europe, South Africa and Israel. PRODUCTS AND SERVICES Current Products and Services To date, MagiNet has focused primarily on providing in-room on-demand video entertainment systems. The Company has recently expanded its systems into entertainment and information gateways that offer an increasingly varied range of services to hotel guests. On-Demand Video. The Company's video entertainment and information systems consist of a microprocessor controlling the converter and the television in each room, a handheld remote control and a central 36 "head-end" video storage unit and system computer located elsewhere in the hotel. The in-room unit may be integrated within, or located behind, the television. These systems allow each hotel guest to use the remote control to choose, at their own convenience, from a large selection of pay-per-view major motion pictures (including new releases), independent motion pictures for adult audiences, as well as free-to-guest broadcast, cable or satellite programming. Generally, guests can choose from approximately 30 to 60 video titles on-demand, depending on the size of the hotel and the capacity of the installed system. Hotel Video Information Services. Pursuant to contracts with each individual hotel, the Company currently offers a variety of interactive information services, including on-demand billing summaries, express check-out services, personalized messaging, interactive guest surveys and room service ordering, as well as information screens to enable hotels to promote their facilities. The Company provides these hotel services in selected languages as appropriate for the hotel market. The Company also provides equipment and interfaces to enable hotels to offer information services such as on-line airline schedules and weather reports. These services allow the hotel to increase the productivity of its staff by automating certain hotel services that would otherwise require additional personnel. Future Products and Services The Company intends to begin implementation of a number of interactive entertainment and information services beginning in 1997 in selected markets in hotels using MagiNet systems. MagiNet believes these services will further differentiate the Company from competitors and enhance revenue per installed room. In-room Casino-style Gaming. The Company has an exclusive, worldwide license from InterGame, Ltd. to provide its casino-style gaming for use in the hospitality industry. The hotel guest will be charged through standard credit card verification, and the Company will receive a share of the net guest losses. The initial market for this service will be certain hotels in the Pacific Rim, and if successful the Company intends to offer this service to hotels in countries where it is permitted by local law. The Company will enter into arrangements with local gaming authorities as necessary. Advertising. The Company has developed its "yellow page" style iLook advertising directory for guests in hotels utilizing the Company's systems. The Company expects to initiate this service in Thailand in early 1997 and later identify local partners to assist the Company in soliciting advertisers for the system in other markets. The Company is currently working with a marketing partner in Thailand to assist with this product offering and believes that an agreement with such a partner can be reached on terms favorable to the Company. There can be no assurances that such a partnership will be established on favorable terms, if at all. The Company expects restaurants, travel agencies, airlines, hotels in other destinations, and local stores and general services, which an international traveler may desire, to subscribe for this service. The Company has also developed the Welcome Channel, currently being tested in Australia. The Welcome Channel has been designed to accommodate 30-second commercials as well as Hollywood-studio movie previews, corporate identity advertising and hotel promotions. Financial News and Information. MagiNet has entered into an agreement with Bloomberg L.P. ("Bloomberg") to distribute Bloomberg Information Television, a 24-hour financial news program, to hotels in the Pacific Rim, Europe, South Africa and Israel. The hotel providing this service to its guests will pay the Company a monthly per-room charge to receive this service, and MagiNet and Bloomberg will share in the revenue received from the hotels. This service will be provided on a free-to-guest basis. Other. The Company has under development or under discussion with potential partners the provision of video games, in-room shopping and Internet access to hotel guests. ON-DEMAND VIDEO PROGRAMMING The Company obtains first-run motion pictures and other programming through distribution agreements with the authorized distributors of the major movie studios in the United States (including Columbia, HBO, MGM, 37 Miramax, Paramount, TriStar, Twentieth Century Fox, United Artists and Universal) and other countries, along with other studios and movie production companies. The Company prepares monthly line-ups for video titles, arranges the ordering and duplication of those titles and changes actual video cassettes for new movies monthly. In recent months, the Company has been successful in acquiring major theatrical films from European sources, enhancing its capability to serve various hotel clientele. The Company obtains French, German, Japanese, Chinese, Thai and Korean language programming from distributors in those countries, and plans to establish similar arrangements with additional local suppliers. The Company has separate distribution agreements in place with major film distributors. The distribution agreements relating to first-run motion pictures generally provide for a specified license period and percentage of revenue of each motion picture, with the studio receiving a percentage generally ranging from 30% to 45% of the Company's gross revenue from a major motion picture. For recently released motion pictures, the Company typically obtains rights to exhibit the picture in a specific country after the motion picture has been released in theaters in that country, but prior to its release to the video rental market or exhibition on cable television in that country. In addition to first-run motion pictures, most of the Company's installations also offer programming independent of the major motion picture studios originating in the United States, Europe and the Pacific Rim, including titles considered appropriate for adult audiences only. Access to such titles may be blocked from either the front desk or in-room remote control. The Company typically obtains such programming for a one-time fee, with no ongoing royalty obligation. Such films provide higher operating margins because of the relatively low acquisition cost. For the nine months ended September 30, 1996, such programming accounted for approximately 64% of the Company's revenue. INSTALLED BASE AND BACKLOG MagiNet's installed base consists of rooms installed in hotels that have signed exclusive five-to-seven year contracts for the Company to provide hotel guests with MagiNet's interactive entertainment and information services. The Company's backlog consists of rooms not yet installed with the Company's systems at hotels that have signed such contracts or, in Japan, have signed a memorandum of understanding. The Company does not include in backlog the rooms in individual hotels within hotel chains that have signed master contracts with the Company until the Company executes a contract with an individual hotel in that chain. The Company's installed base of rooms and backlog as of September 30, 1996 are set forth below:
ROOMS INSTALLED BACKLOG ------------------ ------------------ COUNTRY ROOMS # OF HOTELS ROOMS # OF HOTELS ------- ------ ----------- ------ ----------- Australia.............................. 7,935 33 2,906 9 France................................. 384 1 -- -- Guam/Saipan............................ 4,310 14 -- -- Hong Kong.............................. 4,635 9 1,049 2 Israel................................. 3,090 11 2,326 5 Japan.................................. 6,732 18 1,987 6 New Zealand............................ 1,794 7 275 1 The Philippines........................ -- -- 1,767 4 Singapore.............................. 3,115 6 1,578 2 South Africa........................... 4,603 17 2,183 11 South Korea............................ 5,916 11 1,015 3 Taiwan................................. 5,132 13 332 1 Thailand............................... 11,883 29 1,365 2 ------ --- ------ --- Total.................................. 59,529 169 16,783 46 ====== === ====== ===
38 SALES, DISTRIBUTION AND MARKETING The Company currently targets leading hotels generally in excess of 100 rooms in the Pacific Rim, Europe, the Middle East and Africa. The Company markets its system as requiring no capital investment by the hotel and then pays the hotel a monthly commission based on gross revenue derived from its interactive video entertainment and information services. Except in smaller markets, where the Company utilizes local distributors or representatives, the Company markets its products through controlled subsidiaries located in each market and generally uses its own personnel to supervise installation and provide maintenance services. The Company currently maintains offices and personnel in the metropolitan areas of Auckland, Bangkok, Hong Kong, Johannesburg, Seoul, Singapore, Sydney, Taipei, Tel Aviv and Tokyo. The Company's worldwide headquarters in Sunnyvale, California provides strategic direction, management, finance and accounting, and research and development, as well as support for the local offices in programming, marketing, sales, installations and maintenance. The Company provides service for its installed systems. Pursuant to an exclusive five-to-seven year contract, the Company installs at its own cost its system in the hotel and retains ownership of, and responsibility for, all equipment utilized in providing interactive entertainment and information services. Traditionally, the hotel provides and owns the televisions. The Company undertakes a significant investment when it installs its system in a hotel, sometimes requiring significant changes to be made to the hotel's master antenna television system. The Company's contract with each hotel provides that the Company will be the exclusive provider of interactive entertainment and information services to hotel guests and generally permits the Company to set the price for each pay-per-view event. The hotels collect viewing charges from their guests and retain a commission equal to a percentage of the total pay-per-view revenue. Some contracts also require the Company to upgrade its system to the extent that new technologies and features are introduced during the term of the contract. Based upon contracts entered into as of September 30, 1996, contracts for approximately 5% of the Company's installed rooms expire on or before December 31, 1998, 17% of the Company's installed rooms expire during 1999 and 24% of the Company's installed rooms expire during 2000. The Company has signed master contracts with Hyatt International-Asia Pacific Limited, Hyatt International (Europe Africa Middle East) Ltd., Shangri-La and the Southern Pacific Hotel Corporation. These master contracts establish the Company as a preferred vendor of certain of MagiNet's interactive entertainment and information systems and services without guaranteeing any commitments from individual hotels within the chain. The Company must sign agreements with individual hotels within the chain to install its systems in such hotels. The Company also has individual hotel contracts with other hotels within recognized chains with which the Company does not have master contracts such as the Hilton International, Inter- Continental, Mandarin Oriental, Marriott, Okura, Regent/Four Seasons, Sheraton and Westin. The Company is currently developing additional marketing strategies and obtaining and analyzing market data to promote the MagiNet brand name and the awareness of the Company's product and service offerings. A key element of the Company's marketing strategy is to work closely with the hotels to develop an effective campaign for increasing the use of video-based services. These strategies include in-room advertising and entertainment packages that highlight the Company's services and feature films. The Company also assists the hotels in marketing hotel services to their guests through the Company's systems. REGIONAL AND STRATEGIC RELATIONSHIPS Local Partners The Company's markets reflect a variety of different business cultures and legal environments. To facilitate the marketing, installation and maintenance of the Company's systems in certain of its markets, the Company has entered into joint ventures or similar arrangements with local businesses and individuals believed by the Company to be familiar with local customs and practices and to be otherwise advantageous to the Company's business prospects in such markets. The Company has established such joint ventures in South Korea, Taiwan 39 and Thailand, and expects to establish further ventures with local partners as and when the need and opportunity arise. In Australia, Hong Kong, Israel, New Zealand, Singapore and South Africa, the Company operates through its local country subsidiaries and provides sales, installation, service and maintenance through its own local employees and independent contractors. The Company believes that the existing familiarity its local employees and independent contractors have with the business cultures of these countries will enable the Company to further penetrate these markets successfully without the assistance of a joint venture or similar arrangement. Distributors and Representatives The Company installs and services hotels in Guam and Saipan through one distributor and one representative. In addition, the Company has retained a distributor to install and service the Company's Guestserve-based systems in Malaysia, Singapore, Indonesia and Brunei. The representative installs and services systems owned by the Company, in exchange for a monthly fee and a percentage of revenue. The distributors purchase, install and service the systems and pay the Company a royalty based on rooms installed or revenue. Strategic Relationships On Command Video. Pursuant to a Technology License Agreement dated April 15, 1992 (the "OCV License"), OCV has granted the Company an exclusive, transferable license in 30 countries outside North America to manufacture, modify, market and sell products incorporating OCV's proprietary technology. Following an initial term of 10 years, the OCV License is automatically renewable for an indefinite number of five-year periods. Although the Company is not required to use OCV technology, it is currently incorporated into most of the Company's installed systems. Pursuant to the OCV License, the Company pays OCV royalties based on the Company's revenue derived from OCV patented technology. The Company has paid OCV, in advance, a license fee that is credited against its future royalty obligation under the OCV License. These prepaid royalties are expected to be fully amortized before December 1996, at which time the Company will begin to incur a monthly cash payment in order to fulfill its continuing royalty obligations to OCV. Guestserve. Pursuant to a Technology License Agreement dated December 20, 1995 (the "Guestserve License"), Guestserve has granted the Company a transferable license to manufacture, modify, market and sell products incorporating Guestserve's technology in all countries outside of North America. The Guestserve License is exclusive for the hospitality industry and non-exclusive for apartments serviced by hospitality providers. Following an initial term of 10 years, the Guestserve License is automatically renewable for an indefinite number of five-year periods. Guestserve has granted the Company a license to future technological improvements along with the right to purchase hardware on favorable terms, and the Company has granted Guestserve a license to all technological improvements to the Guestserve system engineered by the Company. Pursuant to the Guestserve License, the Company pays Guestserve royalties, payable in installments upon the Company's acceptance of specified Guestserve technology and on a per-room basis. The royalties are capped and payable over a seven-year period. InterGame, Ltd. The Company has entered into an agreement (the "InterGame Agreement"), effective as of July 8, 1996, with InterGame, Ltd. ("InterGame"), a company engaged in designing, implementing and operating electronic video gaming programs for use with interactive PC and other platform-based systems. Pursuant to the InterGame Agreement, InterGame will deliver its network systems and software to MagiNet, develop an interface for the system to operate on MagiNet's interactive video systems, and grant to MagiNet an exclusive worldwide license to provide in-room casino-style gaming in hotels, as permitted by law. The Company will bear the capital costs of the equipment necessary to deliver the gaming services, and net revenue from the operation of the system (after certain payments are made) is to be divided between the Company and InterGame. MagiNet has exclusivity for the hospitality industry with respect to the technology, provided certain installation milestones are achieved. The InterGame Agreement will remain in force until July 8, 2001, and thereafter is automatically renewable for an indefinite number of one-year periods. To the extent the Company 40 engages third parties to assist the Company in installing and operating the casino-style gaming systems, the Company may share with such parties a percentage of the revenue from the system. Bloomberg. The Company has entered into an agreement dated as of October 3, 1996 with Bloomberg to distribute Bloomberg Information Television, a 24-hour financial news program, to hotels in the Pacific Rim, Europe, South Africa and Israel. The Company will sell the service to the hotels for a monthly per-room fee to be divided between the Company and Bloomberg. Pursuant to this agreement, MagiNet will provide the Bloomberg service on a free-to-guest basis. MagiNet may, subject to the consent of Bloomberg, offer to install a Bloomberg terminal in a hotel's business center or a concierge floor, subject to certain conditions. MANUFACTURING Although under its technology agreements with OCV and Guestserve, the Company has the right to manufacture the components and sub-assemblies of its systems, the Company currently subcontracts the manufacture of such systems including head-ends, converters and remote controls. The Company's remote controls for the OCV-based systems are manufactured by one company in Hong Kong, the remote controls for the Guestserve-based systems are manufactured by one company in China and the Company's converters are manufactured by three companies, one in each of Taiwan, Japan and Singapore. The OCV-based head-ends are currently available solely from OCV, and the Guestserve-based head-ends are available solely from Guestserve. OCV is a majority-owned subsidiary of Ascent Entertainment Group, Inc., which recently acquired the assets of SpectraVision, a competitor of the Company in the Pacific Rim. MagiNet believes that similar contract manufacturing can be obtained from other vendors, including those located in the Pacific Rim, although no assurance can be given that such manufacturing resources will continue to be available on reasonable terms, or at all. The Company will pursue such alternative manufacturing arrangements when and if it appears likely that significant cost savings or quality improvements can be achieved. At present, the Company has no plans for alternative sourcing of its systems or major system sub- assemblies. The Company has experienced delays in receiving converters for installations planned for the Guestserve-based systems, and these delays caused an approximately three-to-four month delay in installing certain hotels. Delays in receiving products could delay a large number of planned room installations. There can be no assurance that the Company will not face such difficulties or delays in the future. An inability of the Company to obtain sole-sourced or other components in a timely manner could significantly delay installations of systems, which could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, any increase in cost to manufacture the system components from existing or alternative sources could have a material adverse effect on the Company's business, financial condition and results of operations. MAINTENANCE AND SUPPORT The Company believes that high quality and consistent systems support and maintenance are essential to competitive success in its industry. As of September 30, 1996, the Company's installation and service organization consisted of 49 installation and service personnel in 11 countries. The Company emphasizes the use of Company-employed installation and service personnel but also uses Company-supervised subcontractors in areas where there is not a sufficient concentration of systems to warrant a full-time installation and service representative. Currently, the Company's in-house service organization is responsible for a substantial majority of the Company's installed base of rooms. Installation and service personnel are responsible for systems maintenance and distribution and collection of video cassettes. In addition, the Company's installation employees prepare site surveys to determine the type of equipment to be installed at each particular hotel, install the Company's systems or supervise third-party installers, train the hotel staff and perform quality auditing in each country. MagiNet receives on-line data daily through modem connections to its systems, enabling the Company to track the status of all of its installed systems. The on-line diagnostic capability of the Company's systems enable 41 MagiNet to identify and resolve a number of the reported system malfunctions from the Company's service control center without visiting the hotel property. When a service visit is required, the modular design of the Company's systems permits installation and service personnel to replace defective components at the hotel site. The Company generally maintains a fully-trained technical support staff in each country, which is available on a 24 hour-a-day basis. The Company also maintains a toll-free technical support line at its headquarters, used by country service personnel. COMPETITION The Company competes with a number of companies that specialize in providing in-room video services, and such competitors may have greater financial, technical, sales and marketing resources to devote to the development, promotion and sale of their products, and may have longer operating histories, greater name recognition and greater market acceptance for their products and services compared to those of the Company. The Company could also face competition in the future from existing and emerging cable, direct broadcast satellite and other communications companies providing entertainment and other in-room services to hotels and hotel guests. The Company's primary competitors in the on-demand video systems market are SpectraVision, Movielink and LodgeNet. SpectraVision was one of the earliest entrants into the hotel entertainment market, and has developed its GuestChoice technology, which allows guests to choose movies to watch on demand. The Company believes that SpectraVision has approximately 8,000 rooms installed with on-demand video systems outside of North America. Movielink, a privately-held Australian company, represents the Company's primary competition in the Pacific Rim. Movielink, which recently introduced an on- demand system, has a large base of free-to-guest customers in Australia and in Singapore and has a small number of installations in Hong Kong and Thailand. The Company estimates that Movielink has approximately 10,000 rooms installed with on-demand video systems. Although LodgeNet markets its systems primarily in the United States, it has recently entered certain of the Company's markets. The Company also experiences separate competition in certain specific countries. For example, in Japan certain large international corporations, such as Toshiba Corporation, Pioneer Electronic Corp., Hitachi, Ltd. and Matsushita Electric Industrial Co., Ltd., which supply the Japanese hospitality industry with master antenna television systems, sometimes offer a scheduled broadcast, pay-per-view movie capability. In addition, Gosoh, Ltd. competes in Hong Kong with a scheduled broadcast, pay-per-view system. In Europe, the Company faces competition from EMI, VMS and Granada. Granada has a supply agreement with Prodac pursuant to which Prodac must supply Granada with Prodac's on-demand video systems. The Company may be precluded from competing in the United Kingdom and Ireland by a non-competition provision in an asset sale agreement executed by Prodac in connection with Prodac's sale of its U.K. operations to UKCEL, a division of Granada. The Company's ability to compete successfully depends on many factors, including the success of competitors' systems and services, the ability to interface directly with hotel property management systems, the ability to provide appropriate programming for an international audience, the ability to obtain leading hotel contracts and name recognition among hotels, the quality of its programming and services, the reliability of its systems, general economic conditions and protection of Company and third-party licensor products by effective utilization of intellectual property laws. In particular, competitive pressures from existing or new competitors who offer lower prices or other incentives or introduce new systems could result in price reductions which would adversely affect the Company's profitability. There can be no assurance that the Company's current or other new competitors will not develop enhancements to, or future generations of, competitive systems and services that offer superior price or performance features, that the Company will be able to compete successfully in the future or that the Company will not be required to incur substantial additional investment costs in connection with its development, marketing and customer service efforts in order to meet any competitive threat. The Company expects competition in its markets to intensify. 42 TECHNOLOGY AND PROPRIETARY RIGHTS The patents to the basic architecture of the Company's system are held by the Company's licensors in the United States and corresponding patent applications for the OCV technology have been filed in Japan, the United Kingdom and under the European Patent Cooperation Treaty. The Company has engineered further improvements to the system to increase its cost-efficiency and flexibility. Hardware enhancements to the system include engineering new single-channel modulators, compatibility with television standards in other countries, and a universal television controller/interface to reduce the need for custom interfaces. The Company has also designed equipment to be compatible with the eight different television standards, frequency plans and AC voltage requirements for each of the countries served. Software enhancements include foreign language prompts and menus, hotel information services and hotel maintenance programs, as well as simplified systems configuration and management. OCV has incorporated certain of the Company's enhancements in its system installations in the United States. MagiNet's success and ability to compete is dependent in part upon its own proprietary technology. The Company relies primarily on a combination of patent, copyright and trademark laws, trade secrets, software security measures and nondisclosure agreements to protect its proprietary technology. There can be no assurance, however, that such protection will be adequate to deter misappropriation of or deter unauthorized third parties from copying aspects of, or otherwise obtaining and using, the Company's proprietary technology. Moreover, the Company licenses from OCV and Guestserve the right to install and operate on-demand video systems incorporating proprietary technology of such companies. If for any reason the Company's rights, under its Guestserve or OCV license agreements or otherwise, were to be successfully challenged by these or other companies, the Company's business, financial condition and results of operations could be materially adversely affected. As a result of the acquisition of Prodac, the Company has obtained Prodac's technologies and technologies under development including digital server technology related to Prodac's Videoquest product and Prodac's television- enabled personal computer technology, all of which will become part of the Company's proprietary rights. The laws of some foreign countries do not protect the Company's proprietary technology to the same extent as do the laws of the United States. There can be no assurance that third parties will not claim infringement by the Company with respect to Prodac's or MagiNet's proprietary technology. The loss or the inability of the Company to maintain any of the Company's licenses could result in delays or reductions in system installations until equivalent technology could be identified, tested, licensed and integrated. Any such delays or reductions in installations would materially adversely affect the Company's business, financial condition and results of operations. Furthermore, there can be no assurance that any confidentiality agreements between the Company and its employees or any agreements with third parties will provide meaningful protection for the Company's proprietary information or the technology licensed from others in the event of any unauthorized use or disclosure of such proprietary information. A substantial amount of the Company's sales are in international markets, and the laws of the other countries may afford the Company little or no effective protection of its intellectual property or the intellectual property of its licensors. While MagiNet believes that its products and trademarks do not infringe upon the proprietary rights of third parties, there can be no assurance that the Company will not receive future communication from third parties asserting that the Company's products infringe, or may infringe, on the proprietary rights of third parties. The Company's trademark registration of the name "MagiNet" has been initially refused by the U.S. Patent and Trademark Office as likely to be confused with "ImagiNet," a mark for which a prior application was made, if "ImagiNet" is ultimately registered. The registration of ImagiNet is being opposed by three parties. In addition, the right to use the name "Prodac" in the United Kingdom was transferred to UKCEL in connection with the sale by Prodac of its operation in the United Kingdom. Any infringement claims, with or without merit, could be time consuming, result in costly litigation and diversion of technical and management personnel and require the Company to develop non-infringing technology, enter into royalty or licensing agreements or cease the marketing or use of certain products, any of which could have a material adverse effect on the Company's business, financial condition and results of operations. Such royalty or licensing agreements, if required, may not be available on terms acceptable to the Company or at all. 43 EMPLOYEES As of September 30, 1996, the Company had 178 employees, of which 114 were located in offices in the Company's local markets. The Company believes its relationships with its employees are good. FACILITIES The Company's administrative, sales, marketing and product development headquarters are located in Sunnyvale, California, where the Company leases approximately 28,000 square feet under a lease expiring in March 1997. The Company anticipates that it will be necessary to obtain a larger facility upon the termination of its headquarters lease but believes that suitable additional or substitute facilities will be available in the future as needed on commercially reasonable terms. The Company also leases office space in the metropolitan areas of Bangkok, Hong Kong, Johannesburg, Seoul, Singapore, Sydney, Taipei, Tel Aviv and Tokyo. 44 ACQUISITION OF PRODAC BUSINESS OF PRODAC Prodac is one of the leading suppliers of video entertainment and information services in Europe. Prodac develops, manufactures and installs proprietary on-demand video and scheduled broadcast systems which allow guests to order pay-per-view movies and which provide other interactive services. As of September 30, 1996, Prodac served 242 hotels with approximately 43,657 rooms, the majority of which were located in Germany, and had a contracted backlog of 10,316 rooms. Approximately 87% of Prodac's installations and 70% of its backlog are scheduled broadcast with the balance representing installations and backlog of Prodac's Videoquest on-demand system. The Company believes that the acquisition of Prodac will provide important competitive and strategic advantages. The Prodac acquisition will substantially expand the geographic scope of the Company's operations and establish the Company as an industry leader in Europe. The Company intends to leverage Prodac's relationships with leading hotels to expand the Company's installed base of rooms. The increase in the Company's installed base of rooms may also further the Company's ability to acquire programming on more favorable terms. In addition, Prodac has developed and implemented a proprietary on-demand video system technology, which the Company intends to evaluate for use in its systems. Prodac develops, manufactures and installs a scheduled broadcast system as well as its proprietary Videoquest on-demand system. Prodac's systems consist of a TCM integrated into the television set, a hand-held remote and a central "head-end" video storage unit. The scheduled systems provide up to eight movies available at scheduled intervals for a daily flat fee. Prodac's Videoquest on-demand video system allows hotel guests to choose, at their convenience, from a selection of up to 16 movies. In addition, Prodac's systems offer video and informational services such as guest checkout, in-room billing, room service, mini-bar charging and room status. Prodac manufactures its video equipment at its facility in Cologne, Germany. The manufacturing process involves the integration of Prodac-produced components with commercially-sourced parts such as modulators, video players, racks and wiring. Certain of these components are currently available from single or limited supply sources. Prodac estimates that it would require three to six months to find and integrate suitable alternative components in the event existing sources proved to be unavailable. Although Prodac has not experienced any difficulty obtaining such components to date, there can be no assurance that Prodac will not face shortages of one or more necessary components in the future. Any failure to obtain components on a timely basis could delay shipments of Prodac's equipment and could have a material adverse effect on the Company's business, financial condition and results of operations. Prodac believes that its maximum production capacity under its two shift system is approximately 30 systems per month. For the last four years, Prodac has had a manufacturing relationship with Philips N.V. pursuant to which Philips integrates Prodac's TCM into Philips television sets. Philips delivers the integrated television sets either directly to the hotel for installation or to Prodac. In addition, Philips' leasing subsidiary has provided a significant portion of Prodac's equipment lease financing. The arrangement with Philips is the only arrangement Prodac has established for the production of the TCM-equipped televisions that Prodac sells to hotels. Any disruption of the supply of components for the TCMs or disruption in Philips' manufacturing process could have a material adverse effect on the Company's business, financial condition and results of operations. In addition to installing its systems in hotels, Prodac sells its video systems and components to other in-room video service providers and occasionally enters into film supply agreements with hotels and hotel chains. In connection with the sale of its United Kingdom operating assets, Prodac entered into a supply agreement to supply its Videoquest system to UKCEL and licensed certain software to UKCEL. Pursuant to the supply agreement, Prodac agreed to supply such quantities of Prodac's Videoquest system as UKCEL may order from time to time for a period of three years and to supply parts for a period of seven years thereafter. 45 Prodac obtains first-run motion pictures and other programming through a distribution agreement with the authorized distributor of certain major movie studios in the United States, including MGM, United Artists and Universal, in addition to other independent studios and movie production companies. Prodac prepares monthly line-ups for video titles at its hotels, arranges the ordering and duplication of those titles and changes actual video cassettes for new movies monthly. Prodac obtains English, French, German, Greek and Spanish language programming. Typically, Prodac broadcasts movies in English and the language of the country in which the hotel is located. The distribution agreements relating to first-run motion pictures generally provide for a specified license period and percentage of revenue of each motion picture, with the studio receiving a percentage generally ranging from 30% to 45% of Prodac's gross revenue from such motion picture. In addition to first-run motion pictures, all of Prodac's installations also offer programming independent of the major movie studios, including titles considered appropriate for adult audiences only. Such programming is typically obtained for a comparatively small flat-rate fee based on the number of rooms served. For the nine months ended September 30, 1996, such independent programming accounted for approximately 46% of Prodac's total revenues, which includes revenues generated from film rentals, system sales and film programming arrangements. Prodac targets leading hotels generally in excess of 100 rooms in Europe. As of September 30, 1996, Prodac had room installations in Albania, Austria, Belgium, France, Germany, Greece, Luxembourg, the Netherlands and Spain. A substantial majority of Prodac's rooms are located in Germany. Prodac's installed base of rooms consists of rooms installed in hotels that have signed exclusive contracts with Prodac for a fixed term of five to ten years, with the typical contract providing for a seven year term. Based upon contracts entered into as of September 30, 1996, contracts for approximately 7% of Prodac's installed base of rooms expire on or before December 31, 1997, 5% of the Company's installed rooms expire during 1998, 7% during 1999 and 7% during 2000. Prodac has also entered master hotel agreements with certain large hotel chains in Europe, including Dorint AG, Maritim Hotel GmbH and Novotel Hoteltriebs GmbH. These master contracts establish Prodac as a preferred vendor of Prodac's scheduled broadcast or Videoquest entertainment systems without guaranteeing any commitments from individual hotels within the chain. Prodac must sign agreements with individual hotels within the chain to install its systems in such hotels. Prodac also has individual contracts within recognized chains with which it does not have master contracts, including Holiday Inns, Hotel Sofitel and Sheraton International. Prodac manufactures, sells, markets and installs its products directly through most of Europe using Prodac personnel. In Austria, Prodac operates through a wholly-owned subsidiary. Hotel employees or local maintenance contractors specifically trained by Prodac perform routine maintenance and repairs. Because Prodac's TCM is integrated with the television set, local maintenance personnel are able to remove the module, when necessary, and return it to Prodac's Cologne manufacturing facility for repairs. As of September 30, 1996, Prodac had 97 employees, 35 of which served in operations, 9 of which served in engineering, 25 of which served in sales, marketing and administrative positions and 28 of which served in manufacturing positions. Prodac's employees have established a workers' council, which represents the employees for purposes of negotiating certain terms and conditions of employment. In addition, certain of Prodac's employees are members of trade unions. Although Prodac has not experienced any labor problems to date and believes its relations with employees to be good, any future failure to reach agreements with its employees or their representatives could result in a work stoppage at Prodac, which could have a material adverse effect on the Company's business, financial condition and results of operations. Prodac's administrative, sales, marketing and product development headquarters are located in Cologne, Germany, where Prodac leases approximately 41,010 square feet under a lease expiring in December 2008. The lessor of such space is a civil law partnership consisting of the two shareholders of Prodac and their wives. See "Certain Transactions." Prodac also leases space in Milton Keynes, England under a real property lease expiring in 2001. The annual rent under the lease is (Pounds)5,000. Prodac intends to continue payments under the lease through 46 December 31, 1996 at which time UKCEL will determine whether it wishes to sublet or seek an assignment of the lease. If UKCEL determines not to lease the space, Prodac will seek a sublessee or assignee. TERMS OF ACQUISITION On November 6, 1996, the Company entered into the Acquisition Agreement to acquire all of the Prodac Shares from Heinrich R. Wirt and Reiner Kaesbach, Prodac's founders and sole shareholders (the "Prodac Founders"). The Acquisition Agreement provides that the transfer of the Prodac Shares from the Prodac Founders to MagiNet GmbH, the Company's German subsidiary, will become effective upon the Company's delivery of acquisition consideration consisting of cash and MagiNet Common Stock with an aggregate value of DM 25 million. Pursuant to the Acquisition Agreement, the Company is obligated to deliver to the Prodac Founders within ten days of the closing of the Offerings cash in the amount of DM 20 million (plus interest at the rate of 6% per annum from November 6, 1996 through the date of the payment of the acquisition consideration) and the aggregate number of shares of MagiNet Common Stock that DM 5 million would purchase at a per share purchase price equal to the initial public offering price, discounted by ten percent. The relevant exchange rates will be determined according to the official middle rate of exchange between the Deutsche Mark and the U.S. Dollar on the Frankfurt am Main exchange on the closing date of the Offerings. Assuming an initial public offering price of $13.00 and an estimated exchange rate of 1.525 DM per U.S. Dollar (the applicable exchange rate at the close of trading in New York on September 30, 1996), MagiNet would be obligated to pay approximately $13.1 million in cash and deliver approximately 280,230 shares of MagiNet Common Stock to the Prodac Founders. The cash consideration for the acquisition is payable in Deutsche Marks, however, and the number of shares of Common Stock issuable to the Prodac Founders is dependent on applicable exchange rates at the time of the closing of the Offerings. Any increase in the value of the Deutsche Mark relative to the U.S. Dollar would increase the Company's U.S. Dollar cash obligation to the Prodac Founders and would increase the number of shares of Common Stock issuable in connection with the acquisition. In addition to the consideration deliverable in connection with the closing of the Offerings, in the event that Prodac achieves certain financial milestones in its fiscal years 1997, 1998 and 1999, the Prodac Founders will be entitled to receive additional consideration of DM 5 million for each year in which such milestones are achieved. The milestones relate to new room installations, average monthly revenue per room, operating costs and per-room installation costs. Such additional consideration will be payable on the date on which the financial audit results for the relevant fiscal year are first published in a combination of cash and MagiNet Common Stock based on the fair market value of MagiNet Common Stock and the exchange rate between the Deutsche Mark and the U.S. Dollar in Frankfurt trading on the payment date. The Acquisition Agreement also provides that the Prodac Founders will be permitted to pay themselves an aggregate of DM 600,000 (approximately $393,000) from the retained earnings of Prodac, calculated based on German GAAP. In addition, in the event the Offerings have not closed on or prior to December 31, 1996, the Prodac Founders will be entitled to receive an additional cash payment equal to all retained earnings in excess of such DM 600,000, calculated under German GAAP, as of December 31, 1996. As of September 30, 1996, Prodac's retained earnings, calculated on a German GAAP basis, totalled approximately DM 2,000,000 (approximately $1,300,000), which will be adjusted for the quarter ending December 31, 1996. In connection with the acquisition, MagiNet has agreed to assume from the Prodac Founders certain guarantees of Prodac indebtedness provided by the Prodac Founders in an aggregate amount of DM 4.6 million and to repay certain loan obligations of Prodac owed to the Prodac Founders in the amount of DM 130,000. Pursuant to the Acquisition Agreement, the Company is obligated to appoint one of the Prodac Founders to its Board of Directors immediately after the effectiveness of the transfer of the Prodac Shares and for so long as the Prodac Founders collectively hold 1% or more of the Company's outstanding Common Stock. The Company expects that Mr. Kaesbach will become a member of its Board of Directors following the Offerings. See "Management" and "Certain Transactions." 47 In connection with the Prodac acquisition, each of the Prodac Founders has entered into an employment agreement with Prodac that will become effective upon the Company's payment of the initial acquisition consideration. Pursuant to the employment agreements, each of the Prodac Founders will be entitled to an annual base salary of DM 338,000 (approximately $222,000). In addition, each of the Prodac Founders is eligible to receive a yearly bonus of up to DM 101,400 (approximately $66,492) if certain business targets are achieved. After December 31, 1999, either of the Prodac Founders may terminate their respective agreement with six months prior notice. Prior to December 31, 1999, the Company may terminate the agreements in any event for cause and on three months prior notice in the event that certain minimum financial targets are not achieved. As employees of Prodac, each of the Prodac Founders will be granted, at the time of the effectiveness of the transfer of the Prodac Shares, an option to acquire 150,000 shares of MagiNet Common Stock at an exercise price per share of $8.00. The option will be issued pursuant to the Company's 1992 Key Personnel Stock Option Plan, will have a five year term, and will be subject to vesting over four years with 25% of the shares vesting one year after the date of grant and the remaining shares vesting ratably over the succeeding 36 months. MagiNet GmbH will assume Prodac's obligations under a 15-year lease for certain real property owned by a civil law partnership consisting of the Prodac Founders and their wives. The lease relates to Prodac's office and manufacturing facilities in Cologne, Germany. The lease agreement provides for monthly rental payments of DM 79,000 (approximately $52,000), subject to inflation adjustments, and terminates in December 2008. See "Certain Transactions." In October 1996, Prodac sold its business operations in the United Kingdom, consisting of approximately 6,700 installed rooms operated by Prodac's English operating subsidiary, to UK Consumer Electronics Limited ("UKCEL"), a subsidiary of Granada Group Plc, a competitor of the Company. In connection with the asset sale, Prodac entered a supply agreement pursuant to which it agreed to supply UKCEL with its requirements of Prodac's interactive video system, Videoquest, for a period of three years, and to continue to supply parts for seven years thereafter. In addition, Prodac agreed that it would not compete with UKCEL in the United Kingdom or Ireland for a period of three years from the date of the asset sale. Pursuant to a master hotel contract with Hyatt International (Europe Africa Middle East) Ltd., the Company is obligated to install Guestserve systems in Hyatt hotels in the United Kingdom and plans to perform such obligations through either a U.K. operating subsidiary or a U.S. subsidiary which is the contracting party to the Guestserve license agreement. In the United Kingdom and Ireland, the Company may be precluded from entering these markets by a non-competition provision in an asset sale agreement executed by Prodac in connection with Prodac's sale of its U.K. operations to UKCEL. 48 MANAGEMENT EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES The following table sets forth certain information concerning the directors, executive officers and certain other key employees of the Company.
NAME AGE POSITION ---- --- -------- Kenneth B. Hamlet....... 52 Chairman of the Board, President and Chief Executive Officer Robert R. Creager....... 51 Founder, Executive Vice President, Corporate Development and Director James A. Barth.......... 53 Executive Vice President, Chief Financial Officer and Secretary Gordon E. (Ned) Druehl, Jr. ................... 54 Executive Vice President and Chief Operating Officer Pang T. Ho, Ph.D........ 51 Vice President of Engineering Reiner Kaesbach(1)...... 45 Director and Managing Director of Prodac GmbH Stuart J. Ellman(2)(3).. 30 Director Michael D. Granoff(2)... 38 Director Michael Ramsay(3)....... 44 Director James D. Robinson IV(3).................. 34 Director
- -------- (1) Mr. Kaesbach is expected to become a director of the Company following the Offerings upon payment of the acquisition consideration for Prodac. (2)Member of the Audit Committee. (3)Member of the Compensation Committee. Kenneth B. Hamlet has served as the Company's President and Chief Executive Officer and as a member of its Board of Directors since January 1996 and as Chairman of the Board since September 1996. Between 1991 and 1995, Mr. Hamlet was Chairman and Chief Executive Officer of Hamlet & Associates, a private investment banking and consulting firm. During such period, Mr. Hamlet provided management consulting services to a number of companies, including serving as Chairman and Chief Executive Officer of Caretenders Healthcorp, a health care company, and Executive Vice President of NTN Communications, Inc., a telecommunications equipment company. From March 1984 to January 1991, Mr. Hamlet served as President and Chief Executive Officer for Holiday Inns, Inc., a wholly-owned subsidiary of Holiday Corporation that owned, operated and franchised 1,750 hotels worldwide. From 1975 to 1984, Mr. Hamlet served in numerous executive capacities within Holiday Inns, Inc. Mr. Hamlet holds a B.S. in hotel administration from the Cornell University School of Hotel Administration. Robert R. Creager founded the Company and has served as Executive Vice President, Corporate Development, since September 1996 and as a member of the Company's Board of Directors since the Company's inception. From January 1996 to September 1996, Mr. Creager served as the Company's Chairman of the Board. From July 1991 to January 1996, Mr. Creager served as President and Chief Executive Officer of the Company. From 1988 to 1990, Mr. Creager was Vice President, Corporate Development, and General Counsel of Arix Corporation, a UNIX minicomputer manufacturer. Mr. Creager holds a B.A. in Business Administration from Pacific Union College and a J.D. from the University of California, Hastings College of Law. James A. Barth has served as the Company's Executive Vice President since September 1995, and as Chief Financial Officer and Secretary since October 1994. From October 1994 to September 1995, Mr. Barth was Vice President of Finance of the Company. From March 1994 to October 1994, Mr. Barth was Vice President and Chief Financial Officer of ACC Microelectronics Corporation, a semiconductor company. From 1982 to March 1994, he served as Vice President and Chief Financial Officer of Rational Software Corporation, a developer of object-oriented software engineering tools. Mr. Barth is a certified public accountant and holds a B.S. in business administration from the University of California, Los Angeles. Gordon E. (Ned) Druehl, Jr. has served as the Company's Executive Vice President and Chief Operating Officer since August 1996. From January 1992 to July 1996, he served as Chairman and Chief Executive Officer of Sandusky Cabinets Manufacturing, Inc., a metal cabinet manufacturing company. From 1990 through October 49 1991, Mr. Druehl founded and operated NKI Hospitality, a hotel management company, and subsequently worked as Vice President of RFS Real Estate, Inc., a diversified property management company, which acquired NKI Hospitality. From 1975 to 1990, Mr. Druehl held various management positions at Holiday Corporation, including President of the Hotel Services Division and Senior Vice President of U.S. Operations. Mr. Druehl holds a B.S. in hotel administration from the Cornell University School of Hotel Administration. Pang T. Ho, Ph.D. has served as the Company's Vice President of Engineering since August 1994. From February 1994 until August 1994, Dr. Ho served as Chairman of Spectrum, Inc., a cable television equipment distributor in Taiwan. From December 1991 until January 1994, Dr. Ho was President of Po-Hsin Entertainment, Inc., a cable television system operator located in Taiwan. From 1985 to 1991, Dr. Ho served as Vice President of Commercial Products for Pacific Monolithics Inc., a wireless communications equipment company. Dr. Ho holds a B.S. in electrical engineering from National Taiwan University, an M.S. in electrical engineering from Princeton University and a Ph.D. in electrical engineering from Rutgers University. Reiner Kaesbach will become a member of the Company's Board of Directors following the closing of the Offerings upon the Company's delivery of the acquisition consideration for Prodac. In addition, upon such payment, Mr. Kaesbach will be employed as a managing director of Prodac pursuant to a Managing Director's Service Agreement dated November 5, 1996. Prior to joining MagiNet, Mr. Kaesbach served as a managing director of Prodac since founding Prodac in 1979. Pursuant to the Acquisition Agreement, for so long as the Prodac Founders continue to hold at least 1% of the outstanding Common Stock of the Company and to serve as managing directors of Prodac, they will together have the right to one seat on the Company's Board of Directors to be filled by either Mr. Wirt or Mr. Kaesbach on an annual, rotating basis. Following the closing of the Offerings, the Company anticipates that Mr. Kaesbach will become a member of the Board of Directors to serve for the first such rotation. Mr. Kaesbach holds an undergraduate degree in engineering from Siegen University. Stuart J. Ellman has served as a member of the Company's Board of Directors since October 1994. Since August 1994, he has served as a Managing Director of RRE Investors, L.L.C., a venture capital investment firm. From August 1992 to August 1994, he was Vice President of Advisory Capital Partners, an investment firm. From June 1988 to July 1990, Mr. Ellman was an associate at Dillon, Read & Co. Inc., an investment banking firm. Mr. Ellman holds a B.A. from Wesleyan University and an M.B.A. from Harvard University. Michael D. Granoff has served as a member of the Company's Board of Directors since October 1994. Since January 1994, Mr. Granoff has served as Chief Executive Officer of Pomona Capital, L.P., a private investment company. From October 1988 to December 1993, Mr. Granoff was President of Golodetz Ventures and a member of the Board of Directors of Golodetz Corporation. From March 1981 to January 1985, Mr. Granoff served on the staff of the U.S. House of Representatives Appropriations Subcommittee on Foreign Operations and was a member of the 1992 Presidential Transition Team. Mr. Granoff holds a B.A. from the University of Pennsylvania and a J.D. from Georgetown University Law Center. Michael Ramsay has served as a member of the Company's Board of Directors since September 1993. Since April 1996, he has served as a Senior Vice President of Silicon Desktop Group of Silicon Graphics, Inc., a developer and manufacturer of computer workstations. From August 1994 to March 1996, he served as President of Silicon Studio, Inc., a subsidiary of Silicon Graphics, Inc. From July 1992 to August 1994, he served as Senior Vice President of Silicon Graphics' Visual System Group, from February 1987 to July 1992, he served as Senior Vice President of Silicon Graphics' Entry Systems Division, and from May 1986 to July 1991, he served as Director of Engineering, Vice President and Senior Vice President of various Silicon Graphics divisions. Mr. Ramsay received his B.S. degree in electrical engineering from the University of Edinburgh in Scotland. James D. Robinson IV has served as a member of the Company's Board of Directors since October 1994. Since December 1994, he has served as Managing Director of RRE Investors, L.L.C., a venture capital investment firm. From September 1992 to December 1994, he served as Vice President of Hambrecht & Quist Venture Partners, a venture capital firm. From July 1986 to March 1990, he was an associate at J.P. Morgan & Co. Incorporated, a commercial and investment banking firm. From January 1984 to June 1986, 50 he was President of IV Systems, Inc., a software consulting firm. Mr. Robinson holds a B.A. from Antioch College and an M.B.A. from Harvard University. DIRECTOR COMPENSATION The Company reimburses each member of the Company's Board of Directors for out-of-pocket expenses incurred in connection with attending Board meetings. No member of the Company's Board of Directors currently receives any compensation for serving as a Director. The Company's 1996 Director Stock Option Plan provides that options will be granted to non-employee directors of the Company pursuant to an automatic nondiscretionary grant mechanism. On the effective date of the Offerings, each of the Company's non-employee directors who is neither the beneficial owner nor an affiliate of a beneficial owner of more than 3% of the Company's outstanding Common Stock will automatically be granted an option to purchase 25,000 shares of the Company's Common Stock at an exercise price equal to the initial public offering price. In addition, upon joining the Board of Directors, each new non-employee director will automatically be granted an option to purchase 25,000 shares of Common Stock. Each non-employee director will subsequently be granted an option to purchase 5,000 shares of Common Stock at each annual meeting of stockholders beginning with the 1997 Annual Meeting of Stockholders. Each such option will be granted at the fair market value of the Common Stock on the date of grant. The initial options granted to non-employee directors will vest at a rate of 25% on the first anniversary of the date of grant and at a rate of 1/48 of the shares per month thereafter, and subsequent options granted to non-employee directors will become exercisable at a rate of 1/48 of the shares subject to such additional options on the monthly anniversary of the date of grant subject to continued Board service. See "--Stock Plans--1996 Director Stock Option Plan." COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Compensation Committee is responsible for determining salaries, incentives and other forms of compensation for directors, officers and other employees of the Company and administers various incentive compensation and benefit plans. The Compensation Committee currently consists of Stuart J. Ellman, Michael Ramsay and James D. Robinson IV. During 1995, the Compensation Committee consisted of Michael Ramsay, Michael D. Granoff, James D. Robinson III and James D. Robinson IV. Kenneth B. Hamlet, Chairman of the Board, President and Chief Executive Officer and a director of the Company, participates in all discussions and decisions regarding salaries and incentive compensation for all employees and consultants of the Company, except that he is excluded from discussions regarding his own salary and incentive compensation. No interlocking relationship exists between any member of the Company's Compensation Committee and any member of any other company's board of directors or compensation committee. EXECUTIVE COMPENSATION The following table sets forth in summary form information concerning the compensation awarded to, earned by, or paid for services rendered to the Company in all capacities during the fiscal year ended December 31, 1995 by (i) the Company's Chief Executive Officer as of the end of fiscal year 1995, (ii) the Company's next four most highly compensated executive officers whose salary and bonus for such fiscal year exceeded $100,000 and who were serving as an officer of the Company as of the end of such fiscal year, (iii) Kenneth B. Hamlet, who became the Company's President and Chief Executive Officer in January 1996, and (iv) Gordon E. (Ned) Druehl, Jr., who became the Company's Executive Vice President and Chief Operating Officer in August 1996 (collectively, the "Named Executive Officers"). 51 SUMMARY COMPENSATION TABLE
FISCAL 1995 ------------ LONG-TERM COMPENSATION FISCAL 1995 AWARDS ------------------------------------ ANNUAL COMPENSATION(1) SECURITIES ------------------------ UNDERLYING NAME AND PRINCIPAL POSITION SALARY BONUS(2) OPTIONS --------------------------- ----------- ------------------------ Current Executive Officers Kenneth B. Hamlet (3)..................... $ -- $ -- -- Chairman of the Board, President and Chief Executive Officer Robert R. Creager (4)..................... 175,000 -- 349,500 Founder and Executive Vice President, Corporate Development James A. Barth............................ 131,245 7,219 150,000 Executive Vice President and Chief Financial Officer Gordon E. (Ned) Druehl, Jr. (5)........... -- -- -- Executive Vice President and Chief Operating Officer Pang T. Ho, Ph.D.......................... 125,683 12,870 81,800 Vice President of Engineering Former Executive Officers Jeffrey A. Bixler (6)..................... 96,708 134,875 75,000 Vice President of Sales and Marketing Eric S. Hass(7)........................... 147,406 -- 169,000 Executive Vice President and Chief Operating Officer
- -------- (1) Other than salary and bonus described herein, the Company did not pay the persons named in the Summary Compensation Table any fringe benefits, perquisites or other compensation in excess of 10% of such executive officer's salary and bonus. (2) Except as otherwise indicated, bonus compensation consists of performance or contractually based cash incentive payments. (3) Mr. Hamlet succeeded Robert R. Creager as President and Chief Executive Officer of the Company in January 1996. In connection with Mr. Hamlet's employment, the Company agreed to pay him an annual salary of $250,000. In addition, Mr. Hamlet is entitled to receive a cash bonus and a corresponding stock bonus based on performance. See "--Employment Agreements and Change in Control Arrangements" and "Certain Transactions." In January 1996, the Company granted Mr. Hamlet an option expiring January 2001 to acquire 654,324 shares of the Company's Common Stock at an exercise price of $2.00 per share, with vesting to occur ratably over 36 months. (4) Mr. Creager resigned as President and Chief Executive Officer in January 1996. (5) Mr. Druehl became the Company's Executive Vice President and Chief Operating Officer in August 1996. In connection with Mr. Druehl's employment, the Company agreed to pay him an annual salary of $155,000 and a cash bonus equal to 33% of his salary, based on performance. See "-- Employment Agreements and Change in Control Arrangements" and "Certain Transactions." In August 1996, the Company granted Mr. Druehl an option expiring August 2001 to acquire 150,000 shares of the Company's Common Stock at an exercise price of $5.25 per share, with 25% of the shares vesting in July 1997, and the remaining shares vesting ratably over the succeeding 36 months of service. (6) Mr. Bixler resigned from the Company effective in December 1995. Bonus for Mr. Bixler includes $39,375 in severance payments, a bonus of $67,500 paid pursuant to an employment agreement with the Company, a $25,000 signing bonus and a $3,000 housing allowance. (7) Mr. Hass resigned from the Company effective in March 1996. 52 OPTION GRANTS IN FISCAL YEAR 1995 The following table provides information relating to stock options awarded to each of the Named Executive Officers during the fiscal year ended December 31, 1995. All such options were awarded under the Company's 1992 Key Personnel Stock Option Plan. No stock appreciation rights were granted to the Named Executive Officers during the fiscal year ended December 31, 1995.
INDIVIDUAL GRANTS ----------------------------------------------- POTENTIAL REALIZABLE VALUE AT ASSUMED NUMBER OF PERCENT OF ANNUAL RATES OF STOCK SECURITIES TOTAL OPTIONS PRICE APPRECIATION UNDERLYING GRANTED TO EXERCISE FOR OPTIONS TERM(1) OPTIONS EMPLOYEES IN PRICE PER EXPIRATION ---------------------- NAME GRANTED FISCAL 1995 SHARE(2)(3) DATE(4) 5% 10% ---- ---------- ------------- ----------- ---------- ---------- ----------- Current Executive Officers Kenneth B. Hamlet(5)............ -- -- % $ -- -- $ -- $ -- Robert R. Creager............... 349,500 36.7 1.00 1/30/00 96,560 213,373 James A. Barth.................. 100,000 10.5 1.00 1/30/00 27,628 61,051 50,000 5.3 2.00 9/18/00 27,628 61,051 Gordon E. (Ned) Druehl, Jr.(6).. -- -- -- -- -- -- Pang T. Ho, Ph.D................ 61,800 6.5 1.00 1/30/00 17,074 37,730 20,000 2.1 2.00 9/18/00 11,051 24,420 Former Executive Officers Jeffrey A. Bixler(7)............ 75,000 7.9 1.00 4/18/00 20,721 45,788 Eric S. Hass(8)................. 169,000 17.8 1.00 1/30/00 46,692 103,176
- -------- (1) Potential realizable value is based on the assumption that the Common Stock of the Company appreciates at the annual rate shown (compounded annually) from the date of grant until the expiration of the five year option term. These numbers are calculated based on the requirements promulgated by the Securities and Exchange Commission and do not reflect the Company's estimate of future stock price growth. (2) Options were granted at an exercise price equal to the fair market value of the Company's Common Stock, as determined by the Board of Directors on the date of grant. (3) Exercise price may be paid in cash, by check, by delivery of already-owned shares of the Company's Common Stock subject to certain conditions, or pursuant to a cashless exercise procedure under which the optionee provides irrevocable instructions to a brokerage firm to sell the purchased shares and to remit to the Company, out of the sale proceeds, an amount equal to the exercise price plus all applicable withholding taxes. (4) Twenty-five percent (25%) of the option shares vest on the first anniversary of the date of grant, and the balance vests at the rate of 1/48 of the total option shares for each month of service thereafter, except for Mr. Robert R. Creager's option, which vests ratably over 36 months. (5) Mr. Hamlet became President and Chief Executive Officer of the Company in January 1996. In January 1996, the Company granted Mr. Hamlet an option expiring January 2001 to acquire 654,324 shares of the Company's Common Stock at an exercise price per share of $2.00 with vesting to occur ratably over 36 months. (6) In August 1996, the Company granted Mr. Druehl an option to acquire 150,000 shares of the Company's Common Stock at an exercise price of $5.25 per share, with 25% of the shares vesting in July 1997 and the remaining shares subject to the option vesting ratably over the succeeding 36 months of service. (7) Mr. Bixler resigned from the Company effective in December 1995. No shares subject to the option had vested as of the date of Mr. Bixler's resignation, and the option terminated. (8) Mr. Hass resigned from the Company effective in March 1996. In connection with his resignation, Mr. Hass exercised the option with respect to 66,895 shares. The option expired with respect to all unvested shares on the effective date of Mr. Hass' resignation. 53 AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES No Named Executive Officer exercised a stock option during fiscal 1995. The following table sets forth certain information regarding stock options held as of December 31, 1995 by the Named Executive Officers.
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT DECEMBER 31, 1995 DECEMBER 31, 1995(1) ------------------------- ------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ----------- ------------- ----------- ------------- Current Executive Officers Kenneth B. Hamlet (2)...... -- -- $ -- $ -- Robert R. Creager ......... 135,917 213,583 1,631,004 2,562,996 James A. Barth............. 32,292 117,708 384,379 1,365,621 Gordon E. (Ned) Druehl, Jr.(3).................... -- -- -- -- Pang T. Ho, Ph.D. ......... 29,583 75,417 353,746 886,254 Former Executive Officers Jeffrey A. Bixler(4)....... -- -- -- -- Eric S. Hass(5)............ 73,000 146,000 876,000 1,752,000
- -------- (1) Based on an initial public offering price of $13.00 per share minus the exercise price of outstanding options. (2) Mr. Hamlet became President and Chief Executive Officer of the Company in January 1996 and, accordingly, held no outstanding options as of December 31, 1995. In January 1996, the Company granted Mr. Hamlet an option expiring January 2001 to acquire 654,324 shares of the Company's Common Stock at an exercise price per share of $2.00 with vesting to occur ratably over 36 months. (3) Mr. Druehl became Executive Vice President and Chief Operating Officer in August 1996 and, accordingly, held no outstanding options as of December 31, 1995. In August 1996, the Company granted Mr. Druehl an option expiring August 2001 to acquire 150,000 shares of the Company's Common Stock at an exercise price per share of $5.25 with 25% of the shares vesting in July 1997 and the remaining shares vesting ratably over the succeeding 36 months of service. (4) Mr. Bixler resigned from the Company effective in December 1995. No shares subject to the option granted to Mr. Bixler had vested as of the date of his resignation, and the option terminated as of such date. Accordingly, Mr. Bixler held no outstanding options as of December 31, 1995. (5) Mr. Hass resigned from the Company effective in March 1996. In connection with his resignation, Mr. Hass exercised two outstanding options for 19,791 and 66,895 shares, respectively. All remaining shares subject to options held by Mr. Hass were unvested and terminated on the effective date of his resignation. STOCK PLANS 1992 Key Personnel Stock Option Plan. The Company's Restated 1992 Key Personnel Stock Option Plan (the "1992 Plan") was originally adopted by the Board of Directors in December 1992 and approved by the Company's stockholders in December 1993. The Board of Directors approved the amendment and restatement of the 1992 Plan in September 1996. A total of 3,800,000 shares of Common Stock, less the number of shares issued under and not returned to the Company's now-terminated 1992 Stock Option Plan, has been reserved for issuance under the 1992 Plan. The 1992 Plan provides for the grant to employees of incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code"), and for the grant to employees and consultants of nonstatutory stock options. Unless terminated sooner, the 1992 Plan will terminate automatically in December 2002. The 1992 Plan may be administered by the Board of Directors or a committee of the Board (the "Committee"), which Committee shall, in the case of options intended to qualify as "performance-based compensation" within the meaning of Section 162(m) of the Code, consist of two or more "outside directors" within the meaning of Section 162(m) of the Code. The Committee has the power to determine the terms of the 54 options granted, including the exercise price, the number of shares subject to each option, the exercisability thereof and the form of consideration payable upon such exercise. In addition, the Committee has the authority to amend, suspend or terminate the 1992 Plan, provided that no such action may affect any share of Common Stock previously issued and sold or any option previously granted under the 1992 Plan. Options granted under the 1992 Plan are not generally transferable by the optionee, and each option is exercisable during the lifetime of the optionee only by the optionee. Options granted under the 1992 Plan must generally be exercised within three months of the end of the optionee's status as an employee or consultant of the Company, or within twelve months after the optionee's termination by death or disability, but in no event later than the expiration of the option's term. The exercise price of all incentive stock options granted under the 1992 Plan must be at least equal to the fair market value of the Common Stock on the date of grant. The exercise price of nonstatutory stock options granted under the 1992 Plan is determined by the Committee, but with respect to nonstatutory stock options intended to qualify as "performance-based compensation" within the meaning of Section 162(m) of the Code, the exercise price must be at least equal to the fair market value of the Common Stock on the date of grant. With respect to any participant who owns stock possessing more than 10% of the voting power of all classes of the Company's outstanding capital stock, the exercise price of any incentive stock option granted must equal at least 110% of the fair market value on the date of grant, and the term of such incentive stock option may not exceed five years. The term of all other options granted under the 1992 Plan may not exceed ten years. The 1992 Plan provides that in the event of a merger of the Company with or into another corporation, a sale of substantially all of the Company's assets or a like transaction involving the Company, each option shall be assumed or an equivalent option substituted by the successor corporation. If the outstanding options are not assumed or substituted for as described in the preceding sentence, the Committee shall provide for the Optionee to have the right to exercise the option as to all of the optioned stock, including shares as to which it would not otherwise be exercisable. If the Committee makes an option exercisable in full in the event of a merger or sale of assets, the Administrator shall notify the optionee that the option shall be fully exercisable for a period of fifteen (15) days from the date of such notice, and the option will terminate upon the expiration of such period. Certain options outstanding under the 1992 Plan contain a provision providing for accelerated vesting of options following an assumption by the successor corporation in the event the optionee's employment is terminated within certain time periods after the consummation of the merger. The Committee may, in its discretion, include such provision in the vesting arrangement for future option grants. 1992 Stock Option Plan. The Company's now-terminated 1992 Stock Option Plan (the "1992 Stock Option Plan") provided for the granting to employees of incentive stock options within the meaning of Section 422 of the Internal Revenue Code and for the granting to employees and consultants of nonstatutory stock options. The 1992 Stock Option Plan was approved by the Board of Directors in December 1992 and by the Company's stockholders in December 1993. A total of 236,430 shares of Common Stock were reserved for issuance pursuant to the 1992 Stock Option Plan. The Board terminated the 1992 Stock Option Plan in September 1996, although the 47,986 shares of Common Stock previously issued and sold and any option previously granted under the 1992 Stock Option Plan will not be affected by the termination of this plan. No further grants will be made under the 1992 Stock Option Plan. Options granted under the 1992 Stock Option Plan are not generally transferable by the optionee, and each option is exercisable during the lifetime of the optionee only by such optionee. Options granted under the 1992 Stock Option Plan must generally be exercised within three months of the end of the optionee's status as an employee or consultant of the Company, within six months after such optionee's termination by disability or within twelve months after such optionee's termination by death (but in no event later than the expiration of the option's ten year term). The exercise price of all incentive stock options granted under the 1992 Stock Option Plan was at least equal to the fair market value of the Common Stock on the date of grant. The exercise price of nonstatutory stock options granted under the 1992 Stock Option Plan was at least equal to 85% of the fair market value of the Common Stock on the date of grant. With respect to any participant who owned stock possessing more than 10% of the voting power of all classes of the Company's outstanding capital stock at the date of grant, 55 the exercise price of any option granted was at least 110% of the fair market value on the date of grant, and the term of such option did not exceed five years. The term of all other options granted under the 1992 Stock Option Plan did not exceed ten years. The 1992 Stock Option Plan provides that in the event of a merger of the Company with or into another corporation, a sale of substantially all of the Company's assets or a like transaction involving the Company, each option shall be assumed or an equivalent option substituted by the successor corporation. If the outstanding options are not assumed or substituted for as described in the preceding sentence, the Committee shall notify the optionee that the option shall be exercisable to the extent it has vested for a period of fifteen (15) days from the date of such notice, and the option shall terminate upon the expiration of such period. 1996 Employee Stock Purchase Plan. The Company's 1996 Employee Stock Purchase Plan (the "Purchase Plan") was adopted by the Board of Directors in September 1996 but will not become effective until the effectiveness of the Registration Statement related to the Offerings. A total of 200,000 shares of Common Stock has been reserved for issuance under the Purchase Plan. The Purchase Plan, which is intended to qualify under Section 423 of the Internal Revenue Code, is implemented by consecutive and overlapping twenty-four month offering periods beginning on the first trading day on or after May 1 and November 1 each year, except for the first such offering period which commences on the first trading day on or after the effective date of the Offerings and ends on the last trading day on or before October 31, 1998. Each offering period contains four intervening purchase periods of approximately six months duration, during which payroll deductions of participants are accumulated and, at the end of which, shares of Common Stock are purchased. The Purchase Plan is administered by the Board of Directors or by a committee appointed by the Board. Employees are eligible to participate if they are customarily employed by the Company or any participating subsidiary for at least 20 hours per week and more than five months in any calendar year. The Purchase Plan permits eligible employees to purchase Common Stock through payroll deductions of up to 15% of an employee's compensation (excluding commissions, overtime and other bonuses and incentive compensation). The price of stock purchased under the Purchase Plan is 85% of the lower of the fair market value of the Common Stock at the beginning of the offering period or the end of the purchase period. Employees may end their participation at any time during an offering period, and they will be paid their payroll deductions to date. Participation ends automatically upon termination of employment with the Company. Rights granted under the Purchase Plan are not transferable by a participant other than by will, the laws of descent and distribution, or as otherwise provided under the Purchase Plan. The Purchase Plan provides that, in the event of a merger of the Company with or into another corporation or a sale of substantially all of the Company's assets, the Board of Directors shall shorten the offering period then in progress (so that employees' rights to purchase stock under the Plan are exercised prior to the merger or sale of assets). The Purchase Plan will terminate in September 2006. The Board of Directors has the authority to amend or terminate the Purchase Plan, except that no such action may adversely affect any outstanding rights to purchase stock under the Purchase Plan. 1996 Director Stock Option Plan. The Company's 1996 Director Stock Option Plan (the "Director Plan") was adopted by the Board of Directors in September 1996 but will not become effective until the date of the effectiveness of the Registration Statement relating to the Offerings. Non-employee directors are entitled to participate in the Director Plan. The Director Plan has a term of ten years, unless terminated sooner by the Board. A total of 200,000 shares of Common Stock have been reserved for issuance under the Director Plan. The Director Plan provides for the grant of 25,000 shares of Common Stock (the "First Option"), to each non-employee director on the later of (i) the effective date of the Director Plan or (ii) the date on which the person first becomes a non-employee director. No non-employee director will be granted a First Option if either (i) immediately prior to becoming a non-employee director, such person was a director of the Company or (ii) such individual is the direct or indirect beneficial owner or an affiliate of a direct or indirect beneficial owner of 3% or more of the Company's outstanding Common Stock. Each non-employee director, including non-employee directors not entitled to receive a First Option, will also be granted an option to purchase 5,000 shares 56 of Common Stock (a "Subsequent Option") each year on the date of the annual shareholder's meeting of the Company, if on such date he or she shall have served on the Board for at least six months. The First Option shall have a term of 10 years and the shares subject to each such option shall vest as to 25% of the shares of Common Stock subject to the option one year after its date of grant, and as to 1/48th of the shares subject to the option each month thereafter, and each Subsequent Option will become exercisable at a rate of 1/48 of the shares subject to such additional options on the monthly anniversary of the date of grant. The exercise prices of the First Option and each Subsequent Option shall be 100% of the fair market value per share of the Common Stock, generally determined with reference to the closing price of the Common Stock as reported on the Nasdaq National Market on the date of grant. In the event of a merger of the Company or the sale of substantially all of the assets of the Company, each option may be assumed or an equivalent option substituted by the successor corporation. If an option is assumed or substituted for, it shall continue to vest as provided in the Director Plan. If a non-employee director's status as a director of the Company or the successor corporation, as applicable, is terminated other than upon a voluntary resignation by the non-employee director, each option granted to such non-employee director shall become fully vested and exercisable. If the successor does not agree to assume or substitute the option, each option shall also become fully vested and exercisable for a period of thirty days, after which period the option shall terminate. Options granted under the Director Plan must be exercised within three months of the end of the optionee's tenure as a director of the Company, or within twelve months after termination of the director's tenure by death or disability, but in no event later than the expiration of the option's ten year term. No option granted under the Director Plan is transferable by the optionee other than by will or the laws of descent and distribution, and each option is exercisable, during the lifetime of the optionee, only by such optionee. 401(k) Plan. The Company maintains the MagiNet Corporation 401k Savings Plan (the "401(k) Plan") which covers all of the Company's U.S. employees who have completed 1/12 of a year of service. Pursuant to the 401(k) Plan, eligible employees may elect to defer their current compensation by up the statutorily prescribed annual limit and have the amount of such reduction contributed to the 401(k) Plan on their behalf as an elective deferral contribution. The 401(k) Plan is intended to qualify under Section 401 of the Internal Revenue Code of 1986, as amended, so that contributions to the 401(k) Plan, and income earned on such contributions, are not includible in the participant's gross income until withdrawn from the 401(k) Plan. The trustee under the 401(k) Plan, at the direction of each participant, invests the assets of the 401(k) Plan in any of a number of investment options. EMPLOYMENT AGREEMENTS AND CHANGE IN CONTROL ARRANGEMENTS The Company currently has employment agreements in effect with Kenneth B. Hamlet, the Company's Chairman of the Board, President and Chief Executive Officer and Gordon E. (Ned) Druehl, Jr., the Company's Executive Vice President and Chief Operating Officer. In addition, in connection with its acquisition by MagiNet, Prodac entered into employment agreements with each of the Prodac Founders. Pursuant to the Acquisition Agreement, the Prodac Founders are together entitled to one seat on the Board of Directors; the Prodac Founder who will serve on the board will alternate annually. Following the closing of the Offerings, Reiner Kaesbach will serve as a member of the Board of Directors for the first rotation. On November 28, 1995, the Company entered into an at-will employment agreement with Mr. Hamlet pursuant to which the Company retained his services as President and Chief Executive Officer beginning January 15, 1996. The agreement provides for an annual base salary of $250,000, subject to annual review concerning increases. In addition, Mr. Hamlet is eligible to receive an annual bonus based upon certain financial criteria to be agreed upon by Mr. Hamlet and the Board of Directors, including revenue and profitability targets and other organizational milestones. Such bonus shall be payable in part in cash and in part in Common Stock of the Company. The number of shares of Common Stock issuable in connection with Mr. Hamlet's bonus shall, upon the closing of the Offerings, be determined by dividing the cash portion of the bonus by a price per share to be determined by negotiation between the Company and Mr. Hamlet. Such shares shall be fully vested at the time of issuance. 57 On June 20, 1996, the Company entered into an at-will employment letter agreement with Mr. Druehl which provides for an annual base salary of $155,000 and an annual cash bonus based on the achievement of individual and Company performance objectives. On November 5, 1995, Prodac entered into a Managing Director's Service Agreement with Reiner Kaesbach pursuant to which Prodac retained his services as Managing Director effective upon the Company's payment of the acquisition consideration for Prodac. The agreement provides for an annual base salary of DM 338,000 (approximately $222,000). In addition, Mr. Kaesbach is eligible to receive a yearly bonus of up to DM 101,400 (approximately $66,492) if certain business targets are achieved. After December 31, 1999, either Mr. Kaesbach or Prodac may terminate the service agreement with six months prior notice. Prior to December 31, 1999, the Company may terminate the agreements in any event for cause and on three months prior notice in the event that certain minimum financial targets for Prodac are not achieved. Prodac and Heinrich R. Wirt are parties to a separate Managing Director's Service Agreement containing substantially equivalent terms. Under the 1992 Plan, in the event of a merger or change-of-control of the Company, the successor corporation may assume outstanding options or substitute equivalent options. If such successor corporation does not assume such options or substitute equivalent options, vesting of outstanding options under the 1992 Plan will automatically accelerate. In addition, currently outstanding options under the 1992 Plan for the Named Executive Officers provide that if such option is assumed or an equivalent option is substituted, vesting of such option will automatically accelerate if such officer's employment with the successor corporation is terminated within twelve months of the merger or change-of-control transaction. LIMITATIONS ON LIABILITY AND INDEMNIFICATION MATTERS The Company has adopted provisions in its Certificate of Incorporation that eliminate to the fullest extent permissible under Delaware law the liability of its directors to the Company for monetary damages. Such limitation of liability does not affect the availability of equitable remedies such as injunctive relief or rescission. The Company's Bylaws provide that the Company shall indemnify its directors and officers to the fullest extent permitted by Delaware law, including in circumstances in which indemnification is otherwise discretionary under Delaware law. The Company has entered into indemnification agreements with its officers and directors containing provisions which may require the Company, among other things, to indemnify the officers and directors against certain liabilities that may arise by reason of their status or service as directors or officers (other than liabilities arising from willful misconduct of a culpable nature), and to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified. There is no currently pending litigation or proceeding involving a director, officer, employee or other agent of the Company in which indemnification would be required or permitted. The Company is not aware of any threatened litigation or proceeding that may result in a claim for such indemnification. 58 CERTAIN TRANSACTIONS Between October 1992 and May 1996, the Company sold and issued 10,908,878 shares of its Preferred Stock for an aggregate consideration of $56,402,000. The Company sold the Preferred Stock in series as follows: (i) 150,000 shares of Series A Preferred Stock in October 1992 at a price of $2.00 per share; (ii) 440,068 shares of Series B Preferred Stock in October 1992 at a price of $4.00 per share; (iii) 888,859 shares of Series B Preferred Stock in March 1993 at a price of $4.50 per share and warrants to acquire 174,993 shares of Common Stock at an exercise price of $4.50 per share; (iv) 6,287,093 shares of Series C Preferred Stock in September 1994 at a price of $4.50 per share and warrants to acquire 1,111,111 shares of Series C Preferred Stock at an exercise price of $4.50 per share; (v) an aggregate of 3,142,858 shares of Series D Preferred Stock in December 1995 and May 1996 at a price of $7.00 per share and warrants to acquire up to an aggregate 200,000 shares of Common Stock (subject to adjustment) at an exercise price of $7.00 per share. The following table summarizes purchases, valued in excess of $60,000, of shares of Preferred Stock and Common Stock by directors, executive officers and 5% stockholders of the Company:
SHARES ----------------------------------------------------------------- COMMON SERIES C SERIES D COMMON SERIES C WARRANTS(1) WARRANTS(2) SERIES D WARRANTS(3) ------ --------- ----------- ----------- --------- ----------- RRE Investors, L.L.C.(4).............. -- 4,000,000 -- 1,111,111 -- -- Equity-Linked Investors II..................... -- -- -- -- 1,500,000 95,455 Festival Company, Inc... -- -- -- -- 1,000,001 63,636 Pomona Capital, L.P.(5)................ -- 669,150 66,667 -- -- -- Kenneth B. Hamlet(6).... 28,000(8) -- -- -- 28,000 1,782 James A. Barth(7)....... 12,000(8) -- -- -- 12,000 764
- -------- (1) Represents the maximum number of shares issuable upon exercise of warrants to acquire Common Stock at an exercise price of $0.50 per share issued in connection with a bridge note financing in September 1994. (2) Represents the maximum number of shares issuable upon exercise of warrants to acquire Series C Preferred Stock (and, upon the effectiveness of the registration statement covering the Offerings, to acquire Common Stock) issued in connection with the Company's Series C Preferred Stock Financing. If not exercised in connection with the Offerings, such warrants will terminate. (3) Represents the maximum number of shares issuable upon exercise of warrants to acquire Common Stock issued in connection with the Company's Series D Preferred Stock Financing. If not exercised in connection with the Offerings, such warrants will terminate. (4) Includes shares purchased by Sunset Partners, L.P., Sunset Partners II, L.P., and Sunset Partners III, L.P. (collectively, the "Sunset Partnerships"). RRE Investors, L.L.C. is the general partner of each of the Sunset Partnerships. (5) Includes shares purchased by Pomona Capital, L.P., SOF Venture Capital, L.P., SP Offshore Venture Capital, L.P. and SP Venture Capital, L.P. Michael D. Granoff, a member of the Company's Board of Directors, is the sole shareholder of Pomona Partners, Inc., the general partner of SOF Venture Capital, L.P., SP Offshore Venture Capital, L.P. and SP Venture Capital, L.P. and the general partner of Pomona Associates, L.P. which serves as the general partner of Pomona Capital, L.P. (6) Mr. Hamlet is Chairman of the Board, President and Chief Executive Officer of the Company. (7) Mr. Barth is Executive Vice President and Chief Financial Officer of the Company. (8) Mr. Hamlet and Mr. Barth purchased the number of shares of Common Stock indicated on May 30, 1996 at a purchase price per share of $2.00. On September 29, 1994, the Company entered into a consulting agreement with RRE Investors, L.L.C. ("RRE"), which terminates on September 28, 1997. RRE is the general partner of each of Sunset Partners, L.P., Sunset Partners, L.P. and Sunset Partners III, L.P., which collectively hold greater than 5% of the outstanding Common Stock of the Company. The agreement provides that RRE will provide consulting and advisory services to the Company regarding strategic planning and business and financial matters for a fee of $150,000 for the first 59 year of the agreement and $200,000 for each of the following two years. The agreement also provides that the Company will reimburse RRE for reasonable business expenses incurred by RRE, its employees and its agents in providing such services. The Company has entered into employment agreements with certain directors and officers of the Company. See "Management--Employment Agreements and Change in Control Arrangements." On November 6, 1996, the Company entered into the Acquisition Agreement pursuant to which the Company agreed to acquire all the outstanding shares of Prodac from the Prodac Founders for an aggregate consideration of DM 25,000,000, consisting of DM 20,000,000 in cash (plus interest at the rate of 6% per annum from November 6, 1996 through the date of the payment of the acquisition consideration) and shares of MagiNet Common Stock with an aggregate value of DM 5,000,000 based on a 10% discount to the initial public offering price. The Prodac Founders are also entitled to a distribution of approximately DM 600,000 to be paid from Prodac's retained earnings. If the closing of the Offerings occurs after December 31, 1996, the Prodac Founders shall be entitled to any additional retained earnings in excess of such DM 600,000. In addition, the Company will pay up to an aggregate of DM 15,000,000 in cash and MagiNet Common Stock contingent upon Prodac achieving certain financial targets in fiscal 1997, 1998 and 1999. The cash portion of the acquisition consideration will be paid in Deutsche Marks out of the net proceeds of the Offerings based on the applicable exchange rate on the Frankfurt am Main exchange on the closing date of the Offerings. Any increase in the value of the Deutsche Mark relative to the U.S. Dollar will increase the portion of the net proceeds of the Offerings used in connection with the Prodac acquisition and will result in the Company's issuing a greater number of shares of MagiNet Common Stock to the shareholders of Prodac. See "Use of Proceeds," "Dilution," "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" and "Acquisition of Prodac." Prodac leases approximately 41,010 square feet of office and manufacturing space in Cologne, Germany from a civil law partnership consisting of each of the Prodac Founders and their wives. The lease agreement provides for monthly rental payments of DM 79,000 (approximately $52,000), subject to periodic adjustments for inflation based on changes in the Cost of Living Index prepared by Germany's Federal Office of Statistics. The lease expires in December 2008 and provides for automatic one-year extensions thereafter unless terminated in advance of such extension with 6 months notice. See "Acquisition of Prodac." 60 PRINCIPAL STOCKHOLDERS The following table sets forth certain information regarding the beneficial ownership of the Company's Common Stock as of September 30, 1996 and as adjusted to reflect the sale of the 5,500,000 shares of Common Stock offered hereby and the assumed issuance of 280,230 shares of Common Stock in connection with the Company's acquisition of Prodac by (i) each person or entity who is known by the Company to own beneficially 5% or more of the Company's outstanding Common Stock; (ii) each director of the Company; (iii) each of the Named Executive Officers and (iv) all directors and executive officers of the Company as a group.
NUMBER OF PERCENTAGE OF TOTAL SHARES(2) SHARES BENEFICIALLY ------------------------------ NAME AND ADDRESS(1) OWNED(2) BEFORE OFFERING AFTER OFFERING ------------------- ------------------- --------------- -------------- RRE Investors, L.L.C.(3).... 4,726,495 34.3% 24.5% 126 East 56th Street, 22nd Floor New York, NY 10022 Equity-Linked Investors II 1,522,028 11.0% 7.9% (4)......................... c/o Desai Capital Management, Inc. 540 Madison Avenue, 36th Floor New York, NY 10022 Festival Company, Inc. ..... 1,014,685 7.4% 5.3% Wisma Barito Pacific, Tower B Lt. 11, J1 S. Paman Kav. 62-63 Jakarta 11410 Indonesia Pomona Capital, L.P.(5)..... 733,251 5.3% 3.8% 780 Third Avenue New York, NY 10017-7076 Kenneth B. Hamlet(6)........ 238,168 1.7% 1.2% Robert R. Creager(7)........ 432,708 3.1% 2.2% James A. Barth(8)........... 88,843 * * Gordon E. (Ned) Druehl, Jr. ............................ -- -- -- Pang T. Ho, Ph.D.(9) ....... 53,645 * * Reiner Kaesbach(10)......... 140,115 * * Stuart J. Ellman(11)........ 4,726,495 34.3% 24.5% Michael D. Granoff(12)...... 733,251 5.3% 3.8% Michael Ramsay(13).......... 7,500 * * James D. Robinson IV(14).... 4,726,495 34.3% 24.5% Jeffrey A. Bixler(15)....... -- -- -- Eric S. Hass(16)............ 132,826 * * All current executive officers and directors as a group (10 persons)(17)............ 6,420,725 44.8% 32.4%
- -------- * Less than 1%. (1) Unless otherwise indicated, the address for each listed stockholder is c/o MagiNet Corporation, 405 Tasman Drive, Sunnyvale, California 94089. Except as otherwise indicated, and subject to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all shares of Common Stock held by them. (2) Applicable percentage ownership is based on 13,788,931 shares of Common Stock outstanding as of September 30, 1996 and 19,288,931 shares immediately following the completion of the Offerings (assuming no exercise of the Underwriters' over-allotment option), together with applicable options for such stockholder and including the assumed issuance of 280,230 shares of Common Stock to be issued in connection with the Company's acquisition of Prodac within 10 business days after the closing of the Offerings. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities, subject to community property laws, where applicable. Shares of Common Stock subject to options that are presently exercisable or exercisable within 60 days of September 30, 1996 are deemed to be beneficially owned by the person holding such options for the purpose of computing the percentage of ownership of such person but are not treated as outstanding for the purpose of computing the percentage of any other person. To the extent that any shares are issued upon exercise 61 of options or other rights to acquire the Company's capital stock that are presently outstanding or granted in the future or reserved for future issuance under the Company's stock plans, there will be further dilution to new public investors. (3) Includes 1,808,907 shares held by Sunset Partners, L.P. ("Sunset"), 1,591,412 shares held by Sunset Partners II, L.P. ("Sunset II") and 1,326,176 shares held by Sunset Partners III, L.P. ("Sunset III"). RRE Investors, L.L.C. is the general partner of each of Sunset Partners, L.P., Sunset Partners II, L.P. and Sunset Partners III, L.P. (collectively, the "Sunset Partnerships"). Stuart J. Ellman, James D. Robinson III and James D. Robinson IV may exercise voting control over the shares held by the Sunset Partnerships. Stuart J. Ellman and James D. Robinson IV are currently directors of the Company. (4) Rohit Desai may exercise voting control over the shares held by Equity- Linked Investors II. (5) Includes 244,417 shares held by Pomona Capital, L.P. ("Pomona"), 195,534 shares held by SOF Venture Capital, L.P. ("SOF Venture"), 175,980 shares held by SP Offshore Venture Capital, L.P. ("SP Offshore") and 117,320 shares held by SP Venture Capital, L.P. ("SP Venture"). Michael D. Granoff, a director of the Company, is the sole shareholder of Pomona Partners, Inc., which serves as the general partner of SOF Venture, SP Offshore and SP Venture, and which also serves as the general partner of Pomona Associates, L.P., the general partner of Pomona. Mr. Granoff, Francis Janis and Steve Futrell may exercise voting control over the shares held by Pomona, SOF Venture, SP Offshore and SP Venture. (6) Includes 181,757 shares of Common Stock issuable upon exercise of stock options which are presently exercisable or will become exercisable within 60 days of September 30, 1996. Mr. Hamlet is the Company's President and Chief Executive Officer and Chairman of its Board of Directors. (7) Includes 242,708 shares of Common Stock issuable upon exercise of stock options which are presently exercisable or will become exercisable within 60 days of September 30, 1996. Mr. Creager is the Company's founder and Executive Vice President of Corporate Development. (8) Includes (i) 66,667 shares of Common Stock issuable upon exercise of stock options which are presently exercisable or will become exercisable within 60 days of September 30, 1996, (ii) 5,000 shares of Common Stock held by Mr. Barth's wife and (iii) 1,000 shares held by Mr. Barth's son. Mr. Barth is the Company's Executive Vice President and Chief Financial Officer. (9) Includes 29,645 shares of Common Stock issuable upon exercise of stock options which are presently exercisable or will become exercisable within 60 days of September 30, 1996 and 4,000 shares held by Dr. Ho's children. Dr. Ho is the Company's Vice President of Engineering. (10) Upon the Company's delivery of acquisition consideration for Prodac and for so long as the Prodac Founders continue to hold collectively at least 1% of the Company's outstanding Common Stock and serve as managing directors of Prodac, the Prodac Founders have the right to one seat on the Company's Board of Directors to be filled by either of them on an annual, rotating basis. Following the closing of the Offerings, the Company anticipates that Mr. Kaesbach will serve as a member of the Board of Directors for the first such rotation. In connection with the Prodac acquisition, Mr. Kaesbach will initially receive an assumed 140,115 shares of Common Stock, subject to additional issuances in the event Prodac achieves certain financial milestones. In addition, in connection with his employment by Prodac, the Company has agreed to grant Mr. Kaesbach an option to acquire 150,000 shares of Common Stock at an exercise price of $8.00 per share under the 1992 Key Personnel Stock Option Plan, subject to vesting over four years, with 25% of the shares vesting one year after the date of grant and the remaining shares vesting ratably over the succeeding 36 months. (11) Includes 1,808,907 shares held by Sunset, 1,591,412 shares held by Sunset II and 1,326,176 shares held by Sunset III. Mr. Ellman is a member of the Company's Board of Directors and a member of RRE Investors, L.L.C., a limited liability company that serves as general partner of each of the Sunset Partnerships. Mr. Ellman disclaims beneficial ownership of such shares except to the extent of his pecuniary interest therein. (12) Includes 244,417 shares held by Pomona, 195,534 shares held by SOF Venture, 175,980 shares held by SP Offshore and 117,320 shares held by SP Venture. Mr. Granoff, a member of the Company's Board of Directors, is the sole shareholder of Pomona Partners, Inc., the general partner of SOF Venture, SP Offshore and SP Venture and the general partner of Pomona Associates, L.P., which serves as the general partner of Pomona. Mr. Granoff disclaims beneficial ownership of such shares except to the extent of his pecuniary interest therein. (13) Includes 7,500 shares of Common Stock issuable upon exercise of stock options which are presently exercisable or will become exercisable within 60 days of September 30, 1996. Mr. Ramsay is a member of the Company's Board of Directors. (14) Includes 1,808,907 shares held by Sunset, 1,591,412 shares held by Sunset II and 1,326,176 shares held by Sunset III. Mr. Robinson is a member of the Company's Board of Directors and a member of RRE Investors, L.L.C., a limited liability company that serves as general partner of each of the Sunset Partnerships. Mr. Robinson disclaims beneficial ownership of such shares except to the extent of his pecuniary interest therein. (15) Mr. Bixler resigned from the Company effective in December 1995. (16) Includes 46,140 shares held by Mr. Hass individually and 86,686 shares held by Mr. Hass and his wife, as trustees of the Hass Community Property Trust. Mr. Hass resigned from the Company effective in March 1996. (17) Includes 528,277 shares of Common Stock issuable upon exercise of outstanding stock options which are presently exercisable or will become exercisable within 60 days of September 30, 1996. Excludes 132,826 shares beneficially held by Eric S. Hass, who resigned as an officer of the Company effective in March 1996. Includes an assumed 140,115 shares issuable to Reiner Kaesbach in connection with the Company's acquisition of Prodac within 10 business days after the closing of the Offerings. 62 DESCRIPTION OF CAPITAL STOCK GENERAL Upon the completion of the Offerings, the Company will be authorized to issue 45,000,000 shares of Common Stock, $0.001 par value, and 5,000,000 shares of undesignated Preferred Stock, $0.001 par value. The following description of the Company's capital stock does not purport to be complete and is subject to and qualified in its entirety by the Company's Restated Certificate of Incorporation and Bylaws, which are included as exhibits to the Registration Statement of which this Prospectus forms a part, and by the provisions of applicable Delaware law. COMMON STOCK Upon conversion of the Preferred Stock and prior to the issuance of the Common Stock in connection with the Offering and the acquisition of Prodac, there will be 13,508,701 shares of Common Stock outstanding held of record by approximately 90 holders. Holders of Common Stock are entitled to one vote per share on all matters to be voted upon by the stockholders. Holders of Common Stock do not have cumulative voting rights, and, therefore, holders of a majority of the shares voting for the election of directors can elect all of the directors. In such event, the holders of the remaining shares will not be able to elect any directors. Holders of the Common Stock are entitled to receive such dividends as may be declared from time to time by the Board of Directors out of funds legally available therefor, subject to the terms of any existing or future agreements between the Company and its debtholders. The Company has never declared or paid cash dividends on its capital stock, expects to retain future earnings, if any, for use in the operation and expansion of its business, and does not anticipate paying any cash dividends in the foreseeable future. See "Dividend Policy." In the event of the liquidation, dissolution or winding up of the Company, the holders of Common Stock are entitled to share ratably in all assets legally available for distribution after payment of all debts and other liabilities and subject to the prior rights of any holders of Preferred Stock then outstanding. PREFERRED STOCK Effective upon the closing of the Offerings, the Company will be authorized to issue 5,000,000 shares of undesignated Preferred Stock. The Board of Directors has the authority to issue the Preferred Stock in one or more series and to fix the price, rights, preferences, privileges and restrictions thereof, including dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences and the number of shares constituting a series or the designation of such series, without any further vote or action by the Company's stockholders. The issuance of Preferred Stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of delaying, deferring or preventing a change in control of the Company without further action by the stockholders and may adversely affect the market price of, and the voting and other rights of, the holders of Common Stock. The issuance of Preferred Stock with voting and conversion rights may adversely affect the voting power of the holders of Common Stock, including the loss of voting control to others. The Company has no current plans to issue any shares of Preferred Stock. ANTITAKEOVER EFFECTS OF PROVISIONS OF CERTIFICATE OF INCORPORATION AND BYLAWS The Company's Restated Certificate of Incorporation provides that all stockholder actions must be effected at a duly called annual or special meeting and may not be effected by written consent. The Company's Bylaws provide that, except as otherwise required by law, special meetings of the stockholders can only be called pursuant to a resolution adopted by a majority of the Board of Directors, by the chief executive officer of the Company, or by stockholders holding shares in the aggregate entitled to cast not less than 10% of the votes at such meeting. In addition, the Company's Bylaws establish an advance notice procedure for stockholder proposals to be brought before an annual meeting of stockholders, including proposed nominations of persons for election to the Board. Stockholders at an annual meeting may only consider proposals or nominations 63 specified in the notice of meeting or brought before the meeting by or at the direction of the Board of Directors or by a stockholder who was a stockholder of record on the record date for the meeting, who is entitled to vote at the meeting and who has delivered timely written notice in proper form to the Company's Secretary of the stockholder's intention to bring such business before the meeting. The foregoing provisions of the Company's Restated Certificate of Incorporation and Bylaws are intended to enhance the likelihood of continuity and stability in the composition of the Board of Directors and in the policies formulated by the Board of Directors and to discourage certain types of transactions which may involve an actual or threatened change of control of the Company. Such provisions are designed to reduce the vulnerability of the Company to an unsolicited acquisition proposal and, accordingly, could discourage potential acquisition proposals and could delay or prevent a change in control of the Company. Such provisions are also intended to discourage certain tactics that may be used in proxy fights but could, however, have the effect of discouraging others from making tender offers for the Company's shares and, consequently, may also inhibit fluctuations in the market price of the Company's shares that could result from actual or rumored takeover attempts. These provisions may also have the effect of preventing changes in the management of the Company. See "Risk Factors--Effect of Certain Charter Provisions; Antitakeover Effects of Certificate of Incorporation, Bylaws and Delaware Law." EFFECT OF DELAWARE ANTITAKEOVER STATUTE The Company is subject to Section 203 of the Delaware General Corporation Law (the "Antitakeover Law"), which regulates corporate acquisitions. The Antitakeover Law prevents certain Delaware corporations, including those whose securities are listed for trading on the Nasdaq National Market, from engaging, under certain circumstances in a "business combination" with any "interested stockholder" for three years following the date that such stockholder became an interested stockholder. For purposes of the Antitakeover Law, a "business combination" includes, among other things, a merger or consolidation involving the Company and the interested stockholder and the sale of more than ten percent (10%) of the Company's assets. In general, the Antitakeover Law defines an "interested stockholder" as any entity or person beneficially owning 15% or more the outstanding voting stock of the Company and any entity or person affiliated with or controlling or controlled by such entity or person. A Delaware corporation may "opt out" of the Antitakeover Law with an express provision in its original certificate of incorporation or an express provision in its certificate of incorporation or bylaws resulting from amendments approved by the holders of at least a majority of the Company's outstanding voting shares. The Company has not "opted out" of the provisions of the Antitakeover Law. See "Risk Factors--Effect of Certain Charter Provisions; Antitakeover Effects of Certificate of Incorporation, Bylaws and Delaware Law." REGISTRATION RIGHTS After the Offerings, the holders of approximately 4,020,000 shares of Common Stock will be entitled upon expiration of lock-up agreements with the Underwriters to certain rights with respect to the registration of such shares under the Securities Act. Under the terms of the agreement between the Company and the holders of such registrable securities, if the Company proposes to register any of its securities under the Securities Act, either for its own account or for the account of other securityholders exercising registration rights, such holders are entitled to notice of such registration and are entitled to include shares of such Common Stock therein. Holders of registration rights may also require the Company to file a registration statement under the Securities Act at the Company's expense with respect to their shares of Common Stock, and the Company is required to use its best efforts to effect such registration. Further, holders may require the Company to file registration statements on Form S-3 at the Company's expense when such form becomes available for use to the Company. All such registration rights are subject to certain conditions and limitations, including the right of the underwriters of an offering to limit the number of shares to be included in such registration. In addition to the 4,020,000 shares indicated above as being subject to registration rights, the Company has granted certain registration rights to the Prodac Founders with respect to the Prodac Shares and any shares 64 subsequently issued to the Prodac Founders upon achievement of certain financial milestones enumerated in the Acquisition Agreement. See "Acquisition of Prodac." Upon expiration of a one-year lock-up agreement included in the Acquisition Agreement, the Company is obligated to register the Prodac Shares and any subsequently issued shares on a Registration Statement on Form S-3 at the Company's expense. TRANSFER AGENT The Transfer Agent and Registrar for the Common Stock is The First National Bank of Boston. 65 SHARES ELIGIBLE FOR FUTURE SALE Prior to the Offerings, there has been no market for the Common Stock and there is no assurance that a significant public market for the Common Stock will develop or be sustained after the Offerings. Sales of substantial amounts of Common Stock in the public market could adversely affect the market price of the Common Stock and could impair the Company's future ability to raise capital through the sale of its equity securities. Upon completion of the Offerings, the Company will have outstanding 19,288,931 shares of Common Stock based upon shares outstanding as of September 30, 1996. In addition to the 5,500,000 shares of Common Stock offered hereby (assuming no exercise of the Underwriters' over-allotment option), as of the effective date of the Registration Statement (the "Effective Date"), there will be 13,788,431 shares of Common Stock outstanding, including 280,230 shares of Common Stock issued in connection with the acquisition of Prodac, all of which are "restricted" shares (the "Restricted Shares") under the Securities Act of 1933, as amended (the "Securities Act"). Approximately 5,000 Restricted Shares will be eligible for sale immediately following the Effective Date in reliance on Rule 144(k) of the Securities Act. Beginning 90 days after the Effective Date, approximately 31,000 Restricted Shares of Common Stock will become eligible for sale in the public market pursuant to Rule 144 and Rule 701 under the Securities Act. Beginning 180 days after the Effective Date, approximately 9,409,000 additional Restricted Shares of Common Stock subject to lock-up agreements will become eligible for sale in the public market. Of the approximately 9,409,000 Restricted Shares that will become available for sale in the public market beginning 180 days after the Effective Date, approximately 7,411,000 shares will be subject to certain volume and other resale restrictions pursuant to Rule 144. Thereafter, approximately 4,065,000 shares held by existing stockholders will become eligible for sale at various times over a period of less than two years and could be sold earlier if the holders exercise registration rights. In addition, the shares of Common Stock to be issued in connection with the acquisition of Prodac will be subject to certain registration rights beginning one year after the closing of the Offerings. See "Description of Capital Stock--Registration Rights." As of September 30, 1996, options to purchase 1,702,080 shares were outstanding, of which options to purchase approximately 521,933 shares were then exercisable. See "Management--1992 Key Personnel Stock Option Plan." The Company intends to file a Form S-8 registration statement under the Securities Act to register shares reserved for issuance under this stock option plan and upon exercise of outstanding options. Shares of Common Stock issued upon exercise of options after the effective date of the Form S-8 will be available for sale in the public market, subject to Rule 144 volume limitations applicable to affiliates and lock-up agreements. Beginning 180 days after the Effective Date, approximately 802,000 shares issuable upon the exercise of vested options will be eligible for sale. In general, under Rule 144 as currently in effect, an affiliate of the Company, or person (or persons whose shares are aggregated) who has beneficially owned Restricted Shares for at least two years but less than three years, will be entitled to sell in any three-month period a number of shares that does not exceed the greater of (i) 1% of the then outstanding shares of the Common Stock (approximately 185,000 shares immediately after the Offerings) or (ii) the average weekly trading volume during the four calendar weeks immediately preceding the date on which notice of the sale is filed with the Securities and Exchange Commission (the "Commission"). Sales pursuant to Rule 144 are subject to certain requirements relating to manner of sale, notice and availability of current public information about the Company. A person (or persons whose shares are aggregated) who is not deemed to have been an affiliate of the Company at any time during the 90 days immediately preceding the sale and who has beneficially owned his or her shares for at least three years is entitled to sell such shares pursuant to Rule 144(k) without regard to the limitations described above. Under Rule 701, shares issued under certain compensatory stock-based plans, such as the Company's option plan, may be resold under Rule 144 by non-affiliates subject only to the manner of sale requirements, and by affiliates without regard to the two- year holding period requirements, commencing 90 days after the date of the Offerings. 66 CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS FOR NON-U.S. HOLDERS OF COMMON STOCK The following is a general discussion of certain United States federal income and estate tax consequences of the ownership and disposition of Common Stock by a person that, for United States federal income tax purposes, is a non-resident alien individual, a foreign corporation, a foreign partnership or an estate or trust, in each case not subject to U.S. federal income tax on a net income tax basis in respect of income or gain from Common Stock (a "non- U.S. holder"). This discussion is based on the Internal Revenue Code of 1986, as amended, Treasury regulations thereunder, and administrative and judicial interpretations as of the date hereof, all of which may be changed. This discussion does not address all the aspects of U.S. federal income and estate taxation that may be relevant to non-U.S. holders in light of their particular circumstances, or to certain types of holders subject to special treatment under United States federal income tax laws (such as life insurance companies and dealers in securities). Nor does it address tax consequences under the laws of any state, municipality or other taxing jurisdiction or under the laws of any country other than the United States. Prospective holders should consult their own tax advisors about the particular tax consequences to them of holding and disposing of Common Stock. DIVIDENDS Generally, dividends paid to a non-U.S. holder of Common Stock will be subject to United States federal withholding tax at a 30% rate or such lower rate as may be specified by an applicable income tax treaty, unless the dividends are effectively connected with the conduct of a trade or business within the United States (or alternatively are attributable to a United States permanent establishment of such holder, if an applicable income tax treaty so requires as a condition for the non-U.S. holder to be subject to United States income tax on a net income basis in respect of such dividends). Such "effectively connected" dividends, or dividends attributable to a permanent establishment, are subject to tax at rates applicable to United States citizens, resident aliens and domestic United States corporations, and are not generally subject to withholding. Effectively connected dividends received by a non-U.S. corporation may be subject to an additional "branch profits tax" at a 30% rate (or a lower rate under an applicable income tax treaty) when such dividends are deemed repatriated from the United States. Under current U.S. Treasury regulations, dividends paid to an address outside the United States in a foreign country are presumed to be paid to a resident of such country for purposes of the withholding tax. Under current interpretation of U.S. Treasury regulations, the same presumption applies to determine the applicability of a reduced rate of withholding under a tax treaty. Thus, non-U.S. holders receiving dividends at addresses outside the United States are not currently required to file tax forms to obtain the benefit of an applicable treaty rate. Under U.S. Treasury regulations that are proposed to be effective for distributions after 1997 (the "Proposed Regulations"), to claim the benefits of a tax treaty a non-U.S. holder of Common Stock would be required to satisfy applicable certification requirements. In addition, under the Proposed Regulations, in the case of Common Stock held by a foreign partnership, (x) the certification requirement would generally be applied to the partners of the partnership and (y) the partnership would be required to provide certain information. The Proposed Regulations also provide look-through rules for tiered partnerships. It is not certain whether, or in what form, the Proposed Regulations will be adopted as final regulations. If there is excess withholding on a person eligible for a treaty benefit, the person can file for a refund with the United States Internal Revenue Service. GAIN ON DISPOSITION OF COMMON STOCK A non-U.S. holder generally will not be subject to United States federal income tax in respect of gain recognized on a disposition of Common Stock unless (i) the gain is effectively connected with a trade or business of the non-U.S. holder in the United States, (ii) in the case of a non-U.S. holder who is an individual and holds 67 the Common Stock as a capital asset, such holder is present in the United States for 183 or more days in the taxable year of the disposition and certain other conditions are met, (iii) the non-U.S. holder is subject to tax pursuant to the provisions of United States tax law applicable to certain United States expatriates, or (iv) the Company is or has been a "U.S. real property holding corporation" for federal income tax purposes and, if the Common Stock is regularly traded on an established securities market, the non-U.S. holder held, directly or indirectly, at any time during the 5-year period ending on the date of disposition (or such shorter period that such shares were held) more than 5% of the Common Stock. The Company has not been and does not anticipate becoming a "U.S. real property holding corporation" for United States federal income tax purposes. INFORMATION REPORTING AND BACKUP WITHHOLDING TAX Generally, the Company must report to the U.S. Internal Revenue Service the amount of dividends paid, the name and address of the recipient and the amount, if any, of tax withheld. A similar report is sent to the holder. Pursuant to tax treaties or other agreements, the U.S. Internal Revenue Service may make its reports available to tax authorities in the recipient's country of residence. Dividends not subject to withholding tax may be subject to backup withholding if the non-U.S. holder is not an "exempt recipient" and fails to provide a tax identification number and other information to the Company. Under the Proposed Regulations, dividend payments generally will be subject to information reporting and backup withholding unless applicable certification requirements are satisfied. If the proceeds of a disposition of Common Stock are paid over by or through a United States office of a broker, the payment is subject to information reporting and possible backup withholding at a 31% rate unless the disposing holder certifies under penalties of perjury as to his name, address, and non- U.S. holder status or otherwise establishes an exemption. Generally, United States information reporting and backup withholding requirement will not apply to a payment of disposition proceeds if the payment is made outside the United States through a non-United States office of a broker. However, United States information reporting requirements (but not backup withholding) will apply to a payment of disposition proceeds outside the United States if (A) the payment is made through an office outside the United States of a broker that either (i) is a U.S. person, (ii) derives 50% or more of its gross income for certain periods from the conduct of a trade or business in the United States or (iii) is a "controlled foreign corporation" for United States federal income tax purposes and (B) the broker fails to maintain documentary evidence that the holder is a non-U.S. holder or that the holder otherwise is entitled to an exemption. Backup withholding is not an additional tax. Rather, the tax liability of persons subject to backup withholding will be reduced by the amount of tax withheld. If withholding results in an overpayment of taxes, a refund may be obtained. FEDERAL ESTATE TAXES Common Stock held by a non-U.S. holder at the time of death will be included in such holder's gross estate for United States federal estate tax purposes unless an applicable estate tax treaty provides otherwise. 68 UNDERWRITING Under the terms of, and subject to the conditions contained in, the U.S. Underwriting Agreement, the form of which is filed as an exhibit to the Registration Statement (the "Registration Statement") of which this Prospectus forms a part, each of the Underwriters named below (the "U.S. Underwriters"), for whom Lehman Brothers Inc. and Hambrecht & Quist LLC are acting as representatives (the "Representatives"), has severally agreed to purchase from the Company, and the Company has agreed to sell to each U.S. Underwriter, the number of shares of Common Stock set forth opposite the name of such U.S. Underwriter below:
NUMBER OF U. S. UNDERWRITERS SHARES ------------------ --------- Lehman Brothers Inc. ............................................. Hambrecht & Quist LLC............................................. --------- Total........................................................... 4,400,000 ========= Under the terms of, and subject to the conditions contained in, the International Underwriting Agreement, the form of which is filed as an exhibit to the Registration Statement of which this Prospectus forms a part, each of the managers named below (the "International Managers"), for whom Lehman Brothers International (Europe) and Hambrecht & Quist LLC are acting as lead managers (the "Lead Managers"), has severally agreed to purchase from the Company, and the Company has agreed to sell to each International Manager, the number of shares of Common Stock set forth opposite the name of such International Manager below: NUMBER OF INTERNATIONAL MANAGERS SHARES ---------------------- --------- Lehman Brothers International (Europe)............................ Hambrecht & Quist LLC............................................. --------- Total........................................................... 1,100,000 =========
The U.S. Underwriting Agreement and the International Underwriting Agreement (collectively, the "Underwriting Agreements") provide that the obligations of the U.S. Underwriters and the International Managers to purchase shares of Common Stock are subject to certain conditions, and that, if any of the foregoing shares of Common Stock are purchased by the U.S. Underwriters pursuant to the U.S. Underwriting Agreement or by the International Managers pursuant to the International Underwriting Agreement, all the shares of Common Stock agreed to be purchased by either the U.S. Underwriters or the International Managers, as the case may be, pursuant to their respective Underwriting Agreement must be so purchased. The offering price and underwriting discounts and commissions for the U.S. Offering and the International Offering are identical. The closing of the U.S. Offering is a condition to the closing of the International Offering, and the closing of the International Offering is a condition to the closing of the U.S. Offering. The Company has been advised that the U.S. Underwriters and the International Managers propose to offer the shares of Common Stock directly to the public initially at the public offering price set forth on the cover page of this Prospectus, and to certain selected dealers (who may include the U.S. Underwriters and the International Managers) at such public offering price less a selling concession not in excess of $ per share. The selected dealers may reallow a concession not in excess of $ per share to certain brokers and dealers. 69 After the initial public offering, the public offering price, the concession to selected dealers and reallowance may be changed by the Representative and the Lead Managers. Prior to the Offerings, there has been no public market for the Common Stock. There can be no assurance that an active trading market will develop for shares of the Common Stock or as to the price at which shares of the Common Stock may trade in the public market from time to time subsequent to the Offerings. The initial public offering price for the Common Stock will be determined by negotiations among the Company, the Representatives and the Lead Managers. Among the factors to be considered in determining the initial public offering price of the Common Stock, in addition to prevailing market conditions, will be the financial and operating history and condition of the Company, the Company's business and financial prospects, the prospects for the industry in which the Company operates, the recent market prices of securities of companies in businesses similar to that of the Company and other relevant factors. The Company has granted to the U.S. Underwriters and the International Managers options to purchase up to an aggregate of 660,000 and 165,000 additional shares of Common Stock, respectively, exercisable solely to cover over-allotments, at the initial price to the public less the aggregate underwriting discounts, shown on the cover page of this Prospectus. Either or both options may be exercised at any time up to 30 days after the date of this Prospectus. To the extent that the U.S. Underwriters or International Managers exercise such options, each of the U.S. Underwriters or International Managers, as the case may be, will be committed, subject to certain conditions, to purchase a number of the additional shares of Common Stock proportionate to such U.S. Underwriter's or International Manager's initial commitment. The U.S. Underwriters and the International Managers have entered into an Agreement between U.S. Underwriters and International Managers pursuant to which such U.S. Underwriter has agreed that as part of the distribution of the shares (plus any of the shares to cover over-allotments) of Common Stock offered in the U.S. Offering, (i) it is not purchasing any of such shares for the account of anyone other than a U.S. Person (as defined below) and (ii) it has not offered or sold, and will not offer, sell, resell or deliver, directly or indirectly, any of such shares or distribute any Prospectus relating to the U.S. Offering to anyone other than a U.S. Person. In addition, pursuant to the same Agreement, each International Manager has agreed that, as part of the distribution of the shares (plus any of the shares to cover over-allotments) of Common Stock offered in the International Offering, (i) it is not purchasing any of such shares for the account of a U.S. Person and (ii) it has not offered or sold, and will not offer, sell, resell or deliver, directly or indirectly, any of such shares or distribute any Prospectus relating to the International Offering to any U.S. Person. Each International Manager has also agreed that it will offer to sell shares only in compliance with all relevant requirements of any applicable laws. The foregoing limitations do not apply to stabilization transactions or to certain other transactions specified in the Underwriting Agreements and the Agreement Between U.S. Underwriters and International Managers, including (i) certain purchases and sales between the U.S. Underwriters and International Managers, (ii) certain offers, sales, resales, deliveries or distributions to or through investment advisors or other persons exercising investing discretion, (iii) purchases, offers or sales by a U.S. Underwriter who is also acting as an International Manager or by an International Manager who is also acting as a U.S. Underwriter and (iv) other transactions specifically approved by the Representatives and the Lead Managers. As used herein, "U.S. Person" means any resident or citizen of the United States or Canada and its provinces, any corporation or other entity created or organized in or under the laws of the United States or Canada and its provinces or any estate or trust the income of which is subject to United States or Canadian federal income taxation regardless of the source of its income. The term "United States" means the United States of America (including the District of Columbia) and its territories, its possessions and other areas subject to its jurisdiction. Pursuant to the Agreement Between U.S. Underwriters and International Managers, sales may be made between the U.S. Underwriters and the International Managers of such number of shares of Common Stock as may be mutually agreed upon. The price of any shares so sold shall be the public offering price as then in effect for Common Stock being sold by the U.S. Underwriters and the International Managers, less an amount not greater than the selling concession allocable to such Common Stock. To the extent there are sales between the 70 U.S. Underwriters and the International Managers pursuant to the Agreement Between U.S. Underwriters and International Managers, the number of shares initially available for sale by the U.S. Underwriters or by the International Managers may be more or less than the amount appearing on the cover page of this Prospectus. Each International Manager has represented and agreed that (i) it has not offered or sold, and will not offer or sell, in the United Kingdom, by means of any document, any shares of the Common Stock other than to persons whose ordinary business it is to buy or sell shares or debentures, whether as principal or agent (except under circumstances which do not constitute an offer to the public within the meaning of the Companies Act 1985); (ii) it has complied and will comply with all applicable provisions of the Financial Services Act 1986 with respect to anything done by it in relation to the Common Stock in, from or otherwise involving the United Kingdom; and (iii) it has only issued or passed on, and will only issue and pass on to any person in the United Kingdom, any document received by it in connection with the issue of the Common Stock if that person is of a kind described in Article 11(3) of the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1995 or is a person to whom the document may otherwise be lawfully issued or passed on. Purchasers of the shares offered pursuant to the Offerings may be required to pay stamp taxes and other charges in accordance with the laws and practices of the country to purchase in addition to the initial public offering price set forth on the cover page hereof. The Company has agreed to indemnify the U.S. Underwriters and the International Managers against certain liabilities, including liabilities under the Securities Act or to contribute to payments that U.S. Underwriters and the International Managers may be required to make in respect thereof. In connection with the Offerings, the officers and directors of the Company, certain other securityholders and the Company have agreed, with certain exceptions, not to sell or otherwise dispose of any shares of Common Stock for a period of 180 days from the date of this Prospectus, in each case, without first obtaining the written consent of Lehman Brothers. The Representatives have informed the Company that the U.S. Underwriters do not intend to confirm sales of Common Stock to any accounts over which they exercise discretionary authority. The U.S. Underwriters and International Managers have reserved for sale, at the initial public offering price, up to 5% of the shares of Common Stock offered hereby for certain employees, customers and vendors of the Company, and certain other individuals and entities, who have expressed an interest in purchasing such shares of Common Stock in the Offerings. The number of shares available for sale to the general public will be reduced to the extent such persons purchase such reserved shares. Any reserved shares not so purchased will be offered by the U.S. Underwriters and International Managers to the general public on the same basis as other shares offered hereby. LEGAL MATTERS Certain legal matters with respect to the legality of the issuance of the shares of Common Stock offered hereby will be passed upon for the Company by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California, and for the U.S. Underwriters and International Managers by Brobeck, Phleger & Harrison LLP, Palo Alto, California. As of the date of this Prospectus, a member of Wilson Sonsini Goodrich & Rosati, Professional Corporation, and investment partnerships of which members of such firm are partners beneficially own 17,457 shares of the Company's Common Stock. 71 EXPERTS The consolidated financial statements of MagiNet Corporation at December 31, 1994 and 1995 and for each of the three years in the period ended December 31, 1995, appearing in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein and in the Registration Statement, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. The consolidated financial statements of PRODAC Prozessdatentechnik GmbH at December 31, 1994 and 1995 and for each of the three years in the period ended December 31, 1995 appearing in this Prospectus and Registration Statement have been audited by Ernst & Young GmbH, independent auditors, as set forth in their report thereon appearing elsewhere herein and in the Registration Statement, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission") a Registration Statement on Form S-1 (the "Registration Statement") under the Securities Act with respect to the securities offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto. For further information with respect to the Company and the Common Stock, reference is made to the Registration Statement and the exhibits and schedules filed as a part thereof. Statements contained in this Prospectus as to the contents of any contract or any other document referred to are not necessarily complete. In each instance, reference is made to the copy of such contract or document filed as an exhibit to the Registration Statement, and each such statement is qualified in all respects by such reference. The Registration Statement, including exhibits and schedules thereto, may be inspected without charge at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of the Commission located at Seven World Trade Center, 13th Floor, New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such materials may be obtained from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission maintains a World Wide Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. The address of the Commission's Web site is http://www.sec.gov. The Company intends to furnish its stockholders with annual reports containing financial statements audited by independent accountants and with quarterly reports containing unaudited summary financial information for each of the first three quarters of each fiscal year. 72 MAGINET CORPORATION INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- MagiNet Corporation Consolidated Financial Statements: Report of Ernst & Young LLP, Independent Auditors...................... F-2 Consolidated Balance Sheets............................................ F-3 Consolidated Statements of Operations.................................. F-4 Consolidated Statement of Stockholders' Equity......................... F-5 Consolidated Statements of Cash Flows.................................. F-6 Notes to Consolidated Financial Statements............................. F-7 PRODAC Prozessdatentechnik GmbH Consolidated Financial Statements: Report of Ernst & Young GmbH, Independent Auditors..................... F-19 Consolidated Balance Sheets............................................ F-20 Consolidated Statements of Operations.................................. F-21 Consolidated Statements of Shareholders' Deficiency.................... F-22 Consolidated Statements of Cash Flows.................................. F-23 Notes to Consolidated Financial Statements............................. F-24 MagiNet Corporation Unaudited Pro Forma Condensed Combined Financial Statements: Unaudited Pro Forma Condensed Combined Financial Information........... F-35 Unaudited Pro Forma Condensed Combined Balance Sheets.................. F-37 Unaudited Pro Forma Condensed Combined Statements of Operations........ F-38 Notes to Unaudited Pro Forma Condensed Combined Financial Statements... F-40
F-1 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Stockholders MagiNet Corporation We have audited the accompanying consolidated balance sheets of MagiNet Corporation as of December 31, 1994 and 1995, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of MagiNet Corporation at December 31, 1994 and 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. Ernst & Young LLP Palo Alto, California February 16, 1996 F-2 MAGINET CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, ------------------ UNAUDITED PRO FORMA STOCKHOLDERS' EQUITY SEPTEMBER 30, SEPTEMBER 30, 1994 1995 1996 1996 -------- -------- ------------- ------------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents.............. $ 10,532 $ 18,672 $ 7,251 Short-term investments.... 429 151 -- Accounts receivable....... 347 1,191 2,081 Other current assets...... 351 624 1,679 -------- -------- -------- Total current assets....... 11,659 20,638 11,011 Video systems, net......... 10,704 20,961 31,683 Property and equipment, net....................... 638 1,376 1,745 Prepaid royalties.......... 876 1,095 1,478 Other assets............... 122 2,470 3,567 -------- -------- -------- Total assets............... $ 23,999 $ 46,540 $ 49,484 ======== ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term debt........... $ 374 $ 97 $ 288 Accounts payable.......... 2,327 1,738 1,999 Accrued compensation...... 54 340 650 Accrued interest.......... 16 1,016 392 Other accrued liabilities.............. 1,137 2,905 2,825 -------- -------- -------- Total current liabilities.. 3,908 6,096 6,154 Deferred tax liability..... -- 544 1,211 Long-term debt............. -- 24,900 25,829 Minority interests in consolidated subsidiaries.............. 167 389 321 Commitments................ Stockholders' equity: Preferred stock, no par value; 12,122 shares authorized, issuable in series: 7,766 shares, 9,005 shares and 10,909 shares issued and outstanding at December 31, 1994 and 1995, and September 30, 1996, respectively, all of which are convertible; aggregate liquidation preference of $56,572 at September 30, 1996 (pro forma: $.001 par value, 5,000 shares authorized, none outstanding)........ 32,593 40,231 53,241 $ -- Common Stock, no par value; 20,000 shares authorized; 276 shares, 307 shares and 508 shares issued and outstanding at December 31, 1994 and 1995, and September 30, 1996, respectively (pro forma: $.001 par value, 45,000 shares authorized, 11,417 shares issued and outstanding)............. 9 23 286 11 Additional paid-in capital.................. -- -- -- 53,516 Warrants to purchase common stock............. -- 101 101 101 Accumulated deficit....... (12,678) (25,474) (37,008) (37,008) Cumulative translation adjustment............... -- (270) (651) (651) -------- -------- -------- -------- Total stockholders' equity................... 19,924 14,611 15,969 $ 15,969 -------- -------- -------- ======== === Total liabilities and stockholders' equity...... $ 23,999 $ 46,540 $ 49,484 ======== ======== ========
See accompanying notes. F-3 MAGINET CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, -------------------------- ------------------- 1993 1994 1995 1995 1996 ------- ------- -------- -------- --------- (UNAUDITED) Revenue....................... $ 395 $ 2,342 $ 8,689 $ 5,655 $ 12,048 Costs and expenses: Direct costs................ 294 1,156 3,731 2,586 6,232 Depreciation and amortization............... 171 957 3,682 2,564 4,747 Operations expenses......... 464 2,876 3,108 2,161 1,514 Selling, general and administrative............. 1,497 4,294 8,420 5,647 6,941 Research and development.... 1,320 856 1,247 890 1,599 ------- ------- -------- -------- --------- Total costs and expenses...... 3,746 10,139 20,188 13,848 21,033 ------- ------- -------- -------- --------- Operating loss................ (3,351) (7,797) (11,499) (8,193) (8,985) Interest expense.............. (49) (319) (1,297) (517) (2,710) Interest income and other, net.......................... 21 66 306 138 627 ------- ------- -------- -------- --------- Loss before income taxes and minority interest in net losses of consolidated subsidiaries................. (3,379) (8,050) (12,490) (8,572) (11,068) Provision for income taxes.... -- -- (554) (423) (681) Minority interest in net losses of consolidated subsidiaries................. -- 124 248 204 215 ------- ------- -------- -------- --------- Net loss...................... $(3,379) $(7,926) $(12,796) $ (8,791) $ (11,534) ======= ======= ======== ======== ========= Pro forma net loss per share.. $ (1.03) $ (0.93) Shares used in computation of pro forma net loss per share........... 12,392 12,407
See accompanying notes. F-4 MAGINET CORPORATION CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (IN THOUSANDS)
PREFERRED STOCK COMMON STOCK CUMULATIVE TOTAL ---------------- ------------- ACCUMULATED TRANSLATION STOCKHOLDERS' SHARES AMOUNT SHARES AMOUNT WARRANTS DEFICIT ADJUSTMENT EQUITY ------- -------- ------ ------ -------- ----------- ----------- ------------- BALANCES AT DECEMBER 31, 1992................... 590 $ 2,018 285 $ 3 $ -- $ (1,373) $ -- $ 648 Issuance of Series B Convertible Preferred Stock (net of issuance costs of $61)......... 889 3,939 -- -- -- -- -- 3,939 Repurchase of Common Stock................. -- -- (21) -- -- -- -- -- Net loss............... -- -- -- -- -- (3,379) -- (3,379) ------- -------- --- ---- ----- -------- ----- ------- BALANCES AT DECEMBER 31, 1993................... 1,479 5,957 264 3 -- (4,752) -- 1,208 Exercise of stock options............... -- -- 12 6 -- -- -- 6 Issuance of Series C Convertible Preferred Stock (net of issuance costs of $1,656)...... 6,287 26,636 -- -- -- -- -- 26,636 Net loss............... -- -- -- -- -- (7,926) -- (7,926) ------- -------- --- ---- ----- -------- ----- ------- BALANCES AT DECEMBER 31, 1994................... 7,766 32,593 276 9 -- (12,678) -- 19,924 Exercise of stock options............... -- -- 31 14 -- -- -- 14 Warrants to purchase Common Stock issued in conjunction with senior debt financing............. -- -- -- -- 101 -- -- 101 Issuance of Series D Convertible Preferred Stock (net of issuance costs of $1,038)...... 1,239 7,638 -- -- -- -- -- 7,638 Translation adjustment............ -- -- -- -- -- -- (270) (270) Net loss............... -- -- -- -- -- (12,796) -- (12,796) ------- -------- --- ---- ----- -------- ----- ------- BALANCES AT DECEMBER 31, 1995................... 9,005 40,231 307 23 101 (25,474) (270) 14,611 Exercise of stock options (unaudited)... -- -- 136 133 -- -- -- 133 Issuance of Common Stock (unaudited)..... -- -- 65 130 -- -- -- 130 Issuance of Series D Convertible Preferred Stock (net of issuance costs of $314) (unaudited)........... 1,904 13,010 -- -- -- -- -- 13,010 Translation adjustment (unaudited)........... -- -- -- -- -- -- (381) (381) Net loss (unaudited)... -- -- -- -- -- (11,534) -- (11,534) ------- -------- --- ---- ----- -------- ----- ------- BALANCES AT SEPTEMBER 30, 1996 (unaudited)... 10,909 $ 53,241 508 $286 $ 101 $(37,008) $(651) $15,969 ======= ======== === ==== ===== ======== ===== =======
See accompanying notes. F-5 MAGINET CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, -------------------------- ------------------- 1993 1994 1995 1995 1996 ------- ------- -------- -------- --------- (UNAUDITED) OPERATING ACTIVITIES Net loss.................. $(3,379) $(7,926) $(12,796) $ (8,791) $(11,534) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation............. 153 851 3,212 2,222 4,335 Amortization of prepaid royalties............... 18 106 479 342 412 Amortization of Senior Secured Note financing costs................... -- -- 145 37 348 Interest on convertible subordinated debt....... -- 192 -- -- -- Minority interests....... -- (124) (248) (204) (215) Changes in operating assets and liabilities: Accounts receivable...... (46) (301) (844) (762) (890) Other current assets..... (90) (261) (273) (280) (1,055) Other assets............. 43 (105) (303) (437) (1,445) Accounts payable and other accrued liabilities............. 1,548 1,431 3,009 1,193 534 ------- ------- -------- -------- --------- Total adjustments........ 1,626 1,789 5,177 2,111 2,024 ------- ------- -------- -------- --------- Net cash used in operating activities.... (1,753) (6,137) (7,619) (6,680) (9,510) ------- ------- -------- -------- --------- INVESTING ACTIVITIES Redemption (purchase) of available-for-sale securities............... -- (429) 278 429 151 Investment in video systems.................. (2,590) (8,670) (13,262) (10,838) (14,826) Investment in property and equipment................ (501) (262) (1,215) (558) (871) Nonrefundable prepaid royalty.................. -- -- (698) -- (905) ------- ------- -------- -------- --------- Net cash used in investing activities............... (3,091) (9,361) (14,897) (10,967) (16,451) ------- ------- -------- -------- --------- FINANCING ACTIVITIES Proceeds from debt........ -- 374 6,000 6,000 1,120 Payment on debt........... (257) -- (6,277) (6,261) -- Proceeds (payment) of note payable to stockholders.. 1,400 (1,400) -- -- -- Proceeds from Senior Secured Notes, net of issuance costs........... -- -- 22,811 22,811 -- Proceeds from Convertible Subordinated Debt........ -- 9,000 -- -- -- Issuance of Preferred Stock, net of issuance costs.................... 3,939 17,444 7,638 -- 13,010 Issuance of Common Stock.. -- 6 14 14 263 Proceeds from minority investors................ -- 291 470 470 147 ------- ------- -------- -------- --------- Net cash provided by financing activities..... 5,082 25,715 30,656 23,034 14,540 ------- ------- -------- -------- --------- Net increase (decrease) in cash and cash equivalents.............. 238 10,217 8,140 5,387 (11,421) Cash and cash equivalents at beginning of period... 77 315 10,532 10,532 18,672 ------- ------- -------- -------- --------- Cash and cash equivalents at end of period......... $ 315 $10,532 $ 18,672 $ 15,919 $ 7,251 ======= ======= ======== ======== ========= SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES Issuance of Series C Preferred Stock for cancellation of convertible subordinated debt plus accrued interest................. $ -- $ 9,192 $ -- $ -- $ -- ======= ======= ======== ======== ========= Warrants issued in connection with Senior Secured Notes............ $ -- $ -- $ 101 $ 101 $ -- ======= ======= ======== ======== ========= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Interest paid............. $ 18 $ 319 $ 187 $ 174 $ 2,986 ======= ======= ======== ======== =========
See accompanying notes. F-6 MAGINET CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND NATURE OF OPERATIONS In August 1995, MagiNet Corporation (the Company) was created as a holding company for all of its operating subsidiaries. The Company provides advanced in-room interactive video entertainment and information systems to hotels in the Pacific Rim, Middle East, Europe, and Africa. On August 8, 1996, the Board of Directors authorized the Company to proceed with an Initial Public Offering (IPO) of Common Stock and increased the authorized number of shares of Common Stock to 45,000,000. Upon completion of the IPO, all of the Company's 10,908,878 shares of convertible Preferred Stock outstanding as of September 30, 1996 will be converted into 10,908,878 shares of Common Stock. The pro forma effect of these conversions has been reflected on the accompanying unaudited pro forma balance sheet assuming they had occurred at September 30, 1996. On August 8, 1996, the Board of Directors approved the reincorporation of the Company in the State of Delaware, which is expected to be effective in November 1996. BASIS OF PRESENTATION The consolidated financial statements include the accounts of MagiNet Corporation and its subsidiaries primarily located in the Pacific Rim. All significant intercompany balances and transactions have been eliminated. In order for the Company to remain in compliance with the amended senior note covenants (see Note 3) through September 1997, the Company must achieve its operating plan and/or raise new capital. If the Company is unable to achieve the revenue element of its operating plan it may have to substantially reduce its level of spending in order to remain in compliance with the amended senior note covenants through September 1997. Management believes it can achieve its operating plan and/or raise additional equity. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. INTERIM FINANCIAL DATA The interim financial data for the nine months ended September 30, 1995 and 1996 is unaudited; however, in the opinion of management, the interim data includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for the interim periods ended September 30, 1995, and 1996. Results for the nine months ended September 30, 1996 are not necessarily indicative of the results that may be expected for the entire year ending December 31, 1996. NET LOSS PER SHARE Except as noted below, historical net loss per share is computed using the weighted average number of common shares outstanding. Common equivalent shares from stock options, convertible Preferred Stock and warrants are excluded from the computation as their effect is antidilutive, except that, pursuant to the Securities and Exchange Commission Staff Accounting Bulletins, common and common share equivalent shares issued during the period beginning 12 months prior to the initial filing of the Company's Registration Statement at prices below the assumed public offering price have been included in the calculation as if they were outstanding for all periods presented (using the treasury stock method and the assumed public offering price for stock options and warrants and the if-converted method for convertible Preferred Stock). F-7 MAGINET CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED) Historical net loss per share information is as follows:
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ------------------------- ------------------ 1993 1994 1995 1995 1996 ------- ------- ------- -------- -------- Net loss per share.......... $(0.73) $(1.72) $(2.77) $(1.90) $(2.49) Shares used in computing historical net loss per share (in thousands)....... 4,598 4,606 4,626 4,620 4,641
Pro forma net loss per share has been computed as described above and also gives effect to the conversion of convertible preferred shares not included above that will automatically convert upon completion of the Company's initial public offering (using the if-converted method). Such shares are included from the original date of issuance. REVENUE RECOGNITION AND CONCENTRATION OF CREDIT RISK The Company installs and operates its video systems at no cost to the hotels, and issues invoices to the hotels and recognizes revenue, less an allowance for denials, each month based on reported viewings of hotel guests. The Company also sells its video systems to hotels in markets where it does not expect to maintain operations. The Company performs ongoing credit evaluations of its installed hotels and does not generally require collateral. Reserves are maintained for potential credit losses and such losses have been within management's expectations. FOREIGN CURRENCY TRANSLATION The Company's foreign subsidiaries use as their functional currency the local currencies of the countries in which they operate. Their assets and liabilities are translated into U.S. dollars at the exchange rates in effect at the balance sheet date. Revenues and expenses are translated at average rates of exchange prevailing during the period. The resulting cumulative translation adjustments are disclosed as a separate component of stockholders' equity. Foreign currency transaction gains and losses were not material in any of the comparison periods. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS The Company adopted in 1996, FASB Statement No.121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" (FAS 121), which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. FAS 121 also addresses the accounting for long-lived assets that are expected to be disposed of. The adoption of FAS 121 did not have a material impact on the Company. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. F-8 MAGINET CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED) CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS The Company invests its surplus cash principally in money market funds and certificates of deposit. Those investments maturing within 90 days after purchase are classified as cash equivalents. Those maturing after 90 days are classified as short-term investments. Short-term investments are stated at cost which approximates market. All marketable securities held by the Company are classified as available-for-sale. The Company has not realized any material gains or losses on such investments during the nine months ended September 30, 1995 and 1996, and during the years ended December 31, 1993, 1994 and 1995. The Company's marketable investments consist of the following:
DECEMBER 31, --------------- SEPTEMBER 30, 1994 1995 1996 ------- ------- ------------- (IN THOUSANDS) Cash........................................... $ 908 $ 2,623 $ 1,814 Money market................................... 3,496 12,768 4,306 Certificates of deposit........................ 599 3,432 1,131 U.S. treasury obligation....................... 3,000 -- -- U.S. commercial paper.......................... 2,958 -- -- ------- ------- ------- Total.......................................... $10,961 $18,823 $ 7,251 ======= ======= ======= Disclosed as: Cash and cash equivalents.................... $10,532 $18,672 $ 7,251 Short-term investments....................... 429 151 -- ------- ------- ------- Total........................................ $10,961 $18,823 $ 7,251 ======= ======= =======
During the nine months ended September 30, 1995 and 1996, there were no gross cash flows from the purchases of available-for-sale securities. During the nine months ended September 30, 1995 and 1996 gross cash flows from the maturities of available-for-sale securities were $429,000 and $151,000, respectively. Gross cash flows from the purchases of available-for-sale securities were none, $429,000 and $151,000 for the years ended December 31, 1993, 1994 and 1995. Gross cash flows from the maturities of available-for-sale securities were none for the years ended December 31, 1993 and 1994, and $429,000 for the year ended December 31, 1995. At September 30, 1996, the Company held approximately $256,000 of restricted cash as collateral against an equipment lease line of credit and $500,000 of certificates of deposit restricted as collateral for letters of credit which expire on December 31, 1996. DEFERRED DEBT FINANCING COSTS Debt financing costs are deferred and amortized over the term of the related debt. The Company's deferred financing costs are included within other assets and consist of the following:
DECEMBER 31, SEPTEMBER 30, 1995 1996 ------------ ------------- (IN THOUSANDS) Deferred financing costs incurred in connection with the August 1995 issuance of Senior Secured Notes, net of amortization of $145 at December 31, 1995 and $493 at September 30, 1996.......................................... $2,045 $1,697 ====== ======
F-9 MAGINET CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED) VIDEO SYSTEMS Video systems are stated at cost, net of accumulated depreciation, and consist of the following:
DECEMBER 31, ----------------------- SEPTEMBER 30, 1994 1995 1996 ------- -------------- ------------- (IN THOUSANDS) Installed video systems.............. $ 7,592 $20,845 $31,097 Uninstalled video systems and installations-in-progress........... 3,935 3,674 7,871 ------- ------- ------- 11,527 24,519 38,968 Less accumulated depreciation........ (823) (3,558) (7,285) ------- ------- ------- $10,704 $20,961 $31,683 ======= ======= =======
Installed video systems consist of equipment and installation costs at hotel locations and are depreciated using the straight-line method over the lesser of the life of the contract or five years. Uninstalled video systems and installations-in-progress consist primarily of purchased components. PROPERTY AND EQUIPMENT Property and equipment is stated at cost, less accumulated depreciation and consist of the following:
DECEMBER 31, -------------------- SEPTEMBER 30, 1994 1995 1996 ---- -------------- ------------- (IN THOUSANDS) Computer and video testing equipment.... $703 $1,758 $2,578 Furniture and fixtures.................. 117 277 328 ---- ------ ------ 820 2,035 2,906 Less accumulated depreciation........... (182) (659) (1,161) ---- ------ ------ $638 $1,376 $1,745 ==== ====== ======
Property and equipment is depreciated using the straight-line method over an estimated useful life of between two and seven years. 2. TECHNOLOGY AGREEMENTS Pursuant to an agreement in 1992, the Company has the exclusive right to use certain technology in the design and manufacture of its product, as defined in the agreement, for use in specific countries principally in the Pacific Rim, Middle East and Africa. The owner of the technology became a related party pursuant to the purchase of Preferred Stock in 1993. Such owner held a seat on the Company's Board of Directors until December 1995. As of September 30, 1996, such owner's share of total outstanding voting securities had declined to approximately 3%. In addition, pursuant to a technology license agreement entered into in December 1995, the Company acquired the exclusive right to use another technology in the design and manufacture of its product for use outside of North America. The Company has paid cumulative nonrefundable royalties of $2,000,000 as of September 30, 1996 in prepayments against future royalty obligations. Future royalty obligation terms range from a certain percentage of net revenues less hotel commissions (subject to reduction upon certain conditions) generated from use of the F-10 MAGINET CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED) technology to a flat fee per room per month where the technology is utilized. Additional nonrefundable royalty prepayments in the amount of $3,000,000 will be due in the fourth quarter of 1996, $1,000,000 in 1997 and $1,500,000 in 1998, based on performance of the vendor in providing additional enhancements to the technology. 3. DEBT Short-term debt represents notes payable on borrowings by the Company's majority-owned joint venture in Japan from the joint venture's minority partner, and the current portion of liabilities for an equipment lease line of credit in Korea. Interest on the Japanese note accrues at 9.5%. Both interest and principal on the Japanese note are payable after the joint venture is profitable for at least one quarter. Long-term debt consists of Senior Secured Notes issued by the Company on August 15, 1995, and an amount borrowed pursuant to a $2.8 million equipment lease line of credit in South Korea which was established in May, 1996. The equipment lease line of credit is partially denominated in Korean won and partially in U.S. dollars. The balance due on the equipment lease line was $962,000 at September 30, 1996 and is to be repaid over 5 years at LIBOR plus 1.42% on the U.S. portion and at South Korean Basic Lending Rate on the South Korean portion. The interest rate at September 30, 1996 was approximately 8% per annum. The amount of restricted cash collateralized against the South Korean equipment lease line was $256,000 at September 30, 1996. The $24,900,000 Senior Secured Notes are payable in full on August 15, 2000 and bear interest at 11.5% per annum. Interest is payable semiannually on February 15 and August 15. The Company has pledged, as collateral to the holders of Senior Secured Notes, between 66% and 100% of its shares in each of its wholly owned subsidiaries and majority-owned joint ventures. The Senior Secured Notes covenants restrict payment of dividends and contains specific financial covenants. At September 30, 1996 the Company was not in compliance with a financial covenant but has obtained a waiver from the Secured Senior Note holders. In addition the Senior Secured Note financial covenants have been amended in exchange for the elimination of a 100,000 share adjustment provision in outstanding warrants and a commitment to issue new warrants for up to 1,000,000 additional shares at an exercise price of $7 per share if the Company does not raise additional equity capital of at least $40 million by March 31, 1997, such as an IPO. The carrying value of the Senior Secured Notes approximates fair value at September 30, 1996. The fair value of the Company's Senior Secured Notes was estimated using discounted cash flow analysis, based on the incremental borrowing rates currently available to the Company for borrowings with similar terms and maturity. 4. COMMITMENTS The Company leases its headquarters and foreign sales and support facilities and certain equipment under noncancelable operating leases. At September 30, 1996, minimum lease commitments are as follows:
OPERATING LEASES -------------- (IN THOUSANDS) Three months ending December 31, 1996...................... $147 Years ending December 31, 1997............................. 324 1998..................................................... 159 1999..................................................... 27 2000..................................................... 8 ---- Total minimum payments required............................ $665 ====
F-11 MAGINET CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED) Rent expense was approximately $235,000 and $454,000 for the nine months ended September 30, 1995 and 1996 and $59,000, $222,000 and $320,000 for the years ended December 31, 1993, 1994 and 1995, respectively. 5. STOCKHOLDERS' EQUITY PREFERRED STOCK Preferred Stock authorized and outstanding at September 30, 1996 is as follows:
NUMBER OF SHARES ---------------------- AGGREGATE ISSUED AND LIQUIDATION AUTHORIZED OUTSTANDING AMOUNT PREFERENCE ---------- ----------- ------- ----------- (IN THOUSANDS, EXCEPT SHARES) Designated series (all convert- ible): A........................... 150,000 150,000 $ 277 $ 300 B........................... 1,328,930 1,328,927 5,680 5,980 C........................... 7,500,000 6,287,093 26,636 28,292 D........................... 3,142,858 3,142,858 20,648 22,000 ---------- ---------- ------- ------- 12,121,788 10,908,878 $53,241 $56,572 ========== ========== ======= =======
All series of Preferred Stock are convertible at the stockholder's option at any time into Common Stock on a one-for-one basis (subject to adjustment for certain dilutive events). All series have voting rights equal to the voting rights of the shares of Common Stock they would have upon conversion. Conversion is automatic upon the closing of an underwritten public offering with aggregate offering proceeds exceeding $25,000,000. At September 30, 1996, the Company had reserved 10,908,878 shares of Common Stock to be issued to stockholders upon conversion of the outstanding Preferred Stock. Holders of Preferred Stock are entitled to noncumulative dividends (per share) as follows: Series A............................................................ $0.16 Series B............................................................ $0.36 Series C............................................................ $0.36 Series D............................................................ $0.56
Dividends, if declared, shall be set apart for payment and paid first to holders of Series D Preferred Stock, second to holders of Series C Preferred Stock, and third ratably to the holders of Series A and B Preferred Stock. No dividends shall be declared on Common Stock until all holders of Preferred Stock have been paid in full. As of September 30, 1996 no dividends have been declared. In the event of a liquidation or winding up of the Company, holders of Preferred Stock are entitled to the following liquidation preferences (per share): Series A............................................................ $2.00 Series B............................................................ $4.50 Series C............................................................ $4.50 Series D............................................................ $7.00
The liquidation preferences are to be paid in full, so long as proceeds are available, first to the holders of Series D Preferred Stock, second to the holders of Series C Preferred Stock, third to the holders of Series B F-12 MAGINET CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED) Preferred Stock, and fourth to the holders of Series A Preferred Stock. If any assets of the Company remain after payment of the full liquidation preferences of the holders of Preferred Stock, they will be distributed among the holders of Series B, Series C, and Series D Preferred Stock and Common Stock in proportion to the shares of Common Stock then held by them and the shares of Common Stock which they then have the right to acquire upon the conversion of their Preferred Stock. STOCK OPTION PLANS The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related Interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under FASB Statement No. 123, "Accounting for Stock-Based Compensation" (FAS 123), requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. During 1992, the Company adopted two stock option plans, the Key Personnel Stock Option Plan and the 1992 Stock Option Plan (together, the Plans). The Plans provide that options for 3,800,000 shares of Common Stock may be granted to employees, officers, directors, consultants and promotional representatives of the Company. The Plans allow for both incentive and nonqualified stock options to be granted to employees. The Plans provide that the exercise price for incentive stock options will be no less than the fair market value of the Company's Common Stock (no less than 85% of fair market value for nonqualified stock options), as determined by the board of directors at the date of grant. These options have five year terms and become exercisable ratably over three to four years. The effect of applying the FASB statement's minimum value method to the Company's stock option awards did not result in pro forma net loss and loss per share that are materially different from historical amounts reported. Therefore, such pro forma information is not separately presented herein. Future pro forma net income and earnings per share results may be materially different from actual amounts reported. F-13 MAGINET CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED) Aggregate option activity is as follows:
OUTSTANDING STOCK OPTIONS ---------------------------- WEIGHTED AVERAGE NUMBER OF PRICE PER SHARES SHARE -------------- ------------ Balance at December 31, 1992................... 49,000 $ 0.45 Granted...................................... 58,300 $ 0.46 -------------- Balance at December 31, 1993................... 107,300 $ 0.46 Granted...................................... 149,750 $ 0.83 Exercised.................................... (12,469) $ 0.45 Canceled..................................... (34,331) $ 0.46 -------------- Balance at December 31, 1994................... 210,250 $ 0.72 Granted...................................... 951,450 $ 1.12 Exercised.................................... (30,913) $ 0.47 Canceled..................................... (118,337) $ 0.89 -------------- Balance at December 31, 1995................... 1,012,450 $ 1.09 Granted...................................... 962,824 $ 2.97 Exercised.................................... (135,810) $ 0.97 Canceled..................................... (137,384) $ 0.99 -------------- Balance at September 30, 1996.................. 1,702,080 $ 2.17 ==============
As of September 30, 1996, 1,918,728 shares of Common Stock reserved under the Plans were available for granting of additional options. The price range at September 30, 1996 of options outstanding under the Plans is $0.45 to $8.00. The weighted average contractual life of the outstanding options at September 30, 1996 is 46 months. On August 8, 1996, the Board of Directors approved the 1996 Director's Stock Option Plan and reserved a total of 200,000 shares of the Company's authorized but unissued Common Stock for issuance to non-employee directors upon the exercise of options granted. Options must be granted with exercise prices at least equal to the fair market value of the Common Stock on the date of grant as determined by the Company's Board of Directors. On August 8, 1996, the Board of Directors approved the 1996 Employee Stock Purchase Plan and reserved a total of 200,000 shares of the Company's authorized but unissued Common Stock for issuance thereunder. At September 30, 1996, the Company has reserved 4,020,808 shares of authorized Common Stock for issuance under all of the Company's stock option plans. F-14 MAGINET CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED) The following table summarizes the number and weighted average price per share of exercisable stock options under the Plans.
EXERCISABLE STOCK OPTIONS --------------------------- WEIGHTED AVERAGE NUMBER OF PRICE PER SHARES SHARE ------------- ------------ December 31, 1993............................... 23,748 $ 0.47 December 31, 1994............................... 44,432 $ 0.50 December 31, 1995............................... 314,187 $ 0.96 September 30, 1996.............................. 521,933 $ 1.37
WARRANTS As of September 30, 1996, warrants to purchase 2,520,396 shares of Common Stock were outstanding at exercise prices of $0.50 to $7.00 per share. As of September 30, 1996, warrants to purchase 1,184,444 shares of Series C Preferred Stock were outstanding at an exercise price of $4.50 per share. At September 30, 1996, the Company has reserved 3,704,840 shares of authorized Common Stock pursuant to these warrants. All warrants are exercisable at the option of the holders on or before dates ranging from March 1, 1998 through September 29, 1999, or earlier upon effectiveness of an initial public offering. 6. INCOME TAXES The provision for income taxes is comprised of the following:
YEAR ENDED DECEMBER 31, NINE MONTHS ------------------------- ENDED 1993 1994 1995 SEPTEMBER 30, 1996 -------- -------- ------- ------------------- (IN THOUSANDS) State Current...................... $ -- $ -- $ 2 $ 4 Foreign Current...................... -- -- 8 10 Deferred..................... -- -- 544 667 -------- -------- ------- ---- $ -- $ -- $ 554 $681 ======== ======== ======= ====
F-15 MAGINET CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED) The Company's effective provision for income taxes from continuing operations differs from the amount computed by applying the federal statutory rate of 34% due to the following:
YEAR ENDED DECEMBER 31, NINE MONTHS ------------------------- ENDED 1993 1994 1995 SEPTEMBER 30, 1996 ------- ------- ------- ------------------ (IN THOUSANDS) Expected benefit at federal statutory rate............. $(1,149) $(2,695) $(4,162) $(3,690) Net operating losses not benefitted................. 1,149 2,695 4,162 3,690 State taxes................. -- -- 2 4 Foreign withholding taxes... -- -- 544 667 Other, net.................. -- -- 8 10 ------- ------- ------- ------- Provision for income taxes.. $ -- $ -- $ 554 $ 681 ======= ======= ======= =======
For the years ended December 31, 1993, 1994 and 1995 and the nine months ended September 30, 1996 the Company had pre-tax losses from foreign operations of $408,000, $1,239,000, $3,990,000 and $3,628,000, respectively. As of December 31, 1995, the Company had federal net operating loss carryforwards and research and development tax credits of approximately $16,200,000 and $130,000, respectively. The net operating loss and credit carryforwards will expire at various dates beginning in 2007 through 2011. The Company had state net operating loss carryforwards of approximately $9,500,000 as of December 31, 1995, which will expire at various dates beginning in 1997 through 2002. The Company also had foreign net operating loss carryforwards from various taxing authorities of approximately $5,800,000 at December 31, 1995. The principal portion of the foreign net operating loss carryforwards will expire at various dates beginning in 1999 through 2000. Utilization of the federal and state net operating losses and credits may be subject to a substantial annual limitation due to the "change in ownership" provisions of the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of net operating losses and credits before utilization. F-16 MAGINET CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED) Significant components of the Company's deferred tax assets for federal, state and foreign income taxes are as follows:
YEAR ENDED DECEMBER 31, NINE MONTHS ------------------------ ENDED 1994 1995 SEPTEMBER 30, 1996 ----------- ----------- ------------------ (IN THOUSANDS) Deferred tax assets: Federal and state net operating losses........... $ 3,450 $ 6,090 $ 8,620 Foreign net operating losses..................... 540 1,890 3,324 Research credit carryforwards.............. 150 200 220 Capitalized research & development................ 90 130 170 Video systems reserves...... 520 600 590 Other....................... 50 90 85 ----------- ----------- -------- Total deferred tax assets... 4,800 9,000 13,009 Valuation allowance for deferred tax assets........ (4,800) (9,000) (13,009) ----------- ----------- -------- Net deferred tax assets..... -- -- -- ----------- ----------- -------- Deferred tax liabilities: Foreign withholding taxes... -- (544) (1,211) ----------- ----------- -------- Net deferred tax liability.. $ -- $ (544) $ (1,211) =========== =========== ========
Due to the Company's lack of earnings history, the net deferred tax asset has been fully offset by a valuation allowance. The valuation allowance increased by $1,300,000 and $3,000,000 in 1993 and 1994, respectively. F-17 MAGINET CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED) 7. GEOGRAPHIC DATA Geographic information for the years ended December 31, 1993, 1994 and 1995 and the nine months ended September 30, 1996 is presented in the following table. Identifiable assets are those that can be directly associated with a particular geographic area.
YEAR ENDED DECEMBER 31, NINE MONTHS -------------------------- ENDED 1993 1994 1995 SEPTEMBER 30, 1996 ------- ------- -------- ------------------ (IN THOUSANDS) Net revenue United States.............. $ -- $ -- $ -- $ 146 Pacific Rim................ 395 2,342 8,520 11,000 Other...................... -- -- 169 902 ------- ------- -------- -------- $ 395 $ 2,342 $ 8,689 $ 12,048 ======= ======= ======== ======== Operating loss United States.............. $(3,111) $(6,763) $ (5,637) $ (3,772) Pacific Rim................ (240) (941) (3,763) (2,877) Other...................... -- (10) (508) (828) Intercompany elimination... -- (83) (1,591) (1,508) ------- ------- -------- -------- $(3,351) $(7,797) $(11,499) $ (8,985) ======= ======= ======== ======== Identifiable assets United States.............. $ 4,752 $23,925 $ 49,266 $ 54,456 Pacific Rim................ 1,050 6,308 22,689 32,675 Other...................... -- 15 1,701 5,673 Intercompany elimination... (1,091) (6,249) (27,116) (43,320) ------- ------- -------- -------- $ 4,711 $23,999 $ 46,540 $ 49,484 ======= ======= ======== ========
8. EVENTS SUBSEQUENT TO DATE OF AUDITOR'S REPORT In November 1996, the Company signed a definitive agreement to acquire all of the outstanding shares of Prodac Prozessdatentechnik GmbH (Prodac). Pursuant to the agreement, following the closing of an equity offering of at least $40 million by January 10, 1997 and subsequent to the Board of Directors approval of the acquisition within ten days of the minimum equity offering, MagiNet will pay approximately 25.8 million Deutsche Marks (DM) in stock and cash. In addition the shareholders/founders of Prodac will be eligible to receive as compensation DM 5 million in cash and stock in each of 1997, 1998 and 1999 based on the achievement of annual financial and performance milestones. The merger will be accounted for using the purchase method of accounting. F-18 REPORT OF ERNST & YOUNG GMBH, INDEPENDENT AUDITORS Board of Directors PRODAC Prozessdatentechnik GmbH. We have audited the accompanying consolidated balance sheets of PRODAC Prozessdatentechnik GmbH (a German Limited Liability Company) and subsidiaries as of December 31, 1994 and 1995, and the related consolidated statements of operations, shareholders' deficiency and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of PRODAC Prozessdatentechnik GmbH and subsidiaries at December 31, 1994 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1995 in conformity with accounting principles generally accepted in the United States of America. Ernst & Young GmbH Dusseldorf, Germany August 30, 1996 F-19 PRODAC PROZESSDATENTECHNIK GMBH AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN DM THOUSANDS)
DECEMBER 31, -------------- SEPTEMBER 30, 1994 1995 1996 ------ ------ ------------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents...................... 300 857 353 Accounts receivable, net (Note 3).............. 1,750 2,867 6,051 Prepaid expenses............................... 34 65 30 Other current assets........................... 116 674 697 ------ ------ ------ Total current assets............................. 2,200 4,463 7,131 Inventory (Note 4)............................... 1,131 3,187 3,380 Video systems: Cost of systems................................ 20,200 28,786 40,409 Less accumulated depreciation.................. 7,428 12,386 17,922 ------ ------ ------ 12,772 16,400 22,487 Property and equipment: Machinery and equipment........................ 50 60 60 Office furniture and equipment................. 2,611 2,514 3,073 ------ ------ ------ 2,661 2,574 3,133 Less accumulated depreciation.................. 1,724 1,607 1,964 ------ ------ ------ 937 967 1,169 Deferred tax asset, net (Note 8)................. -- -- 1,409 ------ ------ ------ Total assets..................................... 17,040 25,017 35,576 ====== ====== ====== LIABILITIES AND SHAREHOLDERS' DEFICIENCY Current liabilities: Bank overdrafts................................ -- -- 1,058 Accounts payable............................... 785 3,909 4,353 Accrued compensation........................... 331 725 1,109 Accrued income taxes........................... 76 230 2,129 Other accrued liabilities...................... 1,323 1,791 2,042 Current portion of long term debt (Note 7)..... 4,177 6,076 7,253 ------ ------ ------ Total current liabilities........................ 6,692 12,731 17,944 Accrued pension liability (Note 12).............. 368 434 486 Long term debt (Note 7).......................... 11,163 16,709 23,965 Commitments (Note 5) Shareholders' deficiency: Registered capital............................. 1,000 1,000 1,000 Retained earnings--restricted.................. -- 500 500 Accumulated deficit............................ (2,206) (6,478) (8,297) Cumulative translation adjustment.............. 23 121 (22) ------ ------ ------ Shareholders' deficiency......................... (1,183) (4,857) (6,819) ------ ------ ------ Total liabilities and shareholders' deficiency... 17,040 25,017 35,576 ====== ====== ======
See accompanying notes. F-20 PRODAC PROZESSDATENTECHNIK GMBH AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN DM THOUSANDS)
NINE MONTHS YEAR ENDED ENDED DECEMBER 31, SEPTEMBER 30, ---------------------- -------------- 1993 1994 1995 1995 1996 ------ ------ ------ ------ ------ (UNAUDITED) Revenue................................ 12,269 13,836 16,879 11,777 19,238 Costs and expenses: Direct costs......................... 6,792 6,623 9,557 6,779 8,966 Depreciation and amortization........ 2,516 3,965 5,479 3,734 5,749 Operating, selling, general and administrative...................... 3,906 3,674 4,590 2,700 4,526 ------ ------ ------ ------ ------ Total costs and expenses............... 13,214 14,262 19,626 13,213 19,241 ------ ------ ------ ------ ------ Operating loss......................... (945) (426) (2,747) (1,436) (3) Interest expense, net.................. 1,176 1,384 1,713 1,166 1,933 Foreign exchange (gain) loss........... (99) 146 23 -- (216) Other (income) expense, net............ (866) (585) (892) (426) (561) ------ ------ ------ ------ ------ Loss before income taxes............... (1,156) (1,371) (3,591) (2,176) (1,159) Provision (benefit) for income taxes: Current.............................. 12 68 181 138 2,069 Deferred............................. (51) -- -- -- (1,409) ------ ------ ------ ------ ------ (39) 68 181 138 660 ------ ------ ------ ------ ------ Net loss............................... (1,117) (1,439) (3,772) (2,314) (1,819) ====== ====== ====== ====== ======
See accompanying notes. F-21 PRODAC PROZESSDATENTECHNIK GMBH AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIENCY (IN DM THOUSANDS)
TOTAL RETAINED CUMULATIVE SHAREHOLDERS' REGISTERED EARNINGS-- ACCUMULATED TRANSLATION EQUITY CAPITAL RESTRICTED DEFICIT ADJUSTMENT (DEFICIENCY) ---------- ---------- ----------- ----------- ------------- BALANCE AT JANUARY 1, 1993................... 260 -- 844 -- 1,104 Capital contribution... 740 -- -- -- 740 Net loss............... -- -- (1,117) -- (1,117) Dividends.............. -- -- (494) -- (494) Foreign currency translation adjustment............ -- -- -- (20) (20) ----- --- ------ ---- ------ BALANCE AT DECEMBER 31, 1993................... 1,000 -- (767) (20) 213 Net loss............... -- -- (1,439) -- (1,439) Foreign currency translation adjustment............ -- -- -- 43 43 ----- --- ------ ---- ------ BALANCE AT DECEMBER 31, 1994................... 1,000 (2,206) 23 (1,183) Net loss............... -- -- (3,772) -- (3,772) Transfer to Retained Earnings--Restricted.. -- 500 (500) -- -- Foreign currency translation adjustment............ -- -- -- 98 98 ----- --- ------ ---- ------ BALANCE AT DECEMBER 31, 1995................... 1,000 500 (6,478) 121 (4,857) Net loss (unaudited)... -- -- (1,819) -- (1,819) Foreign currency translation adjustment (unaudited)........... -- -- -- (143) (143) ----- --- ------ ---- ------ BALANCE AT SEPTEMBER 30, 1996 (unaudited)............ 1,000 500 (8,297) (22) (6,819) ===== === ====== ==== ======
See accompanying notes. F-22 PRODAC PROZESSDATENTECHNIK GMBH AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN DM THOUSANDS)
NINE MONTHS YEAR ENDED ENDED DECEMBER 31, SEPTEMBER 30, ---------------------- --------------- 1993 1994 1995 1995 1996 ------ ------ ------ ------ ------- (UNAUDITED) OPERATING ACTIVITIES Net loss............................. (1,117) (1,439) (3,772) (2,314) (1,819) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization...... 2,516 3,965 5,479 3,734 5,749 Deferred taxes..................... (51) -- -- -- (1,409) Exchange gain (loss)............... (99) 146 23 -- (216) Changes in operating assets and liabilities: Accounts receivable.............. 977 47 (1,117) (1,330) (3,184) Inventory........................ (970) 523 (2,056) (752) (193) Prepaid expenses and other current assets.................. 482 467 (589) (1,215) 12 Accounts payable, accrued and other liabilities............... 489 (1,759) 4,206 5,321 4,088 ------ ------ ------ ------ ------- Net cash provided by operating activities.......................... 2,227 1,950 2,174 3,444 3,028 INVESTING ACTIVITIES Purchase of property, plant, and equipment, net...................... (76) (269) (468) (241) (557) Purchase and manufacture of video systems............................. (4,375) (8,438) (8,669) (5,205) (11,481) Sale of investments.................. -- 133 -- -- -- ------ ------ ------ ------ ------- Net cash used in investing activities.......................... (4,451) (8,574) (9,137) (5,446) (12,038) FINANCING ACTIVITIES Proceeds from issuance of new debt... 4,617 9,040 12,175 6,546 13,752 Repayment of debt.................... (1,778) (3,026) (4,730) (3,550) (5,319) Capital contribution from shareowners......................... 740 -- -- -- -- Dividends paid....................... (494) -- -- -- -- ------ ------ ------ ------ ------- Net cash provided by financing activities.......................... 3,085 6,014 7,445 2,996 8,433 Effect of exchange rate changes on cash................................ 120 (102) 75 73 73 ------ ------ ------ ------ ------- Net increase (decrease) in cash...... 981 (712) 557 1,067 (504) Cash and cash equivalents at beginning of period................. 31 1,012 300 300 857 ------ ------ ------ ------ ------- Cash and cash equivalents at end of period.............................. 1,012 300 857 1,367 353 ====== ====== ====== ====== =======
See accompanying notes. F-23 PRODAC PROZESSDATENTECHNIK GMBH AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED) 1. ORGANIZATION OF BUSINESS AND BASIS OF PRESENTATION ORGANIZATION AND NATURE OF OPERATIONS PRODAC Prozessdatentechnik GmbH (the "Company" or "PRODAC") was merged effective January 1, 1993, with Protronic Electronicgerate GmbH with an original capitalization of TDM 260 ("TDM" is thousands of Deutsche Mark). In 1993, the shareowners contributed an additional TDM 740 in capital to bring the registered capital to DM 1.0 million. In 1991 the Company purchased a 17% interest in Hogodata Deutschland GmbH, located in Bad Wiessee, Germany. The Company sold its investment in June 1994 for a net book value of TDM 133. The Company formed a subsidiary, PRODAC Hotelvideo-Communicationssystems Ltd., ("PRODAC Ltd.") located in Bedford, UK, in 1992 whereby it obtained a 75% ownership interest. PRODAC Ltd. is included in the consolidated financial statements. Also in 1992, the Company founded a subsidiary, PRODAC Hotelvideosysteme Vertriebs-GmbH ("PRODAC Austria") located in Vienna, Austria and originally obtained a 75% ownership interest. In 1996, the Company acquired the remaining 25% of PRODAC Austria for TOS 100 (TDM 15), ("TOS" is thousands of Austrian Schilling). PRODAC Austria is included in the consolidated financial statements. The Company is one of the leading providers to the hospitality industry in Europe of interactive video entertainment and information systems. The Company develops, manufactures and installs its own scheduled broadcast and interactive video entertainment and information systems. On November 6, 1996, the shareowners and directors have entered into an agreement with MagiNet Corporation for the sale of the Company. The Company's continued level of operations is dependent upon continuing to grow its business and obtaining additional financing for that growth. BASIS OF PRESENTATION The accompanying financial statements have been prepared in accordance with United States generally accepted accounting principles ("U.S. GAAP"). The Company maintains its financial records in accordance with the German Commercial Code, which represents generally accepted accounting principles in Germany ("German GAAP"). Generally accepted accounting principles in Germany vary in certain respects from U.S. GAAP. Accordingly, the Company has recorded certain adjustments in order that these financial statements be in accordance with U.S. GAAP. INTERIM FINANCIAL DATA The interim financial information for the nine months ended September 30, 1995 and 1996 is unaudited, however, in the opinion of management, the interim data included all adjustments, consisting only of normal F-24 PRODAC PROZESSDATENTECHNIK GMBH AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED) recurring adjustments, necessary for a fair presentation of the results for the interim periods ended September 30, 1995 and 1996. Results for the nine months ended September 30, 1996 are not necessarily indicative of the results that may be expected for the entire year ending December 31, 1996. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its majority owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. CASH EQUIVALENTS All highly liquid investments purchased with an original maturity of three months or less are considered cash equivalents. REVENUE RECOGNITION The Company owns, installs and operates its video systems in hotels primarily in Germany, the United Kingdom and Austria and issues invoices to hotels and recognizes revenue, less an allowance for denials, each month based on reported viewings. The Company recognizes revenue on video systems it sells directly to distributors upon shipment. Revenues for direct sales to hotels are recognized upon installation. The Company then subsequently enters into agreements with the hotels to supply video services similar to that above. CONCENTRATION OF CREDIT RISK The Company performs ongoing credit evaluations of its installed hotels and generally requires no collateral. Reserves are maintained for potential credit losses and such losses have been within management's expectations. FOREIGN CURRENCY TRANSLATION The Company's foreign subsidiaries use as their functional currency the local currencies of the countries in which they operate. Their assets and liabilities are translated into Deutsche Mark at the exchange rates in effect at the balance sheet date. Revenues and expenses are translated at average rates of exchange prevailing during the period. The resulting cumulative translation adjustments are disclosed as a separate component of shareholders' deficiency. INVENTORY Inventories are stated at the lower of cost or market, with cost principally determined on an average basis. Goods awaiting installation in hotels are classified as finished goods until installation is complete. While the Company does directly sell a portion of its inventory, this inventory is not segregated until a sales contract has been signed and the level of inventory that will be recovered within the next year is not ascertainable at the balance sheet date. F-25 PRODAC PROZESSDATENTECHNIK GMBH AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED) PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation is computed on the straight-line method for financial statement purposes based on the following estimated useful lives: Machinery and equipment......................................... 5 to 8 years Office furniture and equipment.................................. 3 to 5 years Purchased software.............................................. 3 to 5 years
VIDEO SYSTEMS Video systems are stated at historical cost and/or cost to produce equipment plus costs to install the system at hotel locations. Video systems are depreciated using the straight-line method over five years. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. INCOME TAXES The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes", which has been applied for all periods presented. Under this method, deferred tax assets and liabilities are based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the period that includes the enactment date. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying value of financial instruments such as cash, accounts receivable and accounts payable approximate their fair value based on the short-term maturities of these instruments. The carrying value of bank debt approximates fair value based on quoted market prices for the same or similar issues as well as the current rates offered to the Company. The Company uses forward exchange contracts and currency swaps to manage its exposure to fluctuations in foreign currency exchange rates. The fair values of forward exchange contracts, which approximate their carrying amount, are estimated based on quoted market prices of comparable contracts. F-26 PRODAC PROZESSDATENTECHNIK GMBH AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED) 3. TRADE ACCOUNTS RECEIVABLE Trade accounts receivable consisted of the following:
DECEMBER 31, -------------- SEPTEMBER 30, 1994 1995 1996 ------ ------ ------------- (IN DM THOUSANDS) Trade accounts receivable...................... 1,967 3,185 6,582 Reserve for doubtful accounts.................. (217) (318) (531) ------ ------ ----- 1,750 2,867 6,051 ====== ====== =====
4. INVENTORY Inventory of the following:
DECEMBER 31, ------------- SEPTEMBER 30, 1994 1995 1996 ------ ------ ------------- (IN DM THOUSANDS) Raw materials.................................... 1,099 1,598 2,693 Work in process and finished goods............... 32 1,589 687 ------ ------ ----- 1,131 3,187 3,380 ====== ====== =====
5. COMMITMENTS GERMAN FACILITIES The Company leases its facilities in Germany from a related party, Kasbach & Wirt GbR, which is owned by the same share-owners of the Company. The Company's lease agreement expires in 2008. The lease provides for minimum monthly rental payments of TDM 79 per month and is subject to a cost of living adjustment. In addition to the minimum rental, the Company pays taxes, insurance and maintenance relating to the leased property. The Company has an option at the end of the current lease to renew the lease on a yearly basis. The agreement is treated as an operating lease. Rental expense for this lease was TDM 948 for each of the years ending December 31, 1993, 1994, and 1995 and TDM 711 for the nine months ended September 30, 1995 and 1996, respectively. As the Company is currently unable to utilize all of the facility, it has entered into several sublease agreements with various clients. Rental income from these sublease agreements was TDM 308, TDM 218, and TDM 345, in 1993, 1994, and 1995 and TDM 228 and TDM 277 for the nine months ended September 30, 1995 and 1996, respectively. F-27 PRODAC PROZESSDATENTECHNIK GMBH AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED) Future minimum lease payments for the above described facilities due to a related party and future minimum lease payments due from clients under noncancelable operating subleases with initial or remaining terms in excess of one year consisted of the following at September 30, 1996:
FUTURE FUTURE MINIMUM MINIMUM LEASE SUBLEASE NET FUTURE PAYMENTS PAYMENTS MINIMUM DUE TO DUE FROM LEASE RELATED PARTY CLIENTS PAYMENTS ------------- -------- ---------- (IN DM THOUSANDS) Three months ending December 31, 1996........ 237 (83) 154 Years ending December 31, 1997....................................... 948 (326) 622 1998....................................... 948 (279) 669 1999....................................... 948 (125) 823 2000....................................... 948 (8) 940 2001....................................... 948 (8) 940 Thereafter................................... 6,636 (55) 6,581 ------ ---- ------ 11,613 (884) 10,729 ====== ==== ======
OTHER COMMITMENTS The Company leases certain technical and office equipment. Lease terms generally range up to 3 years. Rental expense was TDM 189, TDM 182, and TDM 226, in 1993, 1994, and 1995 and TDM 149 and TDM 194 for the nine months ended September 30, 1995 and 1996, respectively. Future minimum lease payments under noncancelable operating leases with initial or remaining terms in excess of one year consisted of the following at September 30, 1996:
OPERATING LEASES ----------------- (IN DM THOUSANDS) Three months ending December 31, 1996...................... 72 Years ending December 31, 1997..................................................... 193 1998..................................................... 61 1999..................................................... 6 --- 332 ===
6. FINANCIAL INSTRUMENTS The Company uses forward exchange contracts and currency swaps to manage its exposure to fluctuations in foreign currency exchange rates. These contracts generally involve the exchange of one currency for another at a future date. At September 30, 1996, the Company had a notional principal amount of approximately TDM 789 in contracts to buy foreign currency in the future. The carrying value at December 31, 1994 and 1995 and September 30, 1996 approximated fair value. F-28 PRODAC PROZESSDATENTECHNIK GMBH AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED) 7. DEBT SHORT TERM BORROWINGS AND BANK OVERDRAFTS The Company has established short-term secured overdraft facilities under which the Company and its subsidiaries could borrow up to DM 2.6 million. Substantially all of the facilities are denominated in Deutsche Mark. The weighted average interest rate on amounts outstanding at September 30, 1996 was 6.73%. As of September 30, 1996, the Company had available approximately DM 1.5 million under these facilities. LONG TERM DEBT Long term debt consists of the following:
DECEMBER 31, ------------- SEPTEMBER 30, 1994 1995 1996 ------ ------ ------------- (IN DM THOUSANDS) Bank borrowings: Sale and leaseback............................. 14,978 22,517 31,108 Term loans..................................... 362 268 110 ------ ------ ------ 15,340 22,785 31,218 Current portion thereof.......................... 4,177 6,076 7,253 ------ ------ ------ 11,163 16,709 23,965 ====== ====== ======
The Company enters into financing arrangements with various banks whereby the video systems are sold to the bank and subsequently leased back over a period of 54 to 80 months. The amount available for financing is based on the estimated cash flow from equipment installation. The current portfolio bears interest rates ranging from 8.2% to 13.3%. At the end of the lease term, the Company is required to repurchase the equipment for a predetermined residual value. The asset is pledged as security for the lease. Generally, for statutory purposes the sale and leaseback financing arrangement is treated as a sale, whereas for U.S. GAAP purposes the transaction is treated as a financing. Under U.S. GAAP the funds received are recorded as an obligation and equipment is recorded on the books of the Company. The obligation is reduced through the lease payments using the effective interest method. Interest paid totalled TDM 896, TDM 1,298, and TDM 1,575 during the years ended December 31, 1993, 1994, and 1995 and TDM 1,116 and TDM 1,538 during the nine months ended September 30, 1995 and 1996, respectively. F-29 PRODAC PROZESSDATENTECHNIK GMBH AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED) Scheduled maturities of long term debt at September 30, 1996 (assuming no further borrowings) are as follows:
(IN DM THOUSANDS) Three months ending December 31, 1996...................... 2,137 Years ending December 31, 1997..................................................... 7,014 1998..................................................... 6,649 1999..................................................... 5,428 2000..................................................... 4,000 Thereafter................................................. 5,990 ------ 31,218 ======
8. INCOME TAXES The Company and its consolidated subsidiaries each file separate tax returns in accordance with the tax laws in the respective countries. Under German corporate tax law, taxes on income are composed of corporate taxes and trade taxes and effective January 1, 1995 an additional surtax. For financial reporting purposes, the Company and its consolidated subsidiaries calculate their respective tax liabilities on a separate return basis which are combined in the accompanying consolidated financial statements. Additionally, corporation tax rates vary as to whether earnings are reinvested or distributed. Current corporation income taxes were computed on the basis that dividends will not be distributed. Deferred taxes have been provided at rates assuming non-distribution of earnings. The provision (benefit) for income taxes consisted of the following:
YEAR ENDED NINE MONTHS DECEMBER 31, ENDED --------------- SEPTEMBER 30, 1993 1994 1995 1996 ---- ---- ---- ------------- (IN DM THOUSANDS) Current......................................... 12 68 181 2,069 Deferred........................................ (51) -- -- (1,409) --- --- --- ------ (39) 68 181 660 === === === ======
The Company's statutory tax rates ranged between 56% and 58% for the years ended December 31, 1993, 1994 and 1995 and September 30, 1996, respectively. F-30 PRODAC PROZESSDATENTECHNIK GMBH AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED) The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities are presented below:
DECEMBER 31, -------------- SEPTEMBER 30, 1994 1995 1996 ------ ------ ------------- (IN DM THOUSANDS) Deferred tax assets: Sale and leaseback obligation................ 6,729 10,922 16,820 Net operating loss carryforwards............. 51 157 395 ------ ------ ------ 6,780 11,079 17,215 Deferred tax liabilities: Property and equipment....................... 164 146 100 Video systems................................ 5,503 7,508 10,883 Other........................................ 73 385 413 ------ ------ ------ 5,740 8,039 11,396 ------ ------ ------ 1,040 3,040 5,819 Less valuation allowance..................... (1,040) (3,040) (4,410) ------ ------ ------ Net deferred tax asset......................... -- -- 1,409 ====== ====== ======
The Company paid income taxes in Germany of TDM 157, TDM 115, and TDM 96 in 1993, 1994, and 1995 and TDM 73 and TDM 81 during the nine months ended September 30, 1995 and 1996, respectively. As of December 31, 1995, the Company has temporary differences which it believes that there is substantial doubt as to the future realization of a portion of its net deferred tax asset. Therefore the Company has provided a valuation allowance for the amounts currently estimated to be unrealizable. As of December 31, 1995, the Company's subsidiary in the United Kingdom had available cumulative tax loss carry-forwards for income tax purposes of approximately TDM 666. Under current UK tax laws, these loss carryforwards may be used to offset the subsidiary's future taxable income. The Company paid no income taxes in the UK during 1993, 1994, and 1995 or the nine months ended September 30, 1996. The Company currently believes that substantial doubt exists as to the future realization of this deferred tax benefit and has therefore provided a full valuation allowance on the deferred tax asset. As of December 31, 1995, the Company's subsidiary in Austria had available cumulative tax loss carry-forwards for income tax purposes of approximately TDM 128. Under current Austrian tax laws, there is a restriction on the use of these loss carryforwards in 1996 and 1997. From 1998 onwards, these losses can be carryforward indefinitely and may be used to offset the subsidiary's future taxable income. The Company paid no income taxes in Austria during the nine months ended September 30, 1996 or in 1995, 1994, and 1993. The Company currently believes that substantial doubt exists as to the future realization of this deferred tax benefit and has therefore provided a full valuation allowance on the deferred tax asset. 9. CONTINGENCIES The Company is subject to legal proceedings and claims which arise in the ordinary course of business. In the opinion of management, the ultimate resolution of such legal proceedings and claims will not have a material effect on the consolidated financial position and results of operations of the Company. F-31 PRODAC PROZESSDATENTECHNIK GMBH AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED) 10. REGISTERED CAPITAL The Company is a limited liability company (hereafter "GmbH") under German law. Shareholders are generally not liable for the Company's obligations, except to the extent of their capital investment. Registered capital of a GmbH is not in the form of shares and does not represent negotiable securities. The minimum capital requirement for a GmbH is TDM 50. Capital contributions represent additional contributions made by the shareholders in the form of cash or conversion of debt. During 1995, the Company declared that TDM 500 of retained earnings would not be considered for distribution of dividends. The Company does have the opportunity to reverse this restriction in the future. 11. RELATED PARTY TRANSACTIONS LOANS BY DIRECTORS At September 30, 1996, the Company has a liability to its shareowners and directors totalling TDM 129 relating to unpaid bonuses in 1991 and 1992 and related accrued interest. These loans bear interest at 8% per annum. Loan balances outstanding to its shareowners and directors at December 31, 1993, 1994, and 1995 were TDM 120, TDM 129, and TDM 129 respectively. Interest charged on these loans was TDM 9 in both 1994 and 1995. No interest was charged in 1993 or 1996. In 1994 the Company paid interest of TDM 9. 12. EMPLOYEE BENEFIT PLAN The Company's defined benefit pension plan covers the two general managers, who are also the two share-owners. Benefits are based on a monthly pension benefit of DM 7.000 upon retirement with certain death benefits attached. It is the Company's policy to fund the plan through an insurance contract with periodic premium payments. Premium payments were TDM 40, TDM 81, and TDM 81, in 1993, 1994, and 1995, and TDM 59 for the nine months ended September 30, 1996, respectively. The following table sets forth the funded status and amount recognized for the Company's defined benefit pension plan in the consolidated balance sheets:
DECEMBER 31, -------------- SEPTEMBER 30, 1994 1995 1996 ------ ------ ------------- (IN DM THOUSANDS) Actuarial present value of accumulated benefit obligation: Vested.................................... 410 459 503 Nonvested................................. 108 113 124 ------ ------ --- 518 572 627 ====== ====== === Projected benefit obligation................ 518 572 627 Plan assets at fair value................... 183 206 209 ------ ------ --- Projected benefit obligation in excess of plan assets................................ 335 366 418 Unrecognized net gain....................... 33 68 68 ------ ------ --- Accrued pension cost........................ 368 434 486 ====== ====== ===
F-32 PRODAC PROZESSDATENTECHNIK GMBH AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED) The Company's net periodic pension cost included the following components:
YEAR ENDED NINE MONTHS DECEMBER 31, ENDED ---------------- SEPTEMBER 30, 1993 1994 1995 1996 ---- ---- ---- ------------- (IN DM THOUSANDS) Service cost.................................... 32 34 36 28 Interest cost................................... 26 30 34 28 Actual return on plan assets.................... (2) (2) (4) (4) --- --- --- --- 56 62 66 52 === === === ===
The weighted average discount rate and rate of increase in future pension benefits due to cost of living increases used in determining the actuarial present value of the projected benefit obligation were 6.5% and 3.0% for all periods presented. The expected long-term rate of return on plan assets was 8% for all periods presented. 13. SALE OF INTERESTS IN THE UNITED KINGDOM The Company has entered into a definitive agreement to sell its interest in the video systems and related leases of PRODAC Ltd. The agreement calls for the transfer of its interest in the video systems and related leases on October 1, 1996 with the Company retaining substantially all of the remaining assets and liabilities. The Company is required to provide spare parts and services for a period of up to six months. The Company's interest in the video systems and related leases has a net book value at September 30, 1996 of approximately negative GBP 148,000 and was sold for GBP 187,000. Key financial data for the business of PRODAC Ltd. included in the consolidated balance sheets and operating results of the Company are as follows:
NINE MONTHS YEAR ENDED ENDED DECEMBER 31, SEPTEMBER 30, ------------------- -------------- 1993 1994 1995 1995 1996 ----- ----- ----- ------ ------ (IN DM THOUSANDS) Net revenue............................. 623 1,742 1,707 1,212 1,657 Operating loss.......................... (663) (27) (154) (23) (287) Net loss................................ (678) (469) (452) (184) (347) Video system--net....................... 930 3,049 2,486 2,719 2,724 Total assets............................ 1,912 3,680 4,149 4,406 3,676 Total debt.............................. 992 3,241 2,779 3,009 3,149
F-33 PRODAC PROZESSDATENTECHNIK GMBH AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED) 14. GEOGRAPHIC DATA Geographic information for the years ended December 31, 1993, 1994 and 1995 and the nine months ended September 30, 1996 is presented in the following table. Identifiable assets are those that can be directly associated with a particular geographic area.
YEAR ENDED NINE MONTHS DECEMBER 31, ENDED ---------------------- SEPTEMBER 30, 1993 1994 1995 1996 ------ ------ ------ ------------- (IN DM THOUSANDS) Net revenue Germany.............................. 11,188 11,865 14,522 16,274 United Kingdom....................... 623 1,742 1,707 1,657 Other................................ 458 229 650 1,307 ------ ------ ------ ------ 12,269 13,836 16,879 19,238 ====== ====== ====== ====== Operating income (loss) Germany.............................. (166) (381) (2,237) (87) United Kingdom....................... (663) (27) (154) (287) Other................................ (116) (18) (219) 234 Intercompany elimination............. -- -- (137) 137 ------ ------ ------ ------ (945) (426) (2,747) (3) ====== ====== ====== ====== Identifiable assets Germany.............................. 12,257 13,908 20,255 31,763 United Kingdom....................... 1,912 3,680 4,149 3,676 Other................................ 658 426 3,262 2,992 Intercompany elimination............. (646) (974) (2,649) (2,855) ------ ------ ------ ------ 14,181 17,040 25,017 35,576 ====== ====== ====== ======
F-34 MAGINET CORPORATION UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION On November 5, 1996, MagiNet, Corporation. ("MagiNet" or the "Company") entered into a definitive Share Purchase and Transfer Agreement (the Acquisition Agreement) to acquire all of the outstanding shares (the "Prodac Shares") of Prodac Prozessdatentechnik GmbH, a corporation organized under German law ("Prodac"). Pursuant to the Acquisition Agreement, and subject to certain conditions described below, the Company will pay cash in the amount of approximately DM 20,800,000 (approximately $13,600,000) and an aggregate number of shares of MagiNet Common Stock that DM 5 million (approximately $3,300,000) would purchase at a per share price equal to ninety percent of the initial public offering price per share (estimated to be approximately 280,000 shares). The acquisition is expected to be completed in December 1996. A foreign exchange rate of 1.525 Deutsche Marks per U.S. Dollar, the rate at September 30, 1996, was used for translation purposes. In addition, the Company has agreed to pay up to DM 15 million (approximately $9,800,000) to the former employees/owners of Prodac, contingent upon the achievement of certain financial and performance milestones over the years 1997 through 1999. These contingent payments will be treated as period expenses and are accordingly not included in the purchase price. The effectiveness of the Acquisition Agreement is subject to the completion by the Company of a minimum equity offering of $40,000,000 and subsequent approval of the Acquisition Agreement by the Company's Board of Directors. Prodac, head quartered in Cologne, Germany operates through subsidiaries in Austria, and through distributors or sales representatives in other countries, is one of the leading providers to the hospitality industry in Europe of interactive video entertainment and information systems. The Company intends to fund the acquisition primarily through the proceeds of the initial public offering. The unaudited pro forma condensed combined financial statements give effect to the acquisition of Prodac under the purchase method of accounting. Under the purchase method of accounting, the amount relating to acquired in-process technology will be charged to operations as of the purchase date. The purchase price allocations are based on preliminary appraisals received by MagiNet, and will be finalized upon the closings to reflect the final balance sheet of Prodac. The Company presently expects to record a charge of approximately $12.2 million relating to the acquisition of in-process technology in the quarter ending December 31, 1996. The unaudited pro forma condensed combined financial statements also give effect to the sale on October 1, 1996 of substantially all of the assets and liabilities of Prodac's operations in Great Britain. The unaudited pro forma condensed combined balance sheet assumes the acquisition of Prodac occurred as of September 30, 1996 and presents the combined financial position of MagiNet and Prodac. Such unaudited pro forma information is based on the historical balance sheets for MagiNet and Prodac and gives effect for the pro forma adjustments described in the notes accompanying the unaudited pro forma condensed combined financial statements. The charge relating to the acquisition of in-process technology described above is included in the pro forma condensed combined balance sheet as a charge to retained earnings. The pro forma condensed combined statements of operations presents the combined year and nine months results of MagiNet and Prodac and, assumes the acquisition took place on January 1, 1995 and January 1, 1996. Such unaudited pro forma information is based on the historical statements of operations for MagiNet, and Prodac and gives effect for the pro forma adjustments described in the notes accompanying the unaudited pro forma condensed combined financial statements. The charge relating to the acquisition of in-process technology F-35 MAGINET CORPORATION UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION--(CONTINUED) described above is excluded from the pro forma statements of operations as it represents a nonrecurring item directly related to the acquisition. The pro forma condensed combined statement of operations for the year ended December 31, 1995 combines the historical statement of operations of MagiNet and Prodac for the year ended December 31, 1995. The pro forma condensed combined statement of operations for the nine months ended September 30, 1996 combines the historical statement of operations information for MagiNet and Prodac for the nine months ended September 30, 1996. These pro forma statements may not be indicative of the results that actually would have occurred if the combinations had been in effect on the dates indicated or which may be realized in the future. F-36 MAGINET CORPORATION UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEETS (IN THOUSANDS)
PRO FORMA SEPTEMBER 30, 1996 ADJUSTMENTS ------------------- ----------- INCREASE PRO FORMA MAGINET PRODAC (DECREASE) COMBINED --------- -------- ----------- --------- ASSETS Current assets: Cash and cash equivalents... $ 7,251 $ 230 $(6,203)(A)(J) $ 1,278 Accounts receivable......... 2,081 3,968 -- 6,049 Other current assets........ 1,679 477 -- 2,156 --------- -------- ------- ------- Total current assets.......... 11,011 4,675 (6,203) 9,483 Video systems, net............ 31,683 16,963 (1,786)(J) 47,200 340 (B) Property and equipment, net... 1,745 767 (47)(J) 2,465 Other assets.................. 5,045 924 3,712 (B) 9,681 Goodwill...................... -- -- 5,595 (B) 5,595 --------- -------- ------- ------- Total assets.................. $ 49,484 $ 23,329 $ 1,611 $74,424 ========= ======== ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term debt............. $ 288 $ 5,451 $ 8,106 (I) $13,180 (665)(J) Other current liabilities... 5,866 6,316 -- 12,182 --------- -------- ------- ------- Total current liabilities..... 6,154 11,767 7,441 25,362 Long-term debt................ 25,829 15,714 (1,401)(J) 40,142 Other non-current liabilities.................. 1,532 319 -- 1,851 Stockholders' equity: Preferred stock............. 53,241 -- -- 53,241 Common stock................ 387 656 3,300 (A) 3,687 (656)(E) Retained earnings........... (37,008) (5,113) (12,200)(F) (49,208) 5,113 (E) Cumulative translation adjustment................. (651) (14) 14 (E) (651) --------- -------- ------- ------- Total stockholders' equity.. 15,969 (4,471) (4,429) 7,069 --------- -------- ------- ------- Total liabilities and stockholders' equity......... $ 49,484 $ 23,329 $ 1,611 $74,424 ========= ======== ======= =======
See accompanying notes. F-37 MAGINET CORPORATION UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED PRO FORMA DECEMBER 31, 1995 ADJUSTMENTS ------------------- ----------- INCREASE PRO FORMA MAGINET PRODAC (DECREASE) COMBINED --------- -------- ----------- --------- Revenue $ 8,689 $ 11,774 $(1,209)(K) $ 19,254 Costs and expenses: Direct costs................. 3,731 6,667 (495)(K) 9,903 Depreciation and amortization................ 3,682 3,822 2,934 (C) 9,936 (502)(K) Operations expenses, selling, general and administrative.. 11,528 3,202 (313)(K) 14,417 Research and development..... 1,247 -- -- 1,247 --------- -------- ------- -------- Total costs and expenses....... 20,188 13,691 1,624 35,503 Operating loss................. (11,499) (1,917) (2,833) (16,249) Interest expense............... (1,297) (1,195) (971)(D) (3,258) 205 (K) Interest income and other, net........................... 306 606 (9)(K) 903 --------- -------- ------- -------- Loss before income taxes and minority interest in net losses of consolidated subsidiaries.................. (12,490) (2,506) (3,608) (18,604) Provision for income taxes..... (554) (126) -- (680) Minority interest in net losses of consolidated subsidiaries.. 248 -- -- 248 --------- -------- ------- -------- Net loss....................... $ (12,796) $ (2,632) $(3,608) $(19,036) ========= ======== ======= ======== Net loss per share............. $ (1.03) $ (1.50) Shares used in computation of net loss per share............ 12,392 12,672 (H)
See accompanying notes. F-38 MAGINET CORPORATION UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTHS ENDED PRO FORMA SEPTEMBER 30,1996 ADJUSTMENTS ------------------- ----------- INCREASE PRO FORMA MAGINET PRODAC (DECREASE) COMBINED --------- -------- ----------- --------- Revenue........................ $ 12,048 $ 12,890 $ (997)(L) $ 23,941 Costs and expenses: Direct costs................. 6,232 6,008 (448)(L) 11,792 Depreciation and amortization 4,747 3,852 1,216 (C) 9,366 (449)(L) Operations expenses, selling, general and administrative.. 8,455 3,033 (288)(L) 11,200 Research and development..... 1,599 -- -- 1,599 --------- -------- ------- -------- Total costs and expenses....... 21,033 12,893 31 33,957 Operating loss................. (8,985) (3) (1,028) (10,016) Interest expense............... (2,710) (1,295) (941)(D) (4,753) 193 (L) Interest income and other, net........................... 627 521 (153)(L) 995 --------- -------- ------- -------- Loss before income taxes and minority interest in net losses of consolidated subsidiaries.................. (11,068) (777) (1,929) (13,774) Provision for income taxes..... (681) (442) -- (1,123) Minority interest in net losses of consolidated subsidiaries.. 215 -- -- 215 --------- -------- ------- -------- Net loss....................... $ (11,534) $ (1,219) $(1,929) $(14,682) ========= ======== ======= ======== Net loss per share............. $ (0.93) $ (1.16) Shares used in computation of net loss per share............ 12,407 12,687 (G)
See accompanying notes. F-39 MAGINET CORPORATION NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The pro forma information presented is theoretical in nature and not necessarily indicative of the future consolidated results of operations of the Company or the consolidated results of operations which would have resulted had the Company purchased Prodac during the periods presented. The pro forma condensed consolidated financial statements reflect the effects of the acquisition, assuming the acquisition and related events occurred as of September 30, 1996 for the purposes of the pro forma condensed combined balance sheet and as of January 1, 1995 and January 1, 1996 for the purposes of the pro forma condensed combined statements of operations for the year ended December 31, 1995 and the nine months ended September 30, 1996, respectively. 2. PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENT ADJUSTMENTS. (A) The purchase price for the completion of the Prodac acquisition was determined as follows (in thousands): Cash............................................................. $13,600 Common stock..................................................... 3,300 Estimated transaction costs...................................... 1,000 Assumption of net liabilities.................................... 4,471 ------- $22,371 =======
(B) Allocation of the purchase price for the completion of the Prodac acquisition was determined as follows (in thousands): Installed video systems, net at September 30, 1996............... $12,960 Installed video systems purchase price adjustment................ 340 Good will........................................................ 5,595 Acquired in-process technology................................... 12,200 Assembled workforce.............................................. 912 Non compete covenant............................................. 2,800 Other net liabilities............................................ (12,436) ------- $22,371 =======
(C) Amortization of the non-compete covenant, the assembled work force intangible and the excess purchase price of $5,595,000 (goodwill) for Prodac will each be amortized on a straight-line method over the estimated useful lives of five years and will be included in depreciation and amortization expense. depreciation of installed video systems will be over an estimated useful life of three years on a straight-line method. (D) To increase net interest expense on the cash payments made to Prodac and the assumed debt for the purchase price and related acquisition costs. (E) Elimination of Prodac stockholders' equity amounts. (F) The pro forma statement of operations excludes the charge of $12.2 million for purchased in-process technology which arose from the acquisition. These charges will be included in the Company's consolidated financial statements for the three month period ending December 31, 1996. (G) Shares used in the net loss per share calculation have been adjusted to reflect the pro forma issuance of approximately 280,000 shares of MagiNet Common Stock as if the transaction had occurred on January 1, 1996. F-40 MAGINET CORPORATION NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS)--(CONTINUED) (H) Shares used in the net loss per share calculation have been adjusted to reflect the pro forma issuance of approximately 280,000 shares of MagiNet Common Stock as if the transaction had occurred on January 1, 1995. (I) Short-term debt has been adjusted to reflect the excess of the cash portion of the purchase price over the Company's cash balance at September 30, 1996. (J) The September 30, 1996 unaudited pro forma condensed combined balance sheet has been adjusted as follows for the sale on October 1, 1996 of substantially all of the net liabilities of Prodac's operations in Great Britain of approximately $232,000 for approximately $292,000 in cash: Cash and cash equivalents.................................. $ 291,000 Installed video systems, net............................... (1,786,000) Property and equipment, net................................ (47,000) Goodwill................................................... (524,000) ------------ $(2,066,000) ============ Short-term debt............................................ $ (665,000) Long-term debt............................................. (1,401,000) ------------ $ (2,066,000) ============
(K) The unaudited pro forma condensed combined Statement of Operations for the year ended December 31, 1995 has been adjusted as follows for the sale on October 1, 1996 of Prodac's operations in Great Britain: Revenue..................................................... $(1,209,000) Direct costs................................................ (495,000) Depreciation and amortization............................... (502,000) Selling, general and administrative......................... (313,000) Interest expense............................................ (205,000) Interest income and other, net.............................. (9,000) ----------- Net loss.................................................... $ 297,000 ===========
(L) The unaudited pro forma condensed combined Statement of Operations for the nine months ended September 30, 1996 has been adjusted as follows for the sale on October 1, 1996 of Prodac's operations in Great Britain: Revenue....................................................... $(997,000) Direct costs.................................................. (448,000) Depreciation and amortization................................. (449,000) Selling, general and administrative........................... (288,000) Interest expense.............................................. (193,000) Interest income and other, net................................ (153,000) --------- Net loss...................................................... $ 228,000 =========
The purchase price for the Prodac acquisition was allocated to the tangible and intangible assets of Prodac based on the fair market values of those assets using a risk adjusted discounted cash flows approach. The evaluation of the underlying technology acquired considered the inherent difficulties and uncertainties in completing the development, and thereby achieving technological feasibility, and the risks related to the viability of and potential changes in future target markets. The underlying technology had no alternative uses in other research and development projects or otherwise. F-41 MAGINET CORPORATION NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS)--(CONTINUED) The 1995 Prodac statement of operations was converted to U.S. Dollars at an average rate of 1.4336 Deutsche Marks per U.S. Dollar. The Prodac statement of operations for the nine months ended September 30, 1996 was converted to U.S. Dollars at an average rate of 1.4926 Deutsche Marks per U.S. Dollar. The Prodac balance sheet at September 30, 1996 was converted to U.S. Dollars using a rate of 1.525 Deutsche Marks per U.S. Dollar. F-42 [GRAPHIC DEPICTING MAGINET LOGO WITH FILM REEL] - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- NO DEALER, SALES REPRESENTATIVE, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PRO- SPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, OR ANY OF THE U.S. UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLIC- ITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER TO, OR A SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AF- FAIRS OF THE COMPANY OR THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. ------------------ TABLE OF CONTENTS
PAGE ---- Prospectus Summary....................................................... 3 Risk Factors............................................................. 7 Use of Proceeds.......................................................... 18 Dividend Policy.......................................................... 18 Capitalization........................................................... 19 Dilution................................................................. 20 Selected Consolidated Financial and Other Data........................... 20 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 23 Business................................................................. 34 Acquisition of Prodac.................................................... 46 Management............................................................... 50 Certain Transactions..................................................... 60 Principal Stockholders................................................... 62 Description of Capital Stock............................................. 64 Shares Eligible for Future Sale.......................................... 67 Certain United States Federal Tax Considerations for Non-U.S. Holders of Common Stock............................................................ 68 Underwriting............................................................. 70 Legal Matters............................................................ 72 Experts.................................................................. 72 Additional Information................................................... 73 Index to Consolidated Financial Statements............................... F-1
------------------ UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICI- PATING IN THE DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DE- LIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOT- MENTS OR SUBSCRIPTIONS. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 5,500,000 SHARES [LOGO OF MAGINET APPEARS HERE] COMMON STOCK ------------------ PROSPECTUS , 1996 ------------------ LEHMAN BROTHERS HAMBRECHT & QUIST - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR + +THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE + +UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF + +ANY SUCH STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subject to Completion, dated November 22, 1996 PROSPECTUS 5,500,000 SHARES [LOGO OF MAGINET APPEARS HERE] COMMON STOCK ------------- Of the 5,500,000 shares of Common Stock, $.001 par value ("Common Stock"), of MagiNet Corporation ("MagiNet" or the "Company") being offered hereby, 1,100,000 shares are being offered initially outside the United States and Canada by the International Managers (the "International Offering") and 4,400,000 shares are being offered initially in the United States and Canada by the U.S. Underwriters (the "U.S. Offering"). Such offerings are referred to collectively as the "Offerings." Prior to the Offerings, there has been no public market for the Common Stock of the Company. It is currently estimated that the initial public offering price per share will be between $12.00 and $14.00 per share. See "Underwriting" for a discussion of factors to be considered in determining the initial public offering price. The Common Stock has been approved for listing on the Nasdaq National Market under the symbol "MGNT." ------------- THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 7. ------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
Underwriting Price to Discounts and Proceeds to Public Commissions(1) Company(2) - -------------------------------------------------------------------------------- Per Share.................................. $ $ $ - -------------------------------------------------------------------------------- Total(3)................................... $ $ $
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (1) The Company has agreed to indemnify the International Managers and the U.S. Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting estimated expenses of the Offerings estimated at $1,400,000 payable by the Company. (3) The Company has granted to the International Managers a 30-day option to purchase up to 165,000 additional shares of Common Stock on the same terms and conditions as set forth above solely to cover over-allotments, if any. The U.S. Underwriters have been granted a similar option to purchase up to 660,000 additional shares of Common Stock solely to cover over-allotments, if any. If such options are exercised in full, the total Price to Public, Underwriting Discounts and Commissions and Proceeds to Company will be $ , $ and $ , respectively. See "Underwriting." ------------- The shares of Common Stock offered by this Prospectus are offered by the International Managers, subject to prior sale, to withdrawal, cancellation or modification of the offer without notice, to delivery to and acceptance by the International Managers and to certain other conditions. It is expected that delivery of such shares will be made at the offices of Lehman Brothers Inc., New York, New York, on or about , 1996. ------------- LEHMAN BROTHERS HAMBRECHT & QUIST , 1996 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- NO DEALER, SALES REPRESENTATIVE, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PRO- SPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE INTERNA- TIONAL MANAGERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SO- LICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE REGISTERED SECURI- TIES TO WHICH IT RELATES OR AN OFFER TO, OR A SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEI- THER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. ------------------ TABLE OF CONTENTS
PAGE ---- Prospectus Summary....................................................... 3 Risk Factors............................................................. 7 Use of Proceeds.......................................................... 18 Dividend Policy.......................................................... 18 Capitalization........................................................... 19 Dilution................................................................. 20 Selected Consolidated Financial and Other Data........................... 21 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 23 Business................................................................. 34 Acquisition of Prodac.................................................... 46 Management............................................................... 50 Certain Transactions..................................................... 60 Principal Stockholders................................................... 62 Description of Capital Stock............................................. 64 Shares Eligible for Future Sale.......................................... 67 Certain United States Federal Tax Considerations for Non-U.S. Holders of Common Stock............................................................ 68 Underwriting............................................................. 70 Legal Matters............................................................ 72 Experts.................................................................. 72 Additional Information................................................... 73 Index to Consolidated Financial Statements............................... F-1
------------------ UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICI- PATING IN THE DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DE- LIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOT- MENTS OR SUBSCRIPTIONS. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 5,500,000 SHARES [LOGO OF MAGINET APPEARS HERE] COMMON STOCK ------------------ PROSPECTUS , 1996 ------------------ LEHMAN BROTHERS HAMBRECHT & QUIST - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the costs and expenses, other than underwriting discounts, commissions and certain accountable expenses, payable by the Company in connection with the sale of Common Stock being registered. All amounts are estimates except the SEC registration fee and the NASD filing fee. SEC Registration Fee........................................... $ 30,534 NASD Filing Fee................................................ 9,355 Nasdaq National Market Listing Fee............................. 50,000 Printing Fees and Expenses..................................... 200,000 Legal Fees and Expenses........................................ 650,000 Accounting Fees and Expenses................................... 350,000 Blue Sky Fees and Expenses..................................... 10,000 Transfer Agent and Registrar Fees.............................. 15,000 Miscellaneous.................................................. 85,111 ---------- Total........................................................ $1,400,000 ==========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145 of the Delaware General Corporation Law permits a corporation to include in its charter documents, and in agreements between the corporation and its directors and officers, provisions expanding the scope of indemnification beyond that specifically provided by the current law. Article VIII of the Registrant's Certificate of Incorporation provides for the indemnification of directors to the fullest extent permissible under Delaware law. Article VI of the Registrant's Bylaws provides for the indemnification of officers, directors and third parties acting on behalf of the corporation if such person acted in good faith and in a manner reasonably believed to be in and not opposed to the best interest of the corporation, and, with respect to any criminal action or proceeding, the indemnified party had no reason to believe his conduct was unlawful. The Registrant has entered into indemnification agreements with its directors and executive officers, in addition to indemnification provided for in the Registrant's Bylaws, and intends to enter into indemnification agreements with any new directors and executive officers in the future. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES Since inception the Registrant has issued and sold the following unregistered securities: 1. From July 7, 1992 to May 30, 1996, the Registrant issued and sold 328,680 shares of its Common Stock to certain executive officers, including the Registrant's Chief Executive Officer and Chief Financial Officer, at prices ranging from $0.01 to $2.00. 2. From March 31, 1994 to September 30, 1996, the Registrant issued and sold 179,192 shares of Common Stock to employees and consultants at prices ranging from $.45 to $2.00 upon exercise of stock options pursuant to the Registrant's 1992 Key Personnel Stock Option Plan and its 1992 Stock Option Plan. 3. On July 23, 1992, the Registrant issued and sold 150,000 shares of Series A Preferred Stock to two investors at a sale price of $2.00 per share. 4. On August 31, 1992, the Registrant issued and sold 440,068 shares of Series B Preferred Stock to 11 investors at a sale price of $4.50 per share. 5. On March 15, 1993, the Registrant issued and sold 888,859 shares of Series B Preferred Stock to 19 investors at a sale price of $4.50 per share. In connection with the issuance of such shares of Series B Preferred Stock, the Company also issued the investors warrants to acquire up to an aggregate of 182,993 shares of Common Stock. II-1 6. On September 23, 1993, the Registrant issued a Secured Promissory Note in the principal amount of $4,500,000 due on June 30, 1995 to Comsat Video Enterprises, Inc. ("Comsat"). In connection with such note, the Company also issued to Comsat a warrant to acquire up to an aggregate of 157,500 shares of Common Stock at an exercise price per share of $5.00. 7. On March 11, 1994, the Registrant issued its Convertible Secured Promissory Notes in the aggregate principal amount of $3,710,015 to 24 investors. Such notes were convertible into the series of Preferred Stock issued in connection with the Registrant's next round of equity financing and subsequently converted into Series C Preferred Stock on September 29, 1994. The Registrant also issued warrants to such investors to acquire up to an aggregate of 152,381 shares of Common Stock at an exercise price of $0.50 per share. 8. In connection with a debt financing transaction, on June 24, 1994, the Registrant issued to Silicon Valley Bank and Hambrecht & Quist Guaranty Finance warrants to acquire up to an aggregate of 18,553 shares of Common Stock at an exercise price of $0.50 per share. 9. On September 12, 1994, the Registrant issued its Convertible Secured Promissory Notes in the aggregate principal amount of $5,000,000 to eight investors. Such notes were convertible into the series of Preferred Stock issued in connection with the Registrant's next round of equity financing and subsequently converted into Series C Preferred Stock on September 29,1994. The Registrant also issued warrants to such investors to acquire up to an aggregate of 111,112 shares of Common Stock at an exercise price of $0.50 per share. 10. On September 29, 1994, the Registrant issued and sold 6,264,871 shares of Series C Preferred Stock to 37 investors at a sale price of $4.50 per share. In addition, the Registrant also issued to certain purchasers of the Series C Preferred Stock warrants to acquire up to an aggregate of 1,111,111 shares of Series C Preferred Stock at an exercise price of $4.50 per share. In connection with the issuance of Series C Preferred Stock, on October 26, 1994, the Registrant also issued to three consultants to the Company warrants to acquire up to an aggregate of 73,333 shares of Series C Preferred Stock at an exercise price of $4.50 per share. 11. On December 1, 1994, the Registrant issued and sold 22,222 shares of Series C Preferred Stock at a sale price of $4.50 per share. 12. In connection with a debt financing transaction, on May 16, 1995, the Registrant issued to Silicon Valley Bank a warrant acquire up to an aggregate of 75,000 shares of Common Stock at an exercise price of $7.00 per share. 13. On August 15, 1995, the Registrant issued its Seniors Secured Notes due 2000 in the aggregate principal amount of $24,900,000 to New York Life Insurance Company, The Mutual Life Insurance Company of New York, WASLIC Company II and Namtor BVC LP (collectively, the "Senior Noteholders"). In connection with such financing, the Registrant issued warrants to such investors to purchase up to an aggregate of 1,422,857 shares of Common Stock at an exercise price of $7.00 per share. 14. On December 29, 1995, the Registrant issued and sold 1,239,397 shares of Series D Preferred Stock to 5 investors at a price of $7.00 per share. On May 15, 1996, the Registrant issued and sold 1,562,202 shares of Series D Preferred Stock to four investors at a purchase price of $7.00 per share. On May 15, 1996, the Registrant also issued to the purchasers and prior purchasers of its Series D Preferred Stock warrants to purchase up to an aggregate of 178,284 shares of Common Stock at an exercise price of $7.00 per share, subject to adjustment of the number of shares and exercise price. In addition, in connection with effecting certain amendments to the Note Agreement dated August 15, 1996 among the Company and the Senior Noteholders relating to the issuance of Series D Preferred Stock, the Registrant amended the warrants issued August 15, 1996 to provide for the issuance of up to an additional 200,000 shares of Common Stock at an exercise price of $7.00 per share, subject to adjustment of the number of shares and exercise price. 15. On May 30, 1996, the Registrant issued an aggregate of 341,259 shares of Series D Preferred Stock to seven investors, including the Company's President and Chief Executive Officer and Chief Financial Officer, at a sale price of $7.00 per share. In addition, the Registrant issued to such purchasers warrants to acquire up to an aggregate of 21,716 shares of Common Stock at an exercise price of $7.00 per share, subject to adjustment of the exercise price and number of shares. II-2 The sales of the above securities were deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act, or Regulation D promulgated thereunder, or Rule 701 promulgated under Section 3(b) of the Securities Act as transactions by an issuer not involving a public offering or transactions pursuant to compensatory benefit plans and contracts relating to compensation as provided under such Rule 701. The recipients of securities in each such transaction represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the share certificates and warrants issued in such transactions. All recipients had adequate access, through their relationships with the Company, to information about the Registrant. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS - --------------- 1.1* Form of U.S. Underwriting Agreement. 1.2* Form of International Underwriting Agreement. 2.1+ Share Purchase and Transfer Agreement by and among Registrant, MagiNet GmbH i.G., Heinrich R. Wirt and Reiner Kaesbach, dated November 6, 1996. 2.2 Amendment of the Share Purchase and Transfer Agreement by and among Registrant, MagiNet GmbH i.G., Heinrich R. Wirt and Reiner Kaesbach, dated November 19, 1996. 3.1** Form of Certificate of Incorporation to be filed prior to the effective date of the Registration Statement under which the Offerings are made. 3.2** Form of Restated Certificate of Incorporation to be filed after the closing of the Offerings made under this Registration Statement. 3.3** Bylaws, as amended. 4.1 Specimen Common Stock Certificate. 4.2** Form of Lock-Up Agreement. 4.3** Amended and Restated Shareholders' Agreement, as amended, dated December 29, 1995. 4.4** First Amendment of Amended and Restated Shareholders' Agreement, dated May 15, 1996. 5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation. 10.1** Form of Indemnification Agreement for directors and officers. 10.2** 1992 Key Personnel Stock Option Plan, as amended, and form of agreement thereunder. 10.3** 1996 Employee Stock Purchase Plan, as amended, and form of agreement thereto. 10.4** 1996 Director Stock Option Plan, as amended, and form of agreement thereto. 10.5+** Technology License Agreement between Pacific Pay Video Limited and On Common Video Corporation. 10.6+** Technology License Agreement between MagiNet International Corporation and Guestserve Development Group. 10.7** Exclusive License Agreement between Pacific Pay Video Limited and Comsat Video Enterprises, Inc., dated March 15, 1993. 10.8** Exclusive Sublicense Agreement between Pacific Pay Video Limited and Comsat Video Enterprises, Inc., dated March 15, 1993. 10.9+** Agreement between Registrant and InterGame, Ltd., dated July 8, 1996. 10.10+** Note Agreement among Registrant, New York Life Insurance Company, The Mutual Life Insurance Company of New York, WASLIC Company II and Namtor BVC LP, dated August 15, 1995. 10.11** First Amendment Agreement to Note Agreement among Registrant and New York Life Insurance Company, The Mutual Life Insurance Company of New York, WASLIC Company II and Namtor BVC LP, dated May 7, 1996. 10.12+** Installation Agreement between MagiNet (H.K.) Limited and Shangri- la Hotel & Resorts (undated).
II-3 10.13+** Revised Installation Agreement between MagiNet (H.K.) Limited and Shangri-La Hotel & Resorts, dated September 7, 1994. 10.14+** Guest Video Services Agreement between MagiNet Australia Pty Limited and Southern Pacific Hotel Corporation Limited, dated September 6, 1995. 10.15+** Master Guest Video Services Agreement by and among MagiNet International Corporation, Hyatt International-Asia Pacific Limited, Hyatt Chain Services Limited and Guestserve Development Group, dated August 11, 1995. 10.17+** Agreement between Registrant and United International Pictures, dated June 28, 1996. 10.18** Employment Agreement between Registrant and Kenneth B. Hamlet, dated November 28, 1995. 10.19** Employment Agreement between Registrant and Robert R. Creager, dated September 22, 1995. 10.20** Offer of Employment Letter from Registrant to Gordon E. (Ned) Druehl, Jr., dated June 18, 1996. 10.21** Lease for the Registrant's headquarters in Sunnyvale, CA, dated February 16, 1994. 10.22** Pledge of Shares Agreement among Registrant, New York Life Insurance Company, The Mutual Life Insurance Company of New York, WASLIC Company II, Namtor BVC LP and The Chase Manhattan Bank, N.A., dated December 29, 1995. 10.23** Pledge Agreement between Registrant and The Chase Manhattan Bank N.A., dated December 28, 1995. 10.24** Shareholders Agreement between Registrant, Mr. Arun Churdboonchart and AC Telecom Limited, dated June 6, 1995. 10.25+** Bloomberg Information Television Programming Affiliation Agreement between Registrant and Bloomberg, L.P., dated October 3, 1996. 10.26** Shareholder Agreement between Registrant and Spectrum, Inc., dated August 1, 1994. 10.27** Master Guest Video Services Agreement by and among MagiNet International Corporation, Hyatt International (Europe Africa Middle East) Ltd., Hyatt Chain Services Limited and Guestserve Development Group, dated November 15, 1995. 10.28+ Summary of Terms for Second Amendment to Note Agreement, by and among Registrant and New York Life Insurance Company, The Mutual Life Insurance Company of New York, WASLIC Company II, and Namtor BVC LP, dated November 21, 1996. 10.30 Joint Venture Agreement by and among Registrant and Nag Yong Lee, dated March 1, 1995. 10.31+ 1996 Annual Agreement between Prodac Prozessdatentechnik GmbH and Philips Mietsystem GmbH, dated June 18, 1996. 10.32 Managing Director's Service Agreement between Prodac Prozessdatentechnik GmbH and Reiner Kaesbach, dated November 5, 1996. 10.33 Managing Director's Service Agreement between Prodac Prozessdatentechnik GmbH and Heinrich R. Wirt, dated November 5, 1996. 10.34 Lease Contract by and between Kaesbach & Wirt GbR and Prodac Prozessdatentechnik GmbH, dated December 15, 1993. 10.35 Modification agreement of Lease Contract by and between Kaesbach & Wirt GbR and Prodac Prozessdatentechnik GmbH, dated October 7, 1996. 10.36+ Agreement between Prodac Prozessdatentechnik GmbH and United International Pictures GmbH, dated February 8, 1996. 10.37+ 1996 Bonus Agreement between Prodac Prozessdatechnik GmbH and Philips Mietsystem GmbH, dated October 25, 1996. 10.38 Form of standard Leasing Contract between Prodac Prozessdatentechnik GmbH and Philips Mietsystem GmbH. 10.39+ Framework Distributor Contract between Prodac Prozessdatentechnik GmbH and Dorint Aktiengesellschaft, dated May 5, 1994.
II-4 10.40+ Framework Operator Agreement between Prodac Prozessdatentechnik GmbH and Novotel Hotelbetriebs mbH, dated October 10, 1996. 10.41+ Framework Distributor Contract between Prodac Prozessdatentechnik GmbH and Maritim Hotelgesellschaft mbH, dated September 21, 1995. 10.42 Agreement for the Sale and Purchase of Part of the business of Prodac Prozessdatentechnik GmbH and Prodac Hotelvideo Communicationsystems Limited between Prodac Prozessdatentechnik GmbH, Prodac Hotelvideo Communicationsystems Limited and UK Consumer Electronics Limited. 10.43+ Supply Agreement between Prodac Prozessdatentechnik GmbH and UK Consumer Electronics Limited. 10.44 Software License and Technical Support Agreement between Prodac Prozessdatentechnik GmbH and UK Consumer Electronics Limited. 10.45 Source Code Agreement by and among Prodac Prozessdatentechnik GmbH and UK Consumer Electronics Limited. 11.1 Calculation of earnings per share. 21.1 List of Subsidiaries of the Registrant. 23.1 Consent of Ernst & Young LLP, Independent Auditors. 23.2 Consent of Ernst & Young GmbH, Independent Auditors. 23.3* Consent of Counsel (included in Exhibit 5.1). 24.1** Power of Attorney (see page II-5). 27.1 Financial Data Schedule.
- -------- * To be filed by amendment. ** Previously filed. + Confidential treatment has been requested with respect to certain portions of this exhibit pursuant to a request for confidential treatment filed with the Securities and Exchange Commission on September 18, 1996, as amended. Omitted portions have been filed separately with the Commission. (b) Financial Statement Schedules None. Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or notes thereto. ITEM 17. UNDERTAKINGS The undersigned Registrant hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. Insofar as indemnification by the Registrant for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions referenced in Item 14 of this Registration Statement or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer, or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered hereunder, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-5 The undersigned registrant hereby undertakes: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-6 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE REGISTRANT HAS DULY CAUSED THIS AMENDMENT NO. 2 TO REGISTRATION STATEMENT ON FORM S-1 TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF SUNNYVALE, STATE OF CALIFORNIA, ON THE 22ND DAY OF NOVEMBER, 1996. MAGINET CORPORATION /s/ James A. Barth By __________________________________ JAMES A. BARTH EXECUTIVE VICE PRESIDENT, CHIEF FINANCIAL OFFICER AND SECRETARY PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT NO. 2 TO REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED
SIGNATURE TITLE DATE --------- ----- ---- Kenneth B. Hamlet* Chairman of the - ------------------------------------- Board, President November 22, (KENNETH B. HAMLET) and Chief Executive 1996 Officer (Principal Executive Officer) /s/ James A. Barth Executive Vice - ------------------------------------- President, Chief November 22, (JAMES A. BARTH) Financial Officer 1996 and Secretary (Principal Financial and Accounting Officer) Robert R. Creager* Director - ------------------------------------- November 22, (ROBERT R. CREAGER) 1996 Stuart J. Ellman* Director - ------------------------------------- November 22, (STUART J. ELLMAN) 1996 Michael D. Granoff* Director - ------------------------------------- November 22, (MICHAEL D. GRANOFF) 1996 Michael Ramsay* Director - ------------------------------------- November 22, (MICHAEL RAMSAY) 1996 James D. Robinson IV* Director - ------------------------------------- November 22, (JAMES D. ROBINSON IV) 1996 /s/ James A. Barth --------------------------------
* By: (JAMES A. BARTH) (ATTORNEY-IN-FACT) II-7 EXHIBIT INDEX 1.1* Form of U.S. Underwriting Agreement. 1.2* Form of International Underwriting Agreement. 2.1+ Share Purchase and Transfer Agreement by and among Registrant, MagiNet GmbH i.G., Heinrich R. Wirt and Reiner Kaesbach, dated November 6, 1996. 2.2 Amendment of the Share Purchase and Transfer Agreement by and among Registrant, MagiNet GmbH i.G., Heinrich R. Wirt and Reiner Kaesbach, dated November 19, 1996. 3.1** Form of Certificate of Incorporation to be filed prior to the effective date of the Registration Statement under which the Offerings are made. 3.2** Form of Restated Certificate of Incorporation to be filed after the closing of the Offerings made under this Registration Statement. 3.3** Bylaws, as amended. 4.1 Specimen Common Stock Certificate. 4.2** Form of Lock-Up Agreement. 4.3** Amended and Restated Shareholders' Agreement, as amended, dated December 29, 1995. 4.4** First Amendment of Amended and Restated Shareholders' Agreement, dated May 15, 1996. 5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation. 10.1** Form of Indemnification Agreement for directors and officers. 10.2** 1992 Key Personnel Stock Option Plan, as amended, and form of agreement thereunder. 10.3** 1996 Employee Stock Purchase Plan, as amended, and form of agreement thereto. 10.4** 1996 Director Stock Option Plan, as amended, and form of agreement thereto. 10.5** Technology License Agreement between Pacific Pay Video Limited and On Common Video Corporation. 10.6** Technology License Agreement between MagiNet International Corporation and Guestserve Development Group. 10.7** Exclusive License Agreement between Pacific Pay Video Limited and Comsat Video Enterprises, Inc., dated March 15, 1993. 10.8** Exclusive Sublicense Agreement between Pacific Pay Video Limited and Comsat Video Enterprises, Inc., dated March 15, 1993. 10.9+** Agreement between Registrant and InterGame, Ltd., dated July 8, 1996. 10.10+** Note Agreement among Registrant, New York Life Insurance Company, The Mutual Life Insurance Company of New York, WASLIC Company II and Namtor BVC LP, dated August 15, 1995. 10.11** First Amendment Agreement to Note Agreement among Registrant and New York Life Insurance Company, The Mutual Life Insurance Company of New York, WASLIC Company II and Namtor BVC LP, dated May 7, 1996. 10.12+** Installation Agreement between MagiNet (H.K.) Limited and Shangri- la Hotel & Resorts (undated). 10.13+** Revised Installation Agreement between MagiNet (H.K.) Limited and Shangri-La Hotel & Resorts, dated September 7, 1994. 10.14+** Guest Video Services Agreement between MagiNet Australia Pty Limited and Southern Pacific Hotel Corporation Limited, dated September 6, 1995. 10.15+** Master Guest Video Services Agreement by and among MagiNet International Corporation, Hyatt International-Asia Pacific Limited, Hyatt Chain Services Limited and Guestserve Development Group, dated August 11, 1995.
10.17+** Agreement between Registrant and United International Pictures, dated June 28, 1996. 10.18** Employment Agreement between Registrant and Kenneth B. Hamlet, dated November 28, 1995. 10.19** Employment Agreement between Registrant and Robert R. Creager, dated September 22, 1995. 10.20** Offer of Employment Letter from Registrant to Gordon E. (Ned) Druehl, Jr., dated June 18, 1996. 10.21** Lease for the Registrant's headquarters in Sunnyvale, CA, dated February 16, 1994. 10.22** Pledge of Shares Agreement among Registrant, New York Life Insurance Company, The Mutual Life Insurance Company of New York, WASLIC Company II, Namtor BVC LP and The Chase Manhattan Bank, N.A., dated December 29, 1995. 10.23** Pledge Agreement between Registrant and The Chase Manhattan Bank N.A., dated December 28, 1995. 10.24** Shareholders Agreement between Registrant, Mr. Arun Churdboonchart and AC Telecom Limited, dated June 6, 1995. 10.25+** Bloomberg Information Television Programming Affiliation Agreement between Registrant and Bloomberg, L.P., dated October 3, 1996. 10.26** Shareholder Agreement between Registrant and Spectrum, Inc., dated August 1, 1994. 10.27** Master Guest Video Services Agreement by and among MagiNet International Corporation, Hyatt International (Europe Africa Middle East) Ltd., Hyatt Chain Services Limited and Guestserve Development Group, dated November 15, 1995. 10.28+ Summary of Terms for Second Amendment to Note Agreement by and among Registrant and New York Life Insurance Company, The Mutual Life Insurance Company of New York, WASLIC Company II, and Namtor BVC LP, dated November 21, 1996. 10.30 Joint Venture Agreement by and among Registrant and Nag Yong Lee, dated March 1, 1995. 10.31+ 1996 Annual Agreement between Prodac Prozessdatentechnik GmbH and Philip Mietsystem GmbH, dated June 18, 1996. 10.32 Managing Director's Service Agreement between Prodac Prozessdatentechnik GmbH and Reiner Kaesbach, dated November 5, 1996. 10.33 Managing Director's Service Agreement between Prodac Prozessdatentechnik GmbH and Heinrich R. Wirt, dated November 5, 1996. 10.34 Lease Contract by and between Kaesbach & Wirt GbR and Prodac Prozessdatentechnik GmbH, dated December 15, 1993. 10.35 Modification agreement of Lease Contract by and between Kaesbach & Wirt GbR and Prodac Prozessdatentechnik GmbH, dated October 7, 1996. 10.36+ Agreement between Prodac Prozessdatentechnik GmbH and United International Pictures GmbH, dated February 8, 1996. 10.37+ 1996 Bonus Agreement between Prodac Prozessdatentechnik GmbH and Philips Mietsystem GmbH, dated October 25, 1996. 10.38 Form of standard Leasing Contract between Prodac Prozessdatentechnik GmbH and Philips Mietsystem GmbH.
10.39+ Framework Distributor Contract among Prodac Prozessdatentechnik GmbH and Dorint Aktiengesellschaft, dated May 5, 1994. 10.40+ Framework Operator Agreement between Prodac Prozessdatentechnik GmbH and Novotel Hotelbetriebs mbH, dated October 10, 1996. 10.41+ Framework Distributor Contract between Prodac Prozessdatentechnik GmbH and Maritim Hotelgesellschaft mbH, dated September 21, 1995. 10.42 Agreement for the Sale and Purchase of Part of the business of Prodac Prozessdatentechnik GmbH and Prodac Hotelvideo Communicationsystems Limited between Prodac Prozessdatentechnik GmbH, Prodac Hotelvideo Communicationsystems Limited and UK Consumer Electronics Limited. 10.43+ Supply Agreement between Prodac Prozessdatentechnik GmbH and UK Consumer Electronics Limited. 10.44+ Software License and Technical Support Agreement between Prodac Prozessdatentechnik GmbH and UK Consumer Electronics Limited. 10.45 Source Code Agreement by and among Prodac Prozessdatentechnik GmbH and UK Consumer Electronics Limited. 11.1 Calculation of earnings per share. 21.1 List of Subsidiaries of the Registrant. 23.1 Consent of Ernst & Young LLP, Independent Auditors. 23.2 Consent of Ernst & Young GmbH, Independent Auditors. 23.3* Consent of Counsel (included in Exhibit 5.1). 24.1** Power of Attorney (see page II-5). 27.1 Financial Data Schedule.
- -------- * To be filed by amendment. ** Previously filed. + Confidential treatment has been requested with respect to certain portions of this exhibit pursuant to a request for confidential treatment filed with the Securities and Exchange Commission on September 18, 1995. Omitted portions have been filed separately with the Commission. EX-2.1 2 SHARE PURCHASE AND TRANSFER AGREEMENT EXHIBIT 2.1 (Translated from German to English) -1- No. of the document register 1996 ------------------------------------- Recorded in Frankfurt am Main on November 05, 1996 Before me, the undersigned notary Dr. Harald Jung with official residence in Frankfurt am Main, -------------------------------------------------------------------- [***] Confidential treatment requested pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission. -2- appeared today in the offices of the law firm Bruckhaus Westrick Stegemann, Taunusanlage 11, 60329 Frankfurt am Main where the acting notary betook himself at the request of the persons appearing. 1. Mr. Heinrich R. Wirt, with business address at Max-Planck-Strasse 38, 50858 Cologne, identifying himself by presenting his valid federal identity card; 2. Mr. Reiner Kasbach, with business address at Max-Planck-Strasse 38, 50858 Cologne, identifying himself by presenting his valid federal identity card; 3. Attorney-at-law Dr. Konstantin Mettenheimer, having his business address at Taunusanlage 11, 60329 Frankfurt am Main, personally known. The persons appearing under 1. and 2. (hereinafter collectively referred to as the "Sellers") declared that they were acting in their own names and as managing directors of PRODAC Prozessdatentechnik GmbH having its registered office in Cologne, registered in the Commercial Register of the Local Court of Cologne under register number HRB 10002 (hereinafter referred to as the "Company"), authorized to represent the Company individually and being released from the restrictions set forth in (S) 181 German Civil Code. The acting notary has assured himself on the basis of a certified excerpt of the Commercial Register dated August 12, 1996 that the persons appearing under 1. and 2. are authorized to represent the Company. The notary was provided with a sharholders resolution adopted on November 06, 1996 in which the release of the persons appearing under 1. and 2. from the restrictions set forth in (S) 181 German Civil Code was confirmed as a matter of precaution. The notary took such shareholders resolution to this deed. The person appearing under 3. declared that he was not acting in his own name but a) as attorney in fact on behalf of MagiNet GmbH i.G. with registered office in Cologne, established in the notarial deed of September 10, 1996 No. 1274/96 of the notary public Dr. Gerhard Hess in Frankfurt am Main (hereinafter referred to as the "Purchaser"). The notary has, on the basis of an executed copy of the Incorporation Deed which has been taken to this Deed as copy and a power-of-attorney dated November 06, 1996, which was presented in original and is attached as certified copy, assured himself that the person appearing under 3. has the power to represent the Purchaser and is released from the restrictions set forth in (S) 181 German Civil Code. b) as attorney in fact on behalf of MagiNet Corporation with registered office in Sunnyvale, California, 94089 USA (hereinafter referred to as "MagiNet Corp."), as chairman of the board of directors having sole signature power. The notary has satisfied himself on the basis of a notarially certified and legalized Secretary's Certificate which was presented in original -3- and a power-of-attorney dated November 05, 1996, which was presented in original and is attached as certified copy, assured himself that the person appearing under 3. has the power to represent MagiNet Corp. individually. I. Acting as stated, the persons appearing then requested the recording of the following SHARE PURCHASE AND TRANSFER AGREEMENT. PREAMBLE The Sellers are the sole shareholders of the Company. The share capital of the Company is DM 1,000,000.-- and has been paid up in full. Each of the Sellers holds a share in a nominal amount of DM 500,000.-- in the Company (hereinafter collectively referred to as the "Shares"). The Purchaser is a wholly-owned subsidiary of MagiNet Corp. MagiNet Corp. proposes to file a registration statement with the United States Security and Exchange Commission (the "Commission") under the United States Securities Act of 1933, as amended (hereinafter referred to as the "1933 Act"), covering the initial public offering of the Common Stock of MagiNet Corp. (the "IPO"). In connection with the IPO, MagiNet Corp. proposes to list its Common Stock for trading on the National Market of The Nasdaq Stock Market. The date of the closing of the IPO pursuant to the Registration Statement, as declared effective by the Commission under the 1933 Act, will hereinafter be referred to as the "IPO Date". The per-share price at which the Common Stock of MagiNet Corp. is initially offered to the public in the IPO (as set forth in the final prospectus therefore) will hereinafter be referred to as the "IPO Price". The Sellers are interested in selling their Shares. The Purchaser is interested in acquiring the Shares. MagiNet Corp. is prepared to undertake responsibility for the liabilities of the Purchaser arising from the following Agreement. For the purposes of technical simplification of the notarization of this Share Purchase and Transfer Agreement a reference deed was executed on November 5, 1996 (Role of Deeds No. ______/96 of the notary Dr. Harald Jung in Frankfurt am Main). The reference deed contains all of the attachments except Attachment 3 referred to in the -4- following Agreement. The original of the Reference Deed is at the disposal of the parties for inspection. Now therefore the parties agree as follows: ARTICLE 1 SALE AND ASSIGNMENT OF THE SHARES, ALLOCATION OF DIVIDEND, DATE OF TRANSFER 1. The Sellers herewith sell and assign the Shares to the Purchaser. The Purchaser accepts this sale and assignment. In accordance with Art. 15 of the memorandum of association of the Company, the Sellers mutually declare their consent to the sale and assignment of the Shares. 2. The assignment of the Shares pursuant to paragraph 1 above shall not become effective before 5 days have elapsed since the IPO Date, but not later than on February 28, 1996. The assignment shall also be subject to the suspensive condition of payment of the purchase price in accordance with Art. 2 (1) a) and transfer of the shares in MagiNet Corp. in accordance with Art. 2 (1) b). The date at which the assignment of the Shares shall become effective is hereinafter referred to as the "Closing". 3. The Company's profit for the business year 1996, as well as a profit from prior years not distributed to the shareholders (i.e. profit brought forward and profit from prior years for which no resolution regarding its appropriation has been adopted), shall be - in the event that the Closing should be prior to January 1, 1997 - due to the Purchaser and if the Closing should be after December 31, 1996 - due to the Sellers. The foregoing does not apply to retained earnings in the amount of DM 600.000,--. This amount shall be distributed to the Sellers prior to the closing in any case. The resolutions in respect of the establishment of the annual accounts and the distribution of profits shall be adopted by the Purchaser accordingly. If necessary, profit determination and profit appropriation resolutions shall be adopted. -5- ARTICLE 2 PURCHASE PRICE, CONSIDERATION IN SHARES 1. As consideration for the sale of the Shares the Sellers shall receive from the Purchaser the following: a) DM 20,000,000.-- (in words: twenty million Deutsche Marks) in cash payable within 10 bank working days (the banking centre of Frankfurt am Main shall be decisive) from the IPO Date, but not later than on January 10, 1997, in equal parts into the account No. 149702524 of Mr. Heinrich R. Wirt at Kreissparkasse Siegburg (Bank Code 38650000) and account No. 510477014 of Mr. Reiner Kasbach at Raiffeisen Bank Vorgebirge, Bornheim (Bank Code 38061636). In the event that the Purchaser is not in possession of the bank guaranties on first demand to the provided by the Sellers pursuant to (S) 7, the Purchaser is entitled to retain without any obligation to pay interest a share of the purchase price in the amount of DM 1,000,000.-- to secure its claims against the Sellers arising from this Agreeement. The payment of this retained amount shall be effected only upon delivery of the bank guaranties to the Purchaser. The retaining of the Purchase Price Share of DM 1,000,000.-- does not prevent the transfer of the Shares pursuant to (S) 1 para. 2 of this Agreement. b) Non-registered common shares in MagiNet Corp. in a total equivalent of DM 5,000,000.-- (in words: five million Deutsche Marks) shall be transferred to the Sellers within 10 bank working days after the IPO- Date, but not later than on March 10, 1997. The total number of non- registered common shares to be transferred (hereinafter referred to as the "Common Shares") shall be determined by the following computation formula: Consideration Number of Common Shares = ---------------------------- Price per Common Share Consideration = The US dollar equivalent of DM 5,000,000.-- on the basis of the official middle rate of exchange determined on the Frankfurt am Main Exchange for the US dollar at the IPO Date . -6- Price per share = The IPO Price less 10 percent hereof. Should the Common Share IPO Date be after February 28, 1997, a price of US$ 12 per Common Share shall be taken as a basis. The resulting number of Common Shares must be divisible by two. The Sellers shall each receive half the number of Common Shares determined in accordance with the above formula. Receipt of any difference remaining in comparison to the equivalent of DM 5.000.000,-- is waived by the Sellers. The Purchaser undertakes to transfer the Common Shares to the Sellers with due observance of the legal regulations applicable to their transfer. The share certificates, if any, shall be handed over to the Sellers. The obligation to transfer the Shares can be fulfilled also by MagiNet Corp. directly. c) Each of the Sellers is granted the right to acquire a further 150,000 non-registered Common Shares in MagiNet Corp. at a price of US$ 8 per share in accordance with the Option Agreements attached to this Agreement as Annexes 2.2.1 and 2.2.2. ------------- ----- 2. The Purchaser shall take the necessary steps to achieve that the shares aquired by the Sellers through this Agreement, can get registered on their request. The regulations for the management of the MagiNet Corp. apply accordingly. 3. Interest at a rate of 6% p.a. shall be paid on the part of the purchase price determined in para. 1 a) from the day of recording of this Agreement until Closing. The interest shall be part of the purchase price and shall be paid together with the part of the purchase price pursuant to para. 1 a). 4. The purchase price to be paid in accordance with para. 1 a) shall be subsequently reduced by the amount by which the pre-tax profit, net of corporate and trade tax of the Company for the business year 1996 determined in accordance with the German generally accepted accounting principles (Grundsatze ordnungsmaiger Buchfuhrung) under continuation of the accounting principles remains below an amount of DM 3,000,000.--. Any reduction of the purchase price pursuant to this paragraph shall not exceed DM 3,000,000.--. In the event that the purchase price should already have been paid by the Purchaser, the amount of the reduction shall be repaid to the Purchaser immediately upon adoption of the annual accounts of the Company as per December 31, 1996 plus 6% interest from the date of recording of this Agreement. -7- 5. In the event that payment of the purchase price pursuant to para. 1 a) and transfer of the Shares pursuant to para. 1 b) should not have been effected by March 31, 1997, the Sellers shall have the right to rescind this Agreement by means of a written declaration to be submitted to the Purchaser. The right of rescission can be exercised by each Seller, however, only with effect for both the Sellers. 6. Sec. 454 German Civil Code does not apply. ARTICLE 3 EARNOUT PLAN 1. As further consideration for the transfer of the Shares - such further consideration to be dependent on the future financial situation of the Company -the Purchaser is obliged to grant to the Sellers in the years 1997 to 1999 payment or MagiNet Common Shares, as the case may be, pursuant to the following provisions: a) If the Company has achieved in the fiscal year 1997 the targets contained in the business plan for the said fiscal year which is attached as Attachment 3 to this Deed (hereinafter also referred to as ------------ the "Earnout Plan"), the Sellers shall receive a combined cash/share payment equivalent to an amount of up to DM 5,000,000.--(in words: five million Deutsche Marks). b) If the Company has achieved in the fiscal year 1998 the targets contained in the business plan for the said fiscal year which is attached as Attachment 3 to this Deed, the Sellers shall receive a ------------ combined cash/share payment equivalent to an amount of DM 5,000,000.-- (in words: five million Deutsche Mark). c) If the Company has achieved in the fiscal year 1999 the targets contained in the business plan for the said fiscal year which is attached as Attachment 3 to this Deed, the Sellers shall receive a ------------ combined cash/share payment equivalent to an amount of DM 5,000,000.-- (in words: five million Deutsche Mark). 2. The aforementioned consideration is due upon the establishing of the accounts of the respective fiscal year. -8- 3. The respective overall consideration shall be divided into cash- and share portions such that the cash portion covers the tax which accrues to the share portion. The cash- and share portions shall be approximately calculated by the Purchaser. If necessary, the Sellers shall provide any information required therefor. For the determination of the number of Common Shares which shall be transferred to the Sellers the stock price - alternatively the market price - of the MagiNet Corp. Share on the Nasdaq on the one hand, and the official middle exchange rate for US$ determined on the Frankfurt currency exchange on the other hand, on the respective due date shall be decisive. 4. For the method of payment of the cash portion and the method of transfer of the Common Shares to the Sellers, the provisions in Sec. 2 para. 1 a) and b) of this Agreement apply accordingly. 5. Should a Seller be removed or suspended from his office as managing director of the Company, notwithstanding the minimum-targets of the Earnout- Plan- under exception of the category "Average monthly net revenue per room" - being met and without an important cause exisiting in respect of the person (in der Person) or in the behaviour (im Verhalten) of the respective Seller, he shall receive the further consideration under the Earnout-Plan also in the event, the targets were not met. Basis for determining the yearly payment to the affected Seller under the Earnout- Plan shall be the level achieved in the fiscal year preceeding his revocation or suspension as managing director of the Company. ARTICLE 4 WARRANTIES OF THE SELLERS The Sellers warrant to the Purchaser as joint and several debtors (Sec. 421 et seq. of the German Civil Code) in the form of a separate warranty that the following statements are correct and true as of the date of the recording as well as at the Closing: 1. The statements in the Preamble of this Agreement with respect to the Sellers and the Company are complete and correct. 2. The Company is a company with limited liability (Gesellschaft mit beschrankter Haftung) duly organized under the laws of the Federal Republic of Germany and validly existing in accordance with the Articles of Association and the excerpt from the Commercial Register -9- attached as Attachment 4.2 to the Reference Deed. There are no shareholder -------------- resolutions amending the Articles of Association which have not yet been registered in the Commercial Register nor are there any side agreements relating to the constitution and organisation of the Company. 3. The Company has no participations in any other businesses than the subsidiaries set forth in Attachment 4.3.1 (the "Subsidiaries") to the ---------------- Reference Deed and is under no obligation to acquire such participations. All Subisidaries were duly established under the laws of their respective jurisdiction and are validly exisitng since their establishment. Except as set forth in Attachment 4.3.2 to the Reference Deed, the Company holds 100 ---------------- % of the outstanding shares of capital stock of each of the Subsidiaries. 4. The Company has not entered into any enterprise contracts (Unternehmensvertrage) within the meaning of Sec. 291 et seq. of the Stock -------------------- Corporation Act (Aktiengesetz) nor any agreement relating to the ------------ establishment of a silent partnership. 5. The Sellers are the legal and beneficial owner of the Shares which are free of any encumbrances or any other rights for the benefit of third parties. The Sellers have the right and the power to freely dispose of the Shares without that the consent of any third party would be required for such disposal or that such disposal would violate the right of any third party. The Shares do not constitute all or substantially all of the assets of each of the Sellers. 6. The Shares are fully paid up and no repayment of capital contributions has been made, neither openly nor concealed. There are no shareholders of the Company other than the Sellers. 7. Attachment 4.7 to the Reference Deed sets forth a complete and correct -------------- description of the development of the Stated Capital and a composition of the shareholders of the Company since its establishment, indicating all notarial deeds with which the Company has been established, the Stated Capital of the Company has to date been increased or reduced as well as all notarial deeds with which to date shares of the Company have been subscribed to, transferred or otherwise affected. 8. Neither against the Sellers nor the Company any bankruptcy or composition proceedings have been initiated nor are there any circumstances which would justify the initiation of such proceedings in the future. -10- 9. The annual statements of the Company and the Subsidiaries for the fiscal years 1993, 1994, 1995 (the "Accounts") and - to the extent required by the applicable law - the notes have been prepared in accordance with applicable generally accepted accounting principles (Grundsatze ordnungsgemaber -------------------------- Buchfuhrung) as well as observing continuity in the accounting and ----------- evaluation principles and present a view of the assets, finance and operating results of the Company and its Subsidiaries which is in accordance with the actual circumstances. To the extent that there are capitalization options (Aktivierungswahlrechte) no capitalization has taken ---------------------- place. To the extent that there are options to include items in the liabilities (Passivierungswahlrechte) such items have been included. All ----------------------- statutorily permitted depreciations have been taken. All statutorily permitted accruals have been taken. On neither the Company nor any Subsidiary had with exception of liabilities resulting from pending contractual relationships which are not required to be shown on a balance sheet any liabilities other than those shown in the balance sheet of December 31, 1995 or covered by accruals. To the extent that contingent liabilities did not have not be included in liabilities they have been reflected as below-the-line items on the balance sheet (including liabilities resulting from the issue of comfort letters). In respect of the accounts of the Company for the fiscal years 1993, 1994, 1995 prepared in accordance with the American principles of GAAP and in respect of the interim accounts prepared by Ernst & Young as per June 30, 1996, the Sellers represent and warrant only the completeness and the correctness of the documentation and information provided to Ernst & Young by the Sellers or by employees of the Company. 10. The receivables reflected in the balance sheet of December 31, 1995 - except receivables listed in Attachment 4.10 to the Referece Deed the --------------- value of which is uncertain, will be fully collectable upon their due date without that any special collection measures are required, less any specific or lumpsum value adjustment reflected in the Accounts. The equity interest in PRODAC Hotelvideo Communication Systems Ltd., Bedford, Great Britain, reflected in the balance sheet of December 31, 1995 will be fully depreciated in the fiscal year 1996. 11. The inventories shown in the balance sheet of December 31, 1995 are with respect to quantity and quality (1) in the case of raw materials, supplied goods and semi-finished goods usable in the ordinary course of business and (2) in the case of finished products and merchandise goods sellable in the usual course of business at then prevailing market prices or manufacturing cost or acquisition cost, whatever is higher. 12. The pension accrual shown in the Balance sheet of December 31, 1995 duly reflects the cash value of the Company's liabilities from commitments for company pension plans (both -11- direct and indirect commitments) on the basis of a calculation interest rate of 6 per cent and the application of the orientation schedules of Dr. Karl Heuberg in their 1982 version. 13. Neither the Company nor any Subsidiary owns any real property. Attachment ---------- 4.13 to the Reference Deed sets forth a true and complete list of all office ---- lease contracts entered into by the Company or any of its Subsidiaries. All such leases are valid and effective and there is no impending event of default under any of such leases. 14. Attachment 4.14.1 to the Reference Deed sets forth all assets necessary ----------------- for, or used in, the present business operations. Except as set forth in Attachment 4.14.2 to the Reference Deed, all such assets are reflected in ----------------- the balance sheet of December 31, 1995. Except as set forth in Attachment ---------- 4.14.3 to the Reference Deed, the Company is the legal and beneficial ------ owner of all fixed assets (Gegenstanden des Anlagevermogens) used in its -------------------------------- business operations. Such assets are free of any encumbrances or any other rights for the benefit of third parties. Such assets are in a useable operating and conservation condition. The Company is the legal and beneficial owner of all current assets (Gegenstande des Umlaufvermogens) ------------------------------- used in its business operations. With the exception of the items listed in Attachment 4.14.4 to the Reference Deed, such assets are free of any ----------------- encumbrances and any other rights for the benefits of third parties with the exception of statutory pledges or retention of title rights entered into the ordinary course of business for liabilities which are reflected in the balance sheet of December 31, 1995. To the extent the Company or a Subsidiary leases equipment which is necessary for the business, valid lease contracts exist which grant the company a right of use until the end of the contractually stipulated lease term. 15. Attachment 4.15 to the Reference Deed is a complete and correct list of all --------------- industrial property rights and copyrights (patents, utility models, trademarks, design patents, copyrights and topographic rights) which are owned by the Company or any Subsidiary or with respect to which the Company or any Subsidiary has been granted a license for use as well as of, with respect to such rights in respect of which the Company or any Subsidiary has been granted a licence for use, a list of the relevant license agreements under exception of off-shelf standard software (DOS, Windows etc.). With the exception of the industrial property rights and copyrights set forth in this list neither the Company nor any Subsidiary uses in its business operations any other industrial property rights or copyrights nor is it dependent thereon. To the best knowledge of the Sellers no industrial property or copyrights used by the Company or any Subsidiary have been challenged by any third parties. The listed license agreements are valid, and there is no impending cancellation or termination of these agreements for any other reason. -12- 16. Between the Company and any Subsidiary on the one side and the Sellers, their relatives as well as enterprises affiliated with the Sellers within the meaning of Sect. 15 of the Stock Corporation Act (Aktiengesetz) on the ------------ other side there are no contractual relationships with the exception of those listed in Attachment 4.16 to the Reference Deed. --------------- 17. Attachment 4.17 to the Reference Deed is a complete and correct list of the --------------- 21 largest customers, the 10 largest direct sale customers (distributors) and the 10 largest suppliers of the Company as per October 31, 1996 as well as of all suppliers of the Company which, for goods and services of any kind, are the sole source of supply, i.e. for which there is no alternative source at comparable conditions (except for energy supply agreements, mail and telecommunication services), listing in each case the business volume for the fiscal year 1995. To the best knowledge of Sellers there is no reason to believe that any of such customers or suppliers of the Company will reduce the extent of its previous dealings with the Company to any material degree except as for the general development of the economy or market. 18. Attachment 4.18 to the Reference Deed is a complete and correct list of all --------------- bank accounts of the Company and each Subsidiary as well as the respective signatories. 19. Attachment 4.19 to the Reference Deed is a complete and correct list of all --------------- insurance policies taken out by, or for the benefit of, the Company, a Subsidiary or its business operations with the exception of any insurance of the motor vehicles used in the Company's or a Subsidiary's business operations. The respective policy holder is in good standing with respect to its obligations under the insurance contract. Insurance policies which lapse upon the acquisition of the Company by the Purchaser are marked. 20. Attachment 4.20.1 to the Reference Deed is a complete and correct list of ----------------- certain important (written or orally concluded) agreements and obligations of the Company or any Subsidiary (hereinafter referred to as the "Material Contracts", i.e. all agreements and commitments which relate to one of the following items or have been concluded with, or granted to, one of the following parties to the extent that such contracts have not yet been terminated or have not been fully performed: a) All agreements and obligations relating to the acquisition, divestiture, encumbrance or other disposal of real estate or real- estate-like rights; b) All agreements relating to the acquisition or the divestiture of fixed assets (Gegenstande des Anlagevermogens) including intangible ------------------------------- assets, physical fixed -13- assets (with the exception of real estate and real-estate-like rights) and financial assets whose value exceeds DM 50,000.-- per item or collectively DM 200,000.--; c) All usufructuary lease agreements (Pachtvertrage), rental agreements ------------- (Mietvertrage) including lease- and sublease agreements in respect of ------------ office-and business space, or leasing arrangements to the extent that they trigger regardless of for which party annual payments of DM 10,000.-- per item or collectively of DM 50,000.--; d) All license agreements into which the Company or any Subsidiary as licensor or licensee has entered to the extent that they trigger annual payments of DM 10,000.-- per item or collectively DM 50,000.--; e) All credit agreements into which the Company or any Subsidiary, as lender or borrower, has entered, with the exception of customary extensions of the due date of receivables or payables agreed to in the ordinary course of business, as well as all factoring arrangements; f) All agreements with domestic or foreign authorized dealers (Vertragshandler), commercial agents (Handelsvertreter) or agents as --------------- ---------------- well as all similar distribution agreements which either in case of their termination trigger compensation claims against the Company or whose notice period for termination exceeds three (3) months; g) All operating- and film delivery contracts with hotels referencing the contracting party and the location of the hotel, as well as all supply agreements (Ausstattungsvertrage) which are not fully performed or where the warranty period has not yet elapsed; h) All employment agreements which provide for an annual aggregate remuneration of more than DM 80,000.-- (as per the date of conclusion of such agreement) as well as all agreements with advisers to the extent that they trigger payments which exceed DM 50,000.-- per item or collectively DM 200,000.--; i) All agreements and obligations relating to pensions, other social benefits, profit participations, turnover participations or other success bonuses as well as similar agreements with the exception of those already mentioned under Section 4.20. h); -14- j) All material collective bargaining agreements and material shop agreements into which the Company or any Subsidiary has entered or to which the Company or any Subsidiary is subject (with the exception of multi-facility, regional or multi-regional collective bargaining arrangements); k) All cooperation and similar agreements with third parties as well as any agreement or obligation having a restrictive impact on competition; l) All agreements or obligations which have been entered into or assumed outside the ordinary course of business of the Company or any Subsidiary to the extent that they trigger annual payments of DM 50,000 per item or collectively DM 200,000.--; m) All securities granted and all obligations assumed by the Company in favour of the Subsidiaries; n) Other agreements and obligations which trigger annual payments exceeding DM 100,000.-- per item or collectively DM 500,000.--. The validity or enforceability of none of the Material Contracts has been legally contested or is doubtful. No Material Contract is terminated nor to the best knowledge of Sellers is about to be prematurely terminated. The Material Contracts listed in Attachment 4.20.2 to the Reference Deed ----------------- or particularly indicated in the above attachments are already terminated or about to be terminated. Neither the Company nor any Subsidiary nor to the best knowledge of Sellers their respective contractual partner are in breach of or in default with respect to, any Material Contract. The transaction contemplated in this Agreement to the best knowledge of Sellers will not give any party an express right to termination or amendment of a Material Contract. 21. Attachment 4.21.1 to the Reference Deed is a complete and correct list of ----------------- all employees of the Company and each Subsidiary, specifying their names, job designations, place of employment and the total amount paid or payable to such employee in the last fiscal year. No employee marked therein as "important" has declared an intention to terminate the employment relationship with the Company. There are no litigeous labour disputes with the exception of those listed in Attachment 4.21.2 to the Reference Deed. ----------------- 22. Attachment 4.22 to the Reference Deed is a complete and correct list of all --------------- powers of attorney issued by the Company and presently in force which are not reflected in the -15- excerpt from the commercial register attached hereto as Attachment 4.2 to -------------- the Reference Deed. 23. The Company and each Subsidiary has duly prepared and timely filed all tax returns. All taxes, social security contributions (Sozialversicherungsbeitrage) and all other public law dues of any kind --------------------------- owned by the Company or any Subsidiary have been paid upon their due date or, to the extent that such taxes, social security contributions and other public law dues have not yet been due at the respective statement day have been accrued for in the balance sheets being part of the Accounts and the Balance sheet of December 31, 1995, respectively; in particular, neither the Company nor any Subsidiary has made any hidden profit distributions. Attachment 4.23 to the Reference Deed is a complete --------------- and correct description of the corporate income tax structure of the usable equity (verwendbares Eigenkapital) shown in the Annual Statement ------------------------- 1995. The Company, after December 31, 1995, did not have shareholders who were not entitled to a set-off of corporation tax (Korperschaftsteueranrechnung). 24. The Company has applied for, received and used all public grants only in accordance with applicable law and in compliance with all regulatory orders, conditions and impositions. No such grants will have to be repaid as a result of the consummation of the transactions reflected in this Agreement nor due to other circumstances already known. 25. Attachment 4.25 to the Reference Deed is a complete and correct list of all --------------- legal disputes and regulatory proceedings to which the Company or any Subsidiary or employees of the Company or any Subsidiary (the latter only to the extent that such disputes or proceedings could result in a liability of the Company) are party or subject. Aside from the listed disputes and proceedings no disputes or proceedings are impending nor are there any circumstances which are likely to give rise to such disputes or proceedings. 26. The business facilities of the Company have been erected in compliance with all applicable law and regulatory orders (especially in the area of construction law and trade law). Neither their operation nor the other present business operations of the Company nor any of its products or services violate applicable law or regulatory orders. The Company has at its disposal all regulatory permits which are required for the conduct and continuation of its present business operations. To the best knowledge of Sellers neither a revocation nor any restrictions of such permits is impending. 27. The real estate used by the Company (whether or not such real estate is the property of the Company or third parties) as well as the other operational facilities are free of any pollution -16- of soil, ground water, air or any other environmental pollution for whose curing and cleaning up the Company could be held liable. The business operations of the Company do not result in any pollution of soil, water, air or any other environmental pollution with respect to whose omission the Company could be held liable. The Company has always observed all applicable environmental and zoning laws and other provisions. The fresh water supply, the disposal of waste water as well as of gases and solid emissions and effluent is fully assured for the present business operations. 28. Since December 31, 1995, the business operations of the Company have been and will be conducted exclusively in the ordinary course of business, in accordance with cautious practice and substantially in the same manner as before; there have been no materially adverse changes with respect to such business operations or the asset, financial or result situation or with respect to important assets or contracts of the Company. Since December 31, 1995 no profit distributions including preliminary and constructive distributions have been made nor have, except for in the ordinary course of business, hidden reserves been dissolved or withdrawn. 29. To the best knowledge of Sellers all information supplied to the Purchaser and its advisers by the Sellers prior to the recording of this Agreement is complete, correct and accurate in any respect. It is not misleading and does not omit anything relating to the Shares, the Company and its business operations which would be important for the individual information or which the Purchaser at the time of the recording of this Agreement for the evaluation of such information should know. To the best knowledge of Sellers there are no material facts or circumstances which in future could have a materially adverse impact on the Company and its business operations with the exception of general developments of the economy or the market. ARTICLE 5 LEGAL CONSEQUENCES 1. If one or several of the statements for which Sellers pursuant to Article 4 of this Agreement has assumed, a representation turns out not to be accurate, then the Purchaser and the Company have the right to demand that the Sellers within an appropriate period of time but in any case not later than 4 weeks after receipt of such demand remedy the situation. If Sellers within such period of time do not remedy the situation in accordance with this Agreement -17- or if such remedy in accordance with this Agreement is not possible, then the Purchaser and the Company have the right to obtain from Sellers monetary damages. A claim for monetary damages for the Purchaser only exists to the extent that the loss exceeds in total DM 100.000,--. The liability of the Sellers for damages is limited by the purchase price including the earnout payments stipulated in clause 3 of this Agreement and taking into account any purchase price reduction pursuant to clause 2 para. 4. The foregoing limit is initially reduced by an amount of DM 4,600,000.--, which equals the sum of the securities listed in clause 12 granted by the Sellers. The thus reduced limit shall be susequently increased by the amount in which the Purchaser redeems such securities. Any reduction of the purchase price pursuant to clause 2 para. 4 of this Agreement shall not be considered as a loss. Economic disadvantages due to the non-collection of the claims of the Company against PRODAC Hotelvideo-Communication Systems Ltd., Bedford, Great Britain and due to the worthlessness of the Company's interest in this company are also not considered as a loss. The legal principle expressed in Section 460, 464 of the Civil Code (Burgerliches Gesetzbuch) does not apply. If the ----------------------- seller's liability depends upon knowledge or imported knowledge, the knowledge of employee of the corporation shall be attributed to them. 2. All warranty rights of the Purchaser pursuant to this Article 5 are subject to a limitation period of two (2) years. This does not apply to legal defects of the Share sold with respect to which the statutory limitation period applies. The limitation period shall start to run with the Effective Date. 3. Any claims because of non-fulfillment of the warranties assumed in Sect. 4.23 expire due to the running of the limitation period (6) six months after the end of the field audit for the relevant period; this does not apply for cases of tax fraud and grossly negligent tax reduction. Mere adjustment of periods, i.e. to the extent that tax claims or tax reimbursements relating to the period before the Effective Date result in tax credits or tax claims after the Effective Date shall not be taken into account. ARTICLE 6 LIABILITY FOR THE PATRICK SCULLY LITIGIATION The Sellers shall be jointly and severally liable to the Purchaser for any amount exceeding GBP 25,000.-- which has to be paid by the Company or by PRODAC Hotelvideo-Communication -18- Systems Ltd., Bedford, Great Britain due to the litigation currently pending before the High Court of Justice, Queens Bench Division in Nottingham against Mr. Patrick Scully and Hotel Information Systems Limited with registered offices in Dublin, Ireland, reduced by the actual reduction in the Company's taxes due to the payment of the sum of judgment. The amount shall be payable within one month after final judgement has been rendered. Such amount shall be reduced, if possible, by the yearly earnout-payment pursuant to Sec. 3 of this Agreement. In the event that - with respect to the profit situation of the Company - no earnout-payment takes place or if the litigation is finally settled only after all earnout payments were effected, the Sellers shall pay the amount due directly to the Purchaser. -19- ARTICLE 7 BANK GUARANTY OF THE SELLERS To secure claims of the Purchaser under Art. 5 and Art. 2 (4) sentence 2 and Art. 6 of this Agreement, and regardless of any right to assert under this Agreement a claim for a higher amount, each of the Sellers shall provide to the Purchaser a bank guaranty on first demand of a major German bank (Grobank) in the amount of DM 500,000.-- by the IPO-Date, at the latest, however, on February 28, 1997. The bank guaranties shall have a term of at least two and a half years from the IPO-Date. The payment of the guaranty sum shall only be subject to the express declaration of the Purchaser that the respective Seller has not fulfilled its obligations under the Share Purchase Agreement. ARTICLE 8 WARRANTIES OF THE PURCHASER, LEGAL CONSEQUENCES 1. The Purchaser warrants to the Sellers in the form of a separate warranty that the following statements are correct and true as of the Closing: a) MagiNet Corp. is a corporation duly organised under the laws of the State of California and has been validly existing since then. MagiNet intends to transfer its registered office to the State of Delaware in compliance with the laws applying there. b) The Purchaser is the legal and economic owner of theCommon Shares, which are free from any encumbrances and other rights created in favour of third parties. The Purchaser is entitled to freely dispose of the Common Shares without the need to obtain the consent of any third party and such a disposal would not infringe the rights of any third party or general legal provisions; c) The Common Shares have been paid up in full; no repayments of contributions have been made either in a disclosed or undisclosed form; -20- d) No bankruptcy or composition proceedings have been instituted neither against the Purchaser nor against MagiNet Corp., and no circumstances are apparent which would justify the institution of such proceedings in the future; e) The annual accounts of the MagiNet Corp. for the business years 1993, 1994 and 1995 have been drawn up in compliance with generally accepted auditing principles in the USA (GAAP) and give a fair view of the assets and liabilities, financial position and earnings of the MagiNet Corp.; f) Since December 31, 1995 the business of MagiNet Corp. has been conducted exclusively within the scope of ordinary operations in accordance with prudent business practice and substantially in a manner consistent with previous practice. No material adverse changes have occurred in respect of the Company's operations, its assets and liabilities, financial position and earnings or in respect of important assets or agreements of the Company. 2. In the event that it should be found that one or more of the above statements is or are incorrect, the legal consequences mentioned in Art. 4 shall be appropriately applied. ARTICLE 9 ASSURANCES BY THE SELLERS CONCERNING THE PURCHASE OF THE SHARES; RESTRICTIONS ON TRANSFER; INVESTMENT INTENT OF SELLERS; UNITED STATES SECURITIES LAW COMPLIANCE; ADEQUACY OF DISCLOSURE Each of the Sellers hereby severally represents and warrants to MagiNet Corp. and the Purchaser, as of the date of this Agreement and as of the Closing, the following statement with respect to its acquisition of the MagiNet Corp. Common Shares (the "Common Shares") pursuant to this Agreement as follows: 1. EXPERIENCE. He has substantial experience in evaluating and investing in the ----------- securities of private companies similar to MagiNet Corp. so that he is capable of evaluating the merits and risks of his investment in the Common Shares and has the capacity to protect his own interests. 2. INVESTMENT. He will acquire the Common Shares pursuant to this Agreement for ---------- investment for his own account, not as a nominee or agent, and not with the view to, or for resale in -21- connection with, any distribution thereof. He understands that the Common Shares and the underlying Common Stock have not been and will not be registered under the 1933 Act by reason of a specific exemption from the registration provisions of the 1933 Act, the availability of which depends upon, among other things, the bona fide nature of his investment intent and the accuracy of his representations as expressed herein and in response to the inquiries of MagiNet Corp., if any. 3. RULE 144. He acknowledges that the Common Shares must be held indefinitely -------- unless subsequently registered under the 1933 Act or unless an exemption from such registration is available, and the Company is under no obligation to register the Common Shares. He is aware of the provisions of Rule 144 promulgated under the 1933 Act, which permit limited resale of shares purchased in a private placement subject to the satisfaction of certain conditions, including among other things, the existence of a public market for the shares, the availability of certain current public information about the Company, the resale's occurring not less than two years after he has purchased and fully paid for the securities to be sold, the sale's being effected through a "broker's transaction" or in transactions directly with a "market maker" and the number of shares being sold during any three-month period not exceeding specified limitations. 4. LEGENDED CERTIFICATES. He understands that, in addition to any legend --------------------- imposed by applicable state securities laws, the certificates representing the Common Shares to be issued at the Closing will bear a restrictive legend (and stop transfer orders shall be placed against the transfer thereof with the transfer agent of MagiNet Corp.), stating substantially as follows: THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933; AS AMENDED (THE "ACT"). THEY MAY NOT BE SOLD, TRANSFERRED ASSIGNED, OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO, OR AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY, THAT SUCH REGISTRATION IS NOT REQUIRED -UNDER THE ACT, OR A NO-ACTION LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION, THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN CONTRACTUAL RESTRICTIONS ON TRANSFER SET FORTH IN AN AGREEMENT BETWEEN THE COMPANY AND THE HOLDER, A COPY OF WHICH IS AVAILABLE FROM THE SECRETARYOF THE COMPANY. -22- 5. NO PUBLIC MARKET. He understands that, although MagiNet Corp. has proposed ---------------- to file the Registration Statement with the Commission, no public market currently exists for any of the securities issued by MagiNet Corp. and MagiNet Corp. has made no assurances that the Registration Statement will be declared effective or that a public market will ever exist for the securities of MagiNet. 6. ACCESS TO DATA: ADEQUACY OF DISCLOSURE. He has had an opportunity to discuss --------------------------------------- the business of MagiNet Corp., its management, and its financial affairs with its officers and has the opportunity to review the facilities of MagiNet Corp. He has had the opportunities to ask questions of officers of MagiNet Corp., and such questions were answered to his satisfaction. He understands that such discussion, as well as any written information issued by MagiNet Corp., were intended to describe certain aspects of the business of MagiNet and its prospects but were not necessarily or exhaustive description. He has reviewed the copies of the Registration Statement, including the matters discussed under the caption "Risk Factors" therein, has relied only on the written disclosures contained in the SEC Documents (including the Registration Statement) in making his decision to acquire the Common Shares, and believes such disclosure is adequate under the circumstances to permit him to make. such decision. 7. TAX LIABILITY. He has reviewed with his own tax advisors the domestic and -------------- foreign tax consequences of his investment in the Common Shares. He has relied solely on such advisors and not on any statements or representations of MagiNet Corp. or any of its representatives or agents. He understands that he (and not the Company, the Purchaser, or MagiNet Corp.) shall be responsible for his own tax liability that may arise as a result of his investment in the Common Shares. -23- ARTICLE 10 MARKET STAND-OFF AGREEMENT; CONFIDENTIALITY; ADDITIONAL COVENANTS OF SELLERS AND COMPANY 1. MARKET STAND-OFF AGREEMENT. Each of the Sellers agrees that he will not --------------------------- sell, make any short sale of, loan, grant any option for the purchase of or otherwise dispose of or transfer the Common Shares to any person or entity for a period of one year from the IPO Date. Each Seller agrees that MagiNet Corp. may instruct its transfer agent to place stop-transfer notations in its records to enforce the provisions of this section. During the term of the aforementioned restriction, each of the Sellers further agrees to execute and enter a market stand-off agreement in such form as may be requested by any underwriter of any public offering of the securities of MagiNet Corp.; provided, however, that such any such market stand-off agreement shall not limit in any manner the Sellers' obligations pursuant to this section. 2. CONDUCT OF BUSINESS. During the period from the date of this Agreement and -------------------- continuing until the earlier of the Closing or the termination of this Agreement in accordance with its terms, the Sellers and the Company agree that the Company and each of the Subsidiaries shall carry on its business in the usual, regular, and ordinary course in substantially the same manner as heretofore conducted and, to the extent consistent with such business, use all efforts consistent with past practice and policies to preserve intact the present business organizations of the Company and the Subsidiaries, to keep available the services of its present officers and key employees, and preserve its relationships with customers, suppliers, distributors, licensors, licensees, and others having dealings with it, to the end that the goodwill and ongoing businesses of the Company and the Subsidiaries shall be unimpaired at the Closing. The Sellers and/or the Company shall promptly notify MagiNet Corp. of any event or occurrence or emergency not in the ordinary course of business of the Company or any Subsidiary and any event which could have a Material Adverse Effect on the Company or any Subsidiary. 3. NO SOLICITATION. Until the earlier of the Closing or the termination of this ---------------- Agreement in accordance with its terms, neither the Company nor the Sellers will, and will not permit any of the officers, directors, employees, agents, shareholders or representatives of the Company or any Subsidiary to solicit, encourage, initiate, enter into, continue or participate in any negotiations or discussion with, or provide any information to any third party concerning, the possible acquisition of the Company or its capital stock, business, or assets, or any other transaction that would be inconsistent with the transactions contemplated by this Agreement. The Company and/or the Sellers will promptly notify MagiNet Corp. If it or any of the officers, directors, or shareholders of -24- the Company or any Subsidiary learns of any inquiry or proposal during the term of this covenant concerning the possible acquisition of the Company or its stock, business, or assets. Such notice shall include the name of the inquiring party and the terms and conditions of such inquiry or proposal. 4. ACCESS TO INFORMATION. The Company and the Sellers shall afford MagiNet ----------------------- Corp., the Purchaser, their accountants, counsel, and other representatives reasonable access during normal business hours during the period prior to the Closing to (i) all of its properties, books, contracts, commitments, and records and (ii) all other information concerning the business, properties, and personnel of the Company as MagiNet Corp., the Purchaser, their accountants, counsel, and other representatives may reasonably request. The Company and the Sellers agree to provide MagiNet Corp., the Purchaser, their accountants, counsel and other representatives copies of internal financial statements promptly upon request. No information or knowledge obtained in any investigation pursuant to this provision shall affect or be deemed to modify any representation or warranty contained herein or the conditions to the obligations of the parties to consummate the transactions contemplated by this Agreement. 5. CONFIDENTIALITY. From the date hereof to and including the Closing Date, the ---------------- parties hereto shall maintain and cause their directors, employees, agents, and advisors to maintain in confidence and not to disclosure or use for any purpose, except the evaluation of the transactions contemplated hereby and the accuracy of the respective representations and warranties of the parties hereto contained herein, information concerning the other parties hereto and obtained directly or indirectly from such parties, or their directors, employees, agents or advisors, except such information as is or becomes (i) available to the non-disclosing party from third parties not subject to an undertaking of confidentiality; (ii) generally available to the public other than as a result of a breach by the non- disclosing party hereunder, or (iii) required to be disclosed under applicable law; and except such information as was in the possession of such party prior to obtaining such information from such other party as to which the fact of prior possession such possessing party shall have the burden of proof. In the event that the transactions contemplated hereby shall not be consummated, all such information which shall be in writing shall be returned to the party furnishing the same, including to the extent reasonably practicable, copies or reproductions thereof which may have been prepared. The Sellers and the Company acknowledge and agree that the rules and regulations of the Commission require that this Agreement and the employment agreements of the Sellers and potentially other agreements be filed as exhibits to the Registration Statement. -25- 6. INSIDER TRADING POLICY. Each of the Seller's acknowledges that, following ----------------------- the Closing, he will be subject to applicable rules on Insider Trading Policy adopted August 8, 1996, as amended from time to time (the "Policy"), and agrees to comply with its terms for so long as it applies to him. 7. REGISTRATION. MagiNet Corp. shall prepare and file, and the Sellers shall ------------- assist in preparing and filing, a registration statement on Form S-3 under the 1933 Act ("Registration Statement") pertaining to the offer and sale of the Common Shares to be issued to the Sellers pursuant to Article 2 of this Agreement and that my be issued to the Sellers pursuant to Article 3 of this Agreement. As contemplated by the Policy, the Sellers shall not sell, and the Registration Statement shall not permit the sale of such Common Shares during any "black-out period", as defined in the Policy. Each Seller shall provide to MagiNet Corp. and its counsel for inclusion in the Registration Statement such information concerning Sellers as MagiNet Corp. or its counsel may reasonably request, and all of such information shall be in form and substance reasonably satisfactory to MagiNet Corp. and its counsel and shall be true, complete and correct. MagiNet Corp. and each of the Sellers shall use their reasonable efforts to respond to any comments of the Commission and to have the Registration Statement declared effective on or before the date that is one year from the IPO Date. The Sellers will supply MagiNet Corp. with copies of all correspondence between the Sellers or any of their respective representatives, on the one hand, and the Commission on the other hand, with respect to the Registration Statement. Whenever any event occurs that should be set forth in an amendment or supplement to the Registration Statement, MagiNet Corp. or the Sellers as the case may be, shall promptly inform the other party of such occurrence and cooperate in filing with the Commission any such amendment or supplement. MagiNet Corp. will use reasonable commercial efforts to maintain the effectiveness of the Registration Statement until any of the Common shares covered by the Registration Statement can otherwise be sold pursuant to Rule 144. MagiNet Corp. shall bear all expenses incident to preparing, filing and maintaining the effectiveness of the Registration Statement pursuant to this Article 10 (7), provided that the Sellers shall be responsible for expenses of their legal, accounting, financial and other advisors and for any commissions, discounts or other selling expenses. ARTICLE 11 CONTRIBUTION OF EQUITY CAPITAL The Purchaser shall within one month after the Closing take the necessary steps to increase the share capital of the Company by DM 5,000,000.-- in particular to contribute in full the according -26- capital amount and to contribute within a further three month's period an additional amount of DM 5,000,000.-- in the form of equity capital or financial resources equivalent to equity capital. ARTICLE 12 REDEMPTION OF CREDIT SECURITY 1. The Purchaser intends to redeem the following credit security items provided by the Sellers or their spouses: a) Land charge of DM 1,000,000.-- relating to the property registered in the land register of the Local Court of Cologne, District of Lovenich Folio 20467, Part III, serial number 3 in favour of Philips Mietsystem GmbH, Steindamm 55, 20099 Hamburg, securing leasing claims; b) Land charge of DM 1,000,000.-- relating to the property registered in the land register of the Local Court of Cologne, District of Lovenich Folio 20467, Part III, serial number 3 in favour of Philips Mietsystem GmbH, Steindamm 55, 20099 Hamburg, securing leasing claims; c) Surety as principal and co-debtor of Mr. Kasbach for DM 800,000.-- in favour of Stadtsparkasse Koln securing a multifunctional loan facility in the amount of DM 2.600.000,--; d) Surety as principal and co-debtor of Mr. Wirt for DM 800,000.-- in favour of Stadtsparkasse Koln securing a multifunctional loan facility in the amount of DM 2.600.000,--; -27- e) Surety as principal and co-debtor of Mr. Kasbach for DM 500,000.-- in favour of Deutsche Bank AG, Cologne Branch securing claims resulting from the entire business relation; f) Surety as principal and co-debtor of Mr. Wirt for DM 500,000.-- in favour of Deutsche Bank AG, Cologne Branch securing claims resulting from the entire business relation. 2. For this reason, the Purchaser together with the Sellers will use reasonable efforts to obtain a written declaration from the afore- mentioned secured parties that they will release the Purchaser from the respective security obligations granted to it by the Sellers or their spouses, at least in so far as that the Purchaser fulfills its capital contribution obligation pursuant to Article 11 of this Agreement. 3. Should the redemption of any of the afore-mentioned security items fail due to lack of consent by the secured party, the Purchaser will indemnify the Sellers and/or their spouses inter partes in the event of any claims being raised under such security. 4. In the event that the declarations pursuant to para. 2 have not been made at the Closing (a condition precedent), the Purchaser hereby grants to the Seller a pledge on the Shares to secure the indemnification claim pursuant to para. 3. The Sellers hereby accept this pledge subject to the condition precedent. The pledge shall cease to exist, when the last security is released by the respective secured party. ARTICLE 13 EMPLOYMENT AS MANAGING DIRECTORS 1. The employment relationships of the Sellers with the Company will be continued from the Closing as stipulated in the employment contracts attached as Attachment 13.1 and 13.2 to the Reference Deed to be entered --------------- ---- into. In the event the management is transferred to another legal entity due to a conversion of the Company into a partnership, the Purchaser shall be responsible for the appointment of the Sellers as managing directors of this legal entity with the consequent continuation of their employment contracts. -28- 2. The Purchaser agrees that the Company may pay the Sellers jointly a bonus payment totalling DM 90,000.-- prior to the Closing. The distribution inter se is up to the Sellers. ARTICLE 14 DUTY OF MAGINET CORP. TO TAKE RESPONSIBILITY MagiNet Corp. takes responsibility towards the Sellers for the performance of the duties assumed by the Purchaser in this Agreement. Any objections and pleas due to the Purchaser from this Agreement or from other legal relationships with the Sellers may also be asserted by MagiNet Corp. ARTICLE 15 COVENANT NOT TO COMPETE 1. Each of the Sellers undertakes that he will abstain during a period of 5 years from the Closing from engaging in any activity in the territory of the European Economic Area by which he would compete directly or indirectly with the current operations of the Company or which would result directly or indirectly in such a competition. In particular, each of the Sellers will not found or acquire or participate in or counsel any company which operates in direct or indirect competition with the current operations of the Company. Excepted from this covenant not to compete is the acquisition of shares up to a maximum of 1% in listed companies and a possible activity as a Director or member of the Executive Committee of MagiNet Corp. pursuant to Art. 17 para. 4 of this Agreement. 2. In the event that a Seller should infringe the covenant not to compete as agreed in paragraph 1 above and continues such infringement despite a warning given by the Purchaser or MagiNet Corp., the Seller shall pay a contractual penalty of DM 500,000 (in words: five hundred thousand Deutsche Mark) to the Purchaser. Should the infringing act continue, the Seller shall pay a further contractual penalty amount to DM 500,000.-- (in words: five hundred thousand Deutsche Mark) for each further month of infringement. The right of the Purchaser to assert any additional damage which may be incurred by it or by the Company and to demand cessation of the forbidden behaviour shall remain unaffected. -29- ARTICLE 16 CONFIDENTIALITY 1. The parties are agreed that they will treat as strictly confidential any knowledge which they may obtain of one another and the affiliated companies in connection with the negotiation and the conclusion of this Agreement. 2. None of the parties will make a press statement or similar announcements in respect of the legal acts regulated by this Agreement without previously bringing about a written understanding with the other party. Excepted from this are any announcements or other statements by MagiNet Corp. in connection with the preparation of realisation of the IPO. ARTICLE 17 PRINCIPLE OF FUTURE COOPERATION, REPAYMENT OF SHAREHOLDER LOANS 1. Following recording of this Agreement, the Sellers in their capacity as Managing Directors of the Company shall make decisions outside the ordinary course of business or a plan agreed between the Company and MagiNet Corp. in the following matters only in close coordination with MagiNet Corp.: a) Conclusion, amendment and termination of operating agreements; b) Conclusion, amendment and termination of leasing agreements; c) Pricing; d) Personnel decisions; e) Additional borrowings in excess of plans agreed upon between the corporation and MagiNet Corp; f) Marketing strategy; g) Technology; h) Any other matters of fundamental importance in which MagiNet Corp. as the future acquiror of the Shares has a justified interest. 2. The Purchaser agrees that the Company will repay the shareholder loans made available to it and currently outstanding in the amount of DM 130,000.-- to the Sellers within ten bank working days from the -30- Closing. The sellers shall document the repayment of the shareholder loan in an appropriate manner. 3. The Purchaser further agrees that the current employee bonus plan of the Company shall be performed without any changes in the fiscal year 1996. 4. The Purchaser shall be responsible to achieve that the Sellers after the Closing and as long as they together hold 1% of the respective share capital of the MagiNet Corp. and hold their offices as managing directors of the Company are represented together by one seat on the Board of Directors of MagiNet Corp. The seat on the Board of Directors of MagiNet Corp. should be filled by the Sellers, if appropriate, by regular rotation for one term of office each. ARTICLE 18 RESCISSION OF THE CONTRACT IN THE EVENT OF BANKRUPTCY OR COMPOSITION PROCEEDINGS OF MAGINET CORP. In the event that (i) the IPO has not taken place on March 31, 1997 and (ii) MagiNet Corp. prior to August 31, 1997 is subject to bankruptcy or composition proceedings, the Sellers shall have the right to rescind this Agreement by means of a written declaration to the Purchaser. The right of rescission can be exercised by each Seller, however, only with effect for both the Sellers. ARTICLE 19 MISCELLANEOUS 1. The cost of the financial audit and the due diligence examination shall be borne by the Purchaser. The cost of recording by notary public shall be borne at one half each by the Sellers and the Purchaser. Apart from this, each party shall bear the costs of its own advisors. 2. Any modifications of and amendments to this Agreement, including this provision, shall be made in writing, unless a notarial form must be observed. 3. The Purchaser may assign its rights and obligations under this Agreement without the consent of the Sellers to another domestic entity directly or indirectly owned by MagiNet Corp. MagiNet Corp. may assign its rights and obligations under this contract only with the consent of the Sellers; provided, however, the Sellers hereby agree that MagiNet Corp. may transfer its rights and obligations by way of merger to a successor corporation organized under the laws of the State of Delaware. The Sellers hereby already give their consent to such assignment. 4. Should any provision of this Agreement be wholly or partly ineffective or unenforceable, the effectiveness and enforceability of all the remaining provisions of this Agreement shall not be affected thereby. The ineffective or unenforceable provision shall be considered replaced by such effective and enforceable provision as comes as close as possible to the economic purpose pursued by the parties to the Agreement by the ineffective or unenforceable provision. -31- 5. Any agreements made between the parties to the Agreement prior the the conclusion of this Agreement have been superseded by the conclusion of this Agreement. 6. This Agreement - except the Option Agreement - shall be governed by the laws of the Federal Republic of Germany. In case of any disputes arising between the parties to the Agreement out of this Agreement, the parties to the Agreement agree as far as permitted by statute that Cologne shall be the venue. II. The Reference Deed referred to in the preamble of the above agreement was available to the persons appearing during the recording of this Deed. The notary advised the parties of their right to have such Reference Deed read out again and attached to this Deed. The persons appearing confirmed that the contents of such Reference Deed are known to them and that they waive their rights to such reading and attachment. The persons appearing then approved all statements made by Dr. Nicolas Baron von Behr in connection with the execution of such Reference Deed as attorney without power of representation ("vollmachtloser Vertreter"). ------------------------ Thereafter, the persons appearing under 1. and 2., when questioned by the notary public, stated that the assets of the Company do not include any domestic real estate. The notary thereupon advised the deponents that the acquisition of all shares in a company whose assets include domestic real estate is subject to real estate acquisition tax. The notary advised the deponents, - - that the persons acting on behalf of the Purchaser before its registration in the Commercial Register will be personally liable; - - that in case of a divestiture of shares in a GmbH only that party is vis-a- vis the company recognized as the acquiror whose acquisition has been notified to the company together with the submission of evidence of the transfer; -32- - - that the acquiror is bound by acts taken before such notification by the company vis-a-vis the vendor or by the vendor vis-a-vis the company with respect to the shareholding relationship; - - that the acquiror is together with the vendor liable for contributions on the shares which are still outstanding at the time of such notification. The deponents asked the notary to notify the acquisition of the shares by the Purchaser to the Company by means of submitting a certified copy of this Deed. The above protocol including the attachments was read in the presence of the notary to the deponents, approved by them and then signed by them and the notary in their own hands as follows: /s/ Authorized signatures Appendix 3 ---------- Earn-out -------- I. Goals and definitions --------------------- 1. THE GOALS FOR EACH OF THE YEARS 1997, 1998 AND 1999 CONSIST OF THE FOLLOWING FOUR SUB-GOALS: Sub-goal percentage share of total goal -------- ------------------------------ New hotel rooms 20% Average net monthly sales per hotel room 20% Operations costs and manufacturing costs/sales 40% Installation costs per hotel room 20% 2. NEW HOTEL ROOMS IS THE TOTAL NUMBER OF HOTEL ROOMS FOR WHICH THE CORPORATION AND ITS 100% SUBSIDIARIES HAVE FULLY INSTALLED VIDEO SYSTEMS WHICH YIELD SALES FOR THE RELEVANT FISCAL YEAR. 3. AVERAGE MONTHLY NET SALES PER HOTEL ROOM IS THE TOTAL SALES (within the meaning of (S)(S) 275 par. 2 No. 1 German Commercial Code, excluding value-added tax) during a fiscal year divided by 12 which arise from the presentation of video films, excluding all other interactive systems and services, per hotel room. "Hotel room" qualifies as all installed and operating hotel rooms. If a new hotel room is not installed and in operation for the entire year, said hotel room shall count on a pro rata -------- temporis basis. -------- 2 4. Operating costs and manufacturing costs are defined by Ernst & Young according to U.S. generally accepted accounting principles for the financial statements for the period ended September 30, 1996. 5. Installation costs per hotel room are defined by Ernst & Young according to U.S. general accepted accounting principles for the annual financial statements for the period ended September 30, 1996. Installation costs within the meaning of this paragraph 5 are costs for the installation of systems for the presentation of film videos excluding costs for the installation of other interactive systems and service systems. II. General rules ------------- The following tables indicate standards and percentage rates for the sub-goals. If a sub-goal is achieved or not met, a claim arises in the amount of the relevant percentage rate of the relevant sub-goal. Ernst & Young's methods for the determination of Prodac costs are to be used as the basis for the definition of performance compared to the earn-out goals. Services below the 40% level result in no earn-out for the given year (see example for installation costs below). The current sub-goals are based on PRODAC's operating results for the period ended June 30, 1996. The sub-goals (1) operating costs and manufacturing costs/sales, (2) average net monthly sales per hotel room and (3) installation costs per hotel room are to be changed in such a manner that PRODAC's operating results for the period ended September 30, 1996, are as determined by Ernst & Young. In each case, the 100% sub-goal for 1996 must be replaced by the corresponding number for the first nine months of 1996. The increases from year to year and the drop from 100% to 40% remain the same in absolute numbers. Example: Average net monthly sales per hotel room for the first nine months of 1996: [***]. -------------------------------------------------------------------- [***] Confidential treatment requested pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission. 3 1997 1998 1999 100% 80% [***] 60% 40% III. Example: ------- Assumptions: ----------- Sub-goals achieved in 1998: New hotel rooms Average net monthly sales per hotel room Operations costs and manufacturing costs/sales [***] Installation costs per hotel room -------------------------------------------------------------------- [***] Confidential treatment requested pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission. 4 Result: ------ New hotel room sub-goal: 80% achieved This totals 20% of the total goal; thus 16% has been achieved Average net sales per hotel room sub-goal: 40% achieved This totals 20% of the total goal; thus 8% has been achieved Operating costs and manufacturing costs divided by sales sub-goal: 80% achieved This totals 40% of the total goal; thus 32% has been achieved Installation costs sub-goal not achieved 0% This totals 20% of the total; thus 0% has been achieved New hotel rooms 16% Average monthly net sales per hotel room 8% Operating costs and manufacturing costs divided by sales 32% --- 56% Thus a claim for DM 2,800,000.00 arises for 1998. Given an assumed tax rate of 25%, DM 700,000.00 in cash and DM 2,100,000.00 in MagiNet Corporation shares must be paid. Operating expenses and New 97 98 99 cost of goods 97 98 99 Hotel rooms Rooms Rooms Rooms sold/revenue % % % 100% 100% 80% 80% 60% [***] 60% [***] 40% 40% Average monthly net revenue per Installation 97 98 99 room DM DM DM cost DM DM DM 100% 100% 80% 80% 60% [***] 60% [***] 40% 40% -------------------------------------------------------------------- [***] Confidential treatment requested pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission. OMITTED ATTACHMENTS AND ANNEXES TO EXHIBIT 2.1 The Registrant hereby agrees to furnish such attachments and annexes upon the request of the Securities and Exchange Commission. Annexes - ------- 2.2.1. Seller's right to purchase 150,000 options to buy Common Stock under 1992 Key Personnel Stock Option Plan. 2.2.2. Seller's right to purchase 150,000 options to buy Common Stock under 1992 Key Personnel Stock Option Plan. Attachments - ----------- 4.2 Articles of Association 4.3.1 List of Subsidiaries 4.3.2 Exceptions to wholly owned subsidiaries 4.7 Stated capital description 4.10 List of receivables with uncertain value 4.13 List of office lease contracts 4.14.1 List of Assets in present business operations 4.14.2 List of assets not included on balance sheet 4.14.3 List of Assets where Prodac is not legal and beneficial owner 4.14.4 List of assets not free of all encumbrances and liens 4.15 List of industrial property rights and intellectual property rights owned by Prodac 4.16 Agreements between Sellers and Prodac or its subsidiaries 4.17 List of 21 largest customers and 10 largest suppliers 4.18 List of bank accounts of Prodac and its subsidiaries 4.19 List of insurance policies of Prodac and its subsidiaries 4.20.1 List of material agreements a. list of agreements relating to real estate b. list of agreements relating to fixed assets c. list of lease agreements d. list of license agreements e. list of credit agreements f. list of agreements with domestic or foreign dealers g. list of film operating and film delivery agreements h. list of certain employment agreements i. list of employee benefit agreements j. list of collective bargaining agreements k. list of cooperation agreements (restricting competition) l. list of agreements outside the scope of normal business operations m. list of securities granted and obligations assumed by the Company in favor of the subsidiaries n. list of certain other agreements 4.20.2 List of material agreements that have been terminated 4.21.1 List of employees 4.21.2 List of labor disputes 4.22 List of Powers of Attorney 4.23 List of corporate income tax structure 4.25 List of all legal disputes and regulatory proceedings 13.1 Employment agreement for Seller as Managing Director of Prodac 13.2 Employment agreement for Seller as Managing Director of Prodac EX-2.2 3 AMENDMENT OF THE SHARE PURCHASE & TRANSFER AGR. EXHIBIT 2.2 (Translated from German to English) Recorded in Frankfurt am Main on November 19, 1996 Before me, the undersigned notary Dr. Harald Jung with official residence in Frankfurt am Main, appeared today in the offices of the law firm Bruckhaus Westrick Stegemann, Taunusanlage 11, 60329 Frankfurt am Main where the acting notary betook himself at the request of the persons appearing. 1. Attorney-at-law Dr. Nicholas Baron von Behr, having his business address at Taunusanlage 11, 60329 Frankfurt am Main, personally known. 2. Attorney-at-law Dr. Konstantin Mettenheimer, having his business address at Taunusanlage 11, 60329 Frankfurt am Main, personally known. The person appearing under 1. declared that he was not acting in his own name but as attorney without power of attorney ("vollmachtloser Vertreter") for Messrs. Heinrich R. Wirt and Reiner Kaesbach (hereinafter collectively referred to as the "Sellers") with business address at Max-Planck Strasse 38, 50858 Cologne, a) on the one hand in their function as shareholders of PRODAC Prozessdatentechnik GmbH having its registered office in Cologne, registered in the Commercial Register of the Local Court of Cologne under register number HRB 10002 (hereinafter referred to as the "Company") and b) on the other hand in their function as Managing Directors of the Company, authorized to represent the Company individually and being released from the restrictions set forth in (S) 181 German Civil Code. The acting notary has assured himself on the basis of a certified excerpt of the Commercial Register dated August 12, 1996 that the persons appearing under 1. and 2. are authorized to represent the Company. The notary was provided with a shareholders resolution adopted on November 06, 1996 in which the release of the persons appearing under 1. and 2. from the restrictions set forth in (S) 181 German Civil Code was confirmed as a matter of precaution. The person appearing under 1. subjected the validity of his declarations to the declaration of consent of the representatives. The person appearing under 2. declared that he was not acting in his own name but a) as attorney in fact on behalf of MagiNet GmbH i.G. with registered office in Cologne, established in the notarial deed of September 10, 1996 No. 1274/96 of the notary public Dr. Gerhard Hess in Frankfurt am Main (hereinafter referred to as the "Purchaser"). The notary has, on the basis of an executed copy of the Incorporation Deed which has been taken to this Deed as copy and a power-of-attorney dated November 06, 1996, which was presented in original and is attached as certified copy, assured himself that the person appearing under 2. has the power to represent the Purchaser and is released from the restrictions set forth in (S) 181 German Civil Code. b) as attorney in fact on behalf of MagiNet Corporation with registered office in Sunnyvale, California 94089 USA (hereinafter referred to as "MagiNet Corp."). The notary has satisfied himself on the basis of a notarial certified and legalized Secretary's Certificate and a power of attorney dated November 06, 1996 which was presented in original and is attached as certified copy, that the persons appearing under 2. has the power to represent MagiNet Corp. I. Acting as stated, the persons appearing then requested the recording of the following Amendment of the SHARE PURCHASE AND TRANSFER AGREEMENT of November 6, 1996, No. 43 of the document register 1996 of the civil law notary Dr. Harald Jung with official residence in Frankfurt am Main (hereinafter referred to as the "Share Purchase Agreement"). In the event terms are defined in the Share Purchase Agreement, they shall have the same meaning hereafter. The parties agree as follows: I. CONDITIONS PRECEDENT 1. The validity of the Share Purchase Agreement the parties have entered into is subject to the following condition precedent: a) financing of the purchase of the shares in Prodac Prozessdatentechnik GmbH shall be secured by the Purchaser either by public or by private issuance of equity in the minimum amount of US $ 40,000,000.-- and b) declaration of consent in the meaning of Section 184 subsec. 1 German Civil Code shall be given by the Board of Directors of MagiNet Corp. (referred to as "Board of Directors"). 2. The consent of the Board of Directors is deemed to be definitely refused if not granted 10 days after securing the financing. II. STOCK OPTION AGREEMENT The parties also agree that the option agreements mentioned in Article 2.1c) of the Share Purchase Agreement and which are included in the Reference Deed of November 5, 1996, No. 41 of the document register 1996 of the civil law notary Dr. Harald Jung with official residence in Frankfurt am Main, as Appendices 2.2.1 and 2.2.2 (the "Stock Option Agreements") shall be amended as follows: The passage on page one (1) of the Stock Option Agreements "Date of Grant September 10, 1996" shall be replaced by the following formulation: ..Date of Grant The date on which the transfer of the shares in Prodac Prozessdatentechnik GmbH according to the Share Purchase and Transfer Agreement of November 6, 1996 becomes valid" A certified copy of the Share Purchase Agreement and the relating Reference Deed has been at the disposal of the persons appearing who waived to take the agreement to this deed. The above protocol including the attachments was read in the presence of the notary to the deponents, approved by them and then signed by them and the notary in their own hands as follows: /s/ Authorized signatures EX-4.1 4 SPECIMEN COMMON STOCK CERTIFICATE EXHIBIT 4.1 NUMBER SHARES C MAGINET INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE THIS CERTIFICATE IS TRANSFERABLE IN SEE REVERSE FOR CERTAIN DEFINITIONS BOSTON, MA OR NEW YORK, NY AND A STATEMENT AS TO THE RIGHTS, PREFERENCES, PRIVILEGES AND RESTRICTIONS ON SHARES THIS CERTIFIES THAT CUSIP 55917Q 10 8 [BACKGROUND SHOWING OUTLINE OF CONTINENTS OF THE WORD] IS THE OWNER OF FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK, $.001 PAR VALUE, OF MAGINET CORPORATION transferable on the books of the Corporation by the holder hereof in person or by duly authorized attorney upon surrender of this Certificate properly endorsed. This Certificate is not valid until countersigned by the Transfer Agent and Registrar. WITNESS this facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers. DATED /s/ James A. Barth /s/ Kenneth B. Hamlet - --------------------------- ---------------------------- SECRETARY PRESIDENT [CORPORATE SEAL OF MAGINET CORPORATION SEPT. 23, 1996 * DELAWARE *] COUNTERSIGNED AND REGISTERED: THE FIRST NATIONAL BANK OF BOSTON TRANSFER AGENT AND REGISTRAR BY [Signature] --------------------------- AUTHORIZED SIGNATURE A statement of the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights as established, from time to time, by the Certificate of Incorporation of the Corporation and by any certificate of determination, the number of shares constituting each class and series, and the designations thereof, may be obtained by the holder hereof upon request and without charge at the principal office of the Corporation. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed and though they were written out in full according to applicable laws or regulations:
TEN COM -- as tenants in common UNIF GIFT MIN ACT-- ____________ Custodian ___________ TEN ENT -- as tenants by the entireties (Cust) (Minor) JT TEN -- as joint tenants with right of under Uniform Gifts to Minors survivorship and not as tenants Act ______________________________ in common (State) UNIF TRF MIN ACT-- _______ Custodian (until age ____) (Cust) __________ under Uniform Transfers (Minor) to Minors Act ___________________ (State)
Additional abbreviations may also be used though not in the above list. FOR VALUE RECEIVED, _________________________________ hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE __________________________________________ __________________________________________ ________________________________________________________________________________ (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE) _______________________________________________________________________________ _______________________________________________________________________________ _______________________________________________________________________ Shares of the capital stock represented by the within Certificate, and so hereby irrevocably constitute and appoint _______________________________________________________________________ Attorney to transfer the said stock on the books of the within named Corporation with full power of substitution in the premises. Dated ________________________ X _____________________________________ X _____________________________________ THE SIGNATURE(S) TO THIS ASSIGNMENT NOTICE: MUST CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER. Signature(s) Guaranteed By __________________________________ THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15. EX-10.28 5 SUMMARY OF TERMS FOR 2ND AMENDMENT TO NOTE AGR. EXHIBIT 10.28 SECOND AMENDMENT TO NOTE AGREEMENT DATED AUGUST 15, 1995 SUMMARY OF TERMS EFFECTIVE DATE: NOVEMBER 21, 1996 MagiNet Corporation, a California corporation (the "Company"), and each of the institutions (collectively, the "Noteholders") which is a signatory to this Summary of Terms amend the Note Agreement dated August 15, 1995, as amended by the First Amendment Agreement dated May 15, 1996 (the "Note Agreement"), and the outstanding warrants, as amended, issued to the Noteholders pursuant to the Note Agreement (the "Warrants"). The following summarizes the principal terms of such amendment to the Note Agreement. Amendment to Note Agreement - --------------------------- . Section 8.3 of the Note Agreement concerning Adjusted Consolidated Net Worth will be amended as set forth in Exhibit A. --------- . Section 8.4 of the Note Agreement concerning Total Debt to Total Adjusted Capitalization will be amended as set forth in Exhibit A. --------- . Section 8.5 of the Note Agreement concerning Total Debt to Historical EBITDA will be amended as set forth in Exhibit A. --------- . Section 8.6 of Note Agreement concerning Historical EBITDA will be amended as set forth in Exhibit A. --------- . Section 8.9 of the Note Agreement concerning Cumulative Installed Rooms will be amended as set forth in Exhibit A. --------- . The Company will covenant to use its best efforts to effectuate an initial public offering with gross proceeds to the Company of at least $40,000,000 prior to December 31, 1996. . The Noteholders agree that the Note Agreement, and all agreements thereunder, may be assigned by the Company to its successor corporation in connection with its redomiciliation in Delaware by appropriate legal instruments, including amendments to the Note Agreement. Any such assignment shall not relieve the Company of its obligations under the Note Agreement and related agreements. . Section 1 of the Warrants will be amended to eliminate the claw-back provision of the Warrants. If and when the Company obtains new equity financing in excess of $40,000,000: - ------------------------------------------------------------------------------ . Sections 8.4 and 8.9 of the Note Agreement concerning Total Debt to Total Adjusted Capitalization and Cumulative Installed Rooms, respectively, will be amended to the original covenant levels provided for in the Note Agreement. . Section 8.1(d)(y) of the Note Agreement will be amended to read in its entirety as follows: "(y) a security interest granted in connection with a financing, the proceeds of which were used to pay for the purchase, construction or improvement of such After-Acquired Property or to reimburse the Company for the purchase price of such After- Acquired Property 1 --------------------------------------------------------------------- [***] Confidential treatment requested pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission. (including a Lien incurred in connection with a sale-leaseback transaction or the subsequent financing of equipment purchased with cash); provided that such Liens shall only be permitted (pursuant to -------- this clause (d)) to the extent to which they shall attach to the assets acquired, constructed or improved;" . Section 8.3 of Note Agreement concerning Adjusted Consolidated Net Worth will be amended as set forth in Exhibit B. --------- . Section 8.5 of Note Agreement concerning Total Debt to Historical EBITDA will be amended as set forth in Exhibit B. --------- . Section 8.6 of Note Agreement concerning Historical EBITDA will be amended as set forth in Exhibit B. --------- . Section 8.10 of the Note Agreement will be amended so that the Company's negative covenant to not have, at any one time, Adult Titles represent more than 30% of all video entertainment offered by the Group and its Joint Venture Vehicles shall exclude from its calculation all video entertainment offered by the Group and its Joint Venture Vehicles in Europe for a period of two years from the effective date of this Agreement. During the two-year period, Adult Titles will not represent more than 50% of all video entertainment offered by the Group and its Joint Venture Vehicles in Europe. . Section 10.1 of the Note Agreement will be amended as follows (a) "CUMULATIVE INSTALLED ROOMS" shall mean the aggregate number of rooms the Company, its Subsidiaries and Joint Venture Vehicles have under contract to provide an in- room, on-demand or scheduled broadcast, pay-per-view entertainment and information system in hotels and in which rooms such a system has been installed, is fully operational and is capable of generating income; provided -------- however, that "Cumulative Installed Rooms" shall not ------- include rooms installed with systems acquired as a result of a merger or consolidation with, or acquisition of, any single competitor of the Company if the number of rooms installed with systems so acquired in any such transaction exceeds 10,000, except "Cumulative Installed ------ Rooms" shall include all rooms in which systems were installed, became operational or became capable of generating income subsequent to the effectiveness of such merger, consolidation or acquisition. (b) "HISTORICAL EBITDA" shall mean as of the date of determination the sum of all earnings before interest, taxes, depreciation and amortization of the Company on a consolidated basis during the immediately preceding four consecutive fiscal quarters, as set forth in the books and financial records of the Company; provided, that for purposes of Sections 8.5 only, to the extent any Person has become a Subsidiary of the Company (a "New Subsidiary") at any time during such four consecutive fiscal quarters, each such New Subsidiary shall be included on a pro forma basis as a member of the Group for the entire four consecutive fiscal quarters for purposes of determining Historical EBITDA, and historical EBITDA shall exclude amortization of all intangible assets and additional consideration paid in connection with the acquisition of Prodac GmbH ("Prodac"); and further provided, that for purposes of Section 8.6 only, to the extent that Prodac has become a Subsidiary of the Company prior to April 1, 1997, Prodac shall be included on a pro forma basis as a member of the Group for the entire four consecutive fiscal quarters for purposes of determining Historical EBITDA, and Historical EBITDA shall exclude amortization of all intangible assets and additional consideration paid in connection with the acquisition of Prodac. 2 If the Company fails to obtain new equity financing in excess of $40,000,000 - ---------------------------------------------------------------------------- through a public offering or other means prior to March 31, 1997: - ----------------------------------------------------------------- . On April 1, 1997, the Company will grant the Noteholders warrants to purchase up to 1,000,000 additional shares of Common Stock of the Company at an exercise price of $7.00 per share (the "New Warrants") on substantially the same terms set forth in the Warrants issued in connection with Note Agreement on August 15, 1995, as amended May 15, 1996. This Summary of Terms is binding upon the parties to the Note Agreement and the Warrants and will operate as an amendment thereto. The parties hereby agree to undertake their best efforts to enter into a Second Amendment Agreement on the terms hereof as soon as possible, which Second Amendment Agreement will supersede this Summary of Terms. The foregoing is hereby accepted as of the date first written above: MAGINET CORPORATION By: /s/ Authorized Signature ------------------------------------------- Name: Title: NEW YORK LIFE INSURANCE COMPANY By: /s/ Authorized Signature ------------------------------------------- Name: Title: THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK By: /s/ Authorized Signature ------------------------------------------- Name: Title: WASCIC COMPANY II By: /s/ Authorized Signature ------------------------------------------- Name: Title: NAMTOR BVC LP By: /s/ Authorized Signature ------------------------------------------- Name: Title: 3 EXHIBIT A No IPO and No Prodac --------------------
SECTION 8.3 ADJUSTED CONSOLIDATED NET WORTH - Default Level [***] SECTION 8.4 TOTAL DEBT TO TOTAL ADJUSTED CAPITAL - Default Level 09/30/97 85% SECTION 8.5 DEBT TO HISTORICAL EBITDA - Default Level 03/31/97 Waive 06/30/97 Waive 09/30/97 Waive 12/31/97 6.5 SECTION 8.6 HISTORICAL EBITDA - Default Level [***] SECTION 8.9 CUMULATIVE INSTALLED ROOMS - 2x Default Level [***]
4 --------------------------------------------------------------------- [***] Confidential treatment requested pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission. EXHIBIT B IPO + MagiNet and Prodac Consolidated -------------------------------------
SECTION 8.3 ADJUSTED CONSOLIDATED NET WORTH - Default level [***] SECTION 8.5 DEBT TO HISTORICAL EBITDA - Default Level 03/31/97 Waive 06/30/97 Waive 09/30/97 6.5 12/31/97 4.5 SECTION 8.6 HISTORICAL EBITDA - Default Level [***]
5 --------------------------------------------------------------------- [***] Confidential treatment requested pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission. EX-10.30 6 JOINT VENTURE AGREEMENT BY & AMONG REGISTRANT EXHIBIT 10.30 JOINT VENTURE AGREEMENT by and between PACIFIC PAY VIDEO, LIMITED and NAG YONG LEE TABLE OF CONTENTS PAGE ---- 1. Formation of the JVC.................................................... 1 2. Business Purpose........................................................ 2 3. Article of Incorporation of the JVC..................................... 2 4. Capital and Shares...................................................... 2 5. Conditions Precedent to Subscription.................................... 4 6. Preemptive Rights....................................................... 4 7. Transfer of Shares...................................................... 4 8. Shareholders............................................................ 5 9. Board of Directors...................................................... 5 10. Officers................................................................ 6 11. Statutory Auditor....................................................... 6 12. Financial Activity and Accounting....................................... 6 13. Related Agreements...................................................... 7 14. Non-competition......................................................... 8 15. Term.................................................................... 8 16. Termination............................................................. 8 17. Consequences of Termination............................................. 9 18. Miscellaneous........................................................... 10 18.1 Entire Agreement................................................. 10 18.2 Modifications.................................................... 10 18.3 Waiver........................................................... 11 18.4 Severability..................................................... 11 -i- TABLE OF CONTENTS (CONTINUED) PAGE ---- 18.5 Governing Law.............................................. 11 18.6 Arbitration................................................ 11 18.7 Expenses................................................... 11 18.8 Assignment................................................. 11 18.9 Third Party Benefits....................................... 11 18.10 No Partnership or Agency................................... 11 18.11 Force Majeure.............................................. 12 18.12 Notices.................................................... 12 18.13 Compliance with Law........................................ 12 18.14 Counterparts............................................... 12 18.15 Captions................................................... 13 18.16 Confidentiality of Agreement............................... 13 18.17 Language................................................... 13 Exhibits - -------- Exhibit A - Articles of Incorporation Exhibit B - Asset Purchase Agreement -ii- JOINT VENTURE AGREEMENT This JOINT VENTURE AGREEMENT (this "Agreement") is entered into as of March 1, 1995, by and among: I. Pacific Pay Video Limited, a corporation organized and existing under the laws of the State of California, United States of America, with its principal place of business at 405 Tasman Drive, Sunnyvale, California 94089, the United States of America ("PPV"); II. Nag Yong Lee, a Korean individual residing at 82-102, Hyundai Apartment, Apgujung-Dong, Kangnam-Gu, Seoul, Korea ("LEE"). RECITALS -------- A. PPV is engaged in the development, manufacture, maintenance and distribution of software, data processing works, accounting and computing machinery and video distribution involving on-demand pay per view entertainment and information systems for the lodging industry (hereinafter the "Products") and has acquired and possesses valuable technical information, and experience in the installation and operation of such Products; and B. LEE (hereinafter, the "Korean Partner") is engaged in the pre- scheduled hotel pay movie business in the Republic of Korea ("Korea") for numerous years and has thus developed expertise with respect to said business. C. PPV and LEE (hereinafter collectively, the "Parties," and individually, the "Party") have mutually agreed to establish a joint venture company in Korea to market, distribute and service such Products in the premier hotel industry in Korea in accordance with the terms and conditions of this Agreement. AGREEMENT --------- NOW, THEREFORE, in consideration of the mutual promises and covenants contained herein, the Parties agree as follows: 1. Formation of the JVC. -------------------- 1.1 Promptly upon the receipt of all authorizations, approvals, licenses and/or clearances from the Korean government or other authorities necessary to carry out the activities contemplated by this Agreement in form and substance satisfactory to all Parties, the Parties shall establish a joint venture company (the "JVC") as a joint stock company (chusik-hoesa) under the laws of Korea. 1.2 The name of the JVC shall be: (a) In Korean: PPV Korea Chusik-Hoesa; and (b) In English: Pacific Pay Video (Korea), Ltd. 1.3 The head office of the JVC shall be located at Seoul, Korea. Branches and other business offices may be established anywhere within or outside Korea, as required. 1.4 The Korean Partner shall render all possible assistance and support to PPV in the preparation and submission of an "Application for Approval of Foreign Investment" under the Foreign Capital Inducement Law and other related documents, and in securing all approvals, licenses and permits from the Korean authorities that are necessary or appropriate for the execution and performance of this Agreement under the most favorable terms and conditions possible. The Parties to this Agreement shall make best efforts to establish the JVC within 30 days after execution of this Agreement. 2. Business Purpose. The business purpose of the JVC shall be as follows: ---------------- (a) To market, distribute, and service software, data processing works; accounting and computing machinery and video distribution involving on- demand pay per view entertainment and information systems for use in the lodging industry in Korea; (b) To engage in foreign trade within the scope necessary for carrying out the foregoing activities; and (c) To engage in any and all acts, things, businesses and activities that are related, incidental or conducive, directly or indirectly, to the achievement of the foregoing businesses. 3. Article of Incorporation of the JVC. ----------------------------------- 3.1 The JVC's articles of incorporation (the "Articles") and internal regulations shall be in conformity with the terms and conditions of this Agreement. If any discrepancy is found between this Agreement and the Articles and internal regulations, the Parties shall amend the Articles and internal regulations to make them consistent with this Agreement. 3.2 The Parties shall cause the JVC to adopt the Articles that are substantially in the form attached hereto as Exhibit A. 4. Capital and Shares. ------------------ 4.1 The authorized capital of the JVC shall be TWO BILLION FIVE HUNDRED MILLION Korean won (2,500,000,000), divided into FIVE HUNDRED THOUSAND (500,000) shares of, common stock with a par value of FIVE THOUSAND Korean won (5,000) per share. -2- 4.2 The paid-in capital of the JVC at the time of incorporation shall be FIVE HUNDRED SIXTY MILLION Korean won (560,000,000), divided into ONE HUNDRED TWELVE THOUSAND (112,000) shares of common stock with a par value of FIVE THOUSAND Korean Won (5,000) per share. 4.3 The amount of subscription prices to be contributed and the number of shares to be subscribed for by each Party at the time of incorporation shall be as follows: (a) PPV: FOUR HUNDRED SEVENTY SIX MILLION Korean won (476,000,000) (equivalent to SIX HUNDRED TWO THOUSAND FIVE HUNDRED THIRTY TWO United States dollars [US$602,532]) divided into NINETY FIVE THOUSAND TWO HUNDRED (95,200) shares at FIVE THOUSAND Korean won (5,000) per share; (b) LEE: EIGHTY FOUR MILLION Korean won (84,000,000) (equivalent to ONE HUNDRED SIX THOUSAND THREE HUNDRED TWENTY NINE United States dollars [106,329]) divided into SIXTEEN THOUSAND EIGHT HUNDRED (16,800) shares at FIVE THOUSAND Korean won (5,000) per share. 4.4 Subject to the provision of Sections 4.5 and 4.6, the Parties shall make their respective contribution to the paid-in capital of the JVC in the following ratio: (a) PPV: eighty five percent (85%); (b) LEE: fifteen percent (15%); 4.5 The Parties shall make their respective initial capital contributions in cash in Korean won or equivalent U.S. dollars. 4.6 Any shares issued by the JVC shall be common stock of one (1) class, in non-bearer form evidenced by share certificates to be issued immediately after the JVC is incorporated. 4.7 CAPITAL CONTRIBUTION TABLE -------------------------- (WOOO)
DATE PPV LEE FORM - ---------------- ------- ------- --------------------- Initial 476,000 84,000 Cash for Common Stock April 1, 1995 657,333 116,000 Cash for Common Stock June 1, 1995 266,667 47,000 Cash for Common Stock Sept. 1, 1995 283,333 50,000 Cash for Common Stock Jan. 1, 1996 680,000 120,000 Direct loan or guarantee of third party loan
-3- In the event either party fails to make a cash contribution to equity in the amount and on the date specified, the other party shall have the right to make up such shortfall, and in such event the ownership percentages of the respective parties shall be adjusted accordingly. 4.8 Unless otherwise provided by Korean law or this Agreement, no additional shares of the JVC, whether common or preferred, shall be authorized or issued except upon the prior written approval of a majority of the voting shares of the JVC. 5. Conditions Precedent to Subscription. The obligations of the ------------------------------------ Parties to complete the subscription of shares, in the JVC under Section 4.3 are subject to the following conditions precedent: (a) All authorizations, approvals, licenses and/or clearances from the Korean government or other authorities that are necessary to carry out the activities contemplated by this Agreement shall have been received in form and substance satisfactory to all Parties; and (b) The Korean Partner shall deliver or cause to be delivered to PPV a written undertaking that he and GLOBAL ENGINEERING INC. ("GLOBAL") shall indemnify and hold harmless PPV from any damages, losses, lawsuits and claims arising out of, or in connection with, the operation of the on-demand pay video business prior to the establishment of the JVC. 6. Preemptive Rights. The shareholders of the JVC shall have preemptive ----------------- rights in proportion to the number of shares held by each shareholder with respect to any new issuance of shares of the JVC. 7. Transfer of Shares. ------------------ 7.1 If, at any time after the subscription of the shares of the JVC in accordance with Section 4, either party or his successor(s) ("Transferer") wishes to transfer its shares, then such party shall first offer such shares in writing to the other party ("Transferee") specifying the proposed price and other terms and conditions of sale. If the Transferee rejects or does not accept the offer within sixty (60) days from the date of dispatch, and/or the Transferer and the Transferee are unable to reach agreement on the price and terms of such transfer, then the Transferer shall thereafter be free to dispose of the shares so offered for a period of six (6) months after rejection or the expiration of said acceptance period subject to the provision of Section 7 hereof. However, the Transferer may not dispose of such shares (i) at a lower price than the price at which such shares were first offered to Transferee or (ii) on terms and conditions substantively more favorable than those on which shares were first offered to the Transferee. 7.2 In the event the Transferee exercises its option to purchase the shares of the Transferer pursuant to Section 7.1, the Transferer, as appropriate, shall sell to the Transferee the shares subscribed for by the Transferer free and clear of all liens, claims, encumbrances or any impediments of any nature whatsoever. -4- 7.3 If a material disagreement concerning the operation or management of the JVC arises between any Transferer and Transferee, which either party deems in good faith to be an irreconcilable disagreement, and after one hundred twenty (120) days following written notice thereof by either party is given to the other party, the notifying party continues to believe in good faith that an irreconcilable disagreement exists, then the notifying party or his successor(s) shall offer to sell his shares to the other party pursuant to the procedure set forth in Paragraphs 7.1 and 7.2 hereof. 7.4 Notwithstanding the provisions of Section 7.1 above, the Korean Partner or successor thereto shall not sell shares in the JVC to any third party ("Transferee") that is a competitor of either PPV or the JVC, or which Transferee does not agree in writing to comply with and be governed by the terms of this Agreement and to assume all obligations of the selling Korean Partner or successors). 8. Shareholders. ------------ 8.1 The board of directors shall decide the time and place for convening all meetings of the shareholders of the JVC unless the applicable law provides otherwise. 8.2 Unless otherwise provided by the applicable law, the presence of shareholders representing a majority of the total number of shares issued and outstanding shall constitute a quorum at all meetings of the shareholders, and no meeting of shareholders shall be validly convened or constituted unless a quorum is present at such meeting. 8.3 Unless otherwise provided by the applicable law, resolutions of the shareholders at any meeting of shareholders shall be adopted by the affirmative vote of a majority of the shares represented at such meeting at which a quorum is present. 9.0 Board of Directors. ------------------ 9.1 The Parties shall exercise their respective voting rights in the JVC and take such other steps as are necessary or proper to ensure: (a) the board of directors of the JVC shall consist of three (3) members; (b) of such three (3) members, two (2) shall be nominated by PPV and, so long as the Korean Partner continues to own at least ten (10) percent of the equity of the JVC, one (1) shall be nominated by the Korean Partner; and (c) if any of the Parties wishes to remove the directors it has nominated with or without cause, the other Parties shall vote accordingly; provided that if such removal is without cause, the Party proposing the removal shall indemnify and hold the JVC and the other Party harmless for any and all damages and other expenses that may arise from such action. -5- 9.2 Meetings of the board of directors may be convened by the chairperson of the board of directors at the request of two (2) or more directors. 9.3 Unless otherwise provided by the applicable law, the presence of two (2) directors shall constitute a quorum at all meetings of the board of directors, and no meeting of the board of directors shall be validly convened or constituted unless a quorum is present at such meeting. 9.4 Unless otherwise provided by the applicable law, all actions taken and resolutions adopted at a meeting of the board of directors shall be taken or adopted by the affirmative vote of a majority of directors present at a meeting at which a quorum is present. 9.5 If the position of director of the JVC becomes vacant for any reason, the Parties agree to cause their shares to be voted to elect, as director, a person nominated by the Party who had nominated the director whose office is vacant. 10. Officers. -------- 10.1 The board of directors shall elect from its members one (1) representative director who shall serve as the president of the JVC. The director nominated by the Korean Partner shall serve as the initial representative director of the JVC until changed by the board according to the foregoing. The parties to this Agreement agree that the more detailed terms and -------------------------------------------------------------------- conditions on the appointment of the representative director shall be provided - ------------------------------------------------------------------------------ in a separate agreement. - ----------------------- 10.2 The board of directors shall appoint such other officers as it considers necessary or appropriate to operate the JVC. The board of directors shall also determine the level of management staffing necessary or appropriate to conduct the day-to-day operations of the JVC. 10.3 The president shall serve as the chairperson of the shareholders meetings and the board of directors meetings. If the president is unable to attend such meetings, the directors present shall elect a chairman among themselves. 10.4 No director shall be deemed to have a separate, particular interest in a matter and be disqualified from voting on such matter on the ground that such director is a nominee of PPV or the Korean Partner, as the case may be. 11. Statutory Auditor. The JVC shall appoint one (1) statutory auditor ----------------- who shall be nominated by PPV at a meeting of shareholders. 12. Activity and Accounting. ----------------------- 12.1 The Parties shall exercise their best efforts to enable the JVC to obtain the necessary working capital by arranging financing for the JVC or providing guarantees or otherwise. -6- 12.2 The JVC shall prepare monthly unaudited financial statements for delivery to the Parties of this Agreement by the tenth day of the following month. 12.3 The JVC, upon resolution of the shareholders and depending upon the results of each fiscal year's settlement of accounts, shall make periodic payment of dividends to the shareholders according to the provisions of the applicable law and the provisions of the Articles. 12.4 Unless otherwise prescribed hereunder, all of the payments made by the JVC to PPV shall be made in U.S. dollars at the bank account or other address designated by PPV in writing. 12.5 The Korean withholding tax, if applicable, to the payments to PPV shall be withheld by the JVC and be immediately paid to the competent Korean tax office. The Parties shall cause the JVC to obtain from the competent tax authorities a certificate of payment of such withholding tax or other appropriate evidence in such form as shall be acceptable to the tax authorities of PPV and forward the same to PPV. 12.6 The books and records of the JVC shall be maintained in accordance with generally accepted international accounting principles and shall accurately reflect the JVC's financial position. The books, records and supporting documents of the JVC shall be available for inspection by any Party or its designee at all reasonable times. Each Party may request an audit of such records by a certified public accountant of its selection, other than the statutory auditor used by the JVC for its annual audit, at the expense of such Party. 12.7 The Parties agree to cause the books and records of the JVC to be audited at the end of each fiscal year during the term of this Agreement by an independent certified public accountant. Such accountant shall annually provide the Parties with financial reports in both the English and Korean languages in accordance with generally accepted international accounting principles. Copies of such financial reports shall be provided to each of the Parties at the JVC's expense. Such annual audits shall be final and binding upon the Parties as to the revenues, costs, losses and profits of the JVC, in the absence of manifest error or fraud. 12.8 The fiscal year of the JVC shall commence on January 1 and end on December 31 of each calendar year; provided, however, that the first fiscal year of the JVC shall commence on the date of the registration of incorporation of the JVC and shall end on December 31 of that calendar year. 12.9 Profits of the JVC shall be calculated in conformity with the requirements of Korean law and generally accepted international accounting principles. 13. Related Agreements. ------------------ 13.1 Simultaneously with the execution of this Agreement, the Korean Partner shall enter into the asset purchase agreement in the form attached hereto as Exhibit B with the JVC -7- information under which the JVC shall purchase from the Korean Partner certain assets of GLOBAL that are necessary for the operation of the JVC as a on-demand pay video business. 13.2 Immediately after the JVC is incorporated, the JVC and PPV may enter into other agreements that are necessary for the successful operation of the JVC, including technical Assistance or license agreements in the form attached hereto as Exhibit C. 14. Non-competition. --------------- 14.1 Throughout the term of this Agreement and two (2) years after this Agreement is terminated for any reason, no Party shall engage in, and all Parties shall cause their Affiliates not to engage in, any business or activity in Korea, directly or indirectly except through the JVC, that is in competition with any business or activity the JVC engages in at any time, regardless of whether the Party or the Affiliate concerned engaged in said business or activity before the JVC engaged in said business or activity. For the purpose of this Section, GLOBAL shall be regarded as Affiliates of the Korean Partner. 14.2 PPV acknowledges that after the execution of this Agreement but until the issuance by the Korean tax authorities of the business registration certificate of the JVC, GLOBAL should act as the exclusive agent of the parties to commence business in Korea and may engage in the normal business operations such as receiving orders, collection of credits already invoiced by GLOBAL and sales of the inventory already at GLOBAL's possession. Immediately after the JVC has registered itself with the local tax authorities, GLOBAL shall assign and transfer to the JVC all orders not yet completed by GLOBAL, and the JVC and GLOBAL shall in good faith consummate the sale of items of inventory from GLOBAL to the JVC, the sale price of which shall not exceed the book value of such inventory. 14.3 If any Party or its Affiliate is engaged in any business or activity in Korea which was not in competition with any business or activity of the JVC at the time of commencement of said business or activity but becomes in competition with any business or activity of the JVC, such Party shall promptly cease to engage in such business or activity or shall cause such Affiliate to promptly cease to engage in such business or activity, as the case may be. 15. Term. This Agreement shall be effective upon its execution by all ---- Parties, and shall, continue in full force and effect until terminated in accordance with the terms hereof. 16. Termination. ----------- 16.1 Each Party shall have the right to terminate this Agreement immediately by giving written notice to the other Parties, if any of the conditions specified in Section 5(a) or (b) has not been fulfilled within six (6) months after the execution of this Agreement or if it becomes evident that any of the conditions specified in Section 5(a) or (b) cannot be satisfied. -8- 16.2 Each Party shall have the right to terminate this Agreement immediately by giving a written notice to the other Parties, if any of the other Parties commits a material breach of any of its obligations or covenants under this Agreement and fails to cure such breach within sixty (60) days following the date of the receipt of written notice thereof from the non-breaching Party. 16.3 If any Party has been adjudicated a bankrupt or has made an assignment for the benefit of creditors, or if bankruptcy, insolvency, reorganization, arrangement, debt adjustment, receivership, liquidation or dissolution proceedings have been instituted by or against such Party and, if instituted adversely, such Party consents to the same or admits in writing the material allegations thereof or said proceedings shall remain undismissed for sixty (60) days, any of the other Parties may terminate this Agreement. 16.4 Each Party shall have the right to terminate this Agreement immediately by giving written notice to the other Parties if any of the other Parties is prevented from performing any obligation under this Agreement because of Force Majeure (as defined in Section 18.11) for longer than ninety (90) days. 17. Consequences of Termination. --------------------------- 17.1 Upon termination of this Agreement, subject to the provisions of Section 17.2, the Parties shall have no further rights or obligations under this Agreement, except that the rights and obligations of any of the Parties that have accrued at the date of termination shall not be affected thereby. 17.2 The Parties, obligations under Sections 14, 17, 18.5, 18.6 and 18.12 shall survive any termination of this Agreement and remain in full force and effect in accordance with their terms thereafter. 17.3 The right of each Party to terminate this Agreement is not an exclusive remedy, and upon breach of this Agreement, each Party shall be entitled alternatively or cumulatively to any available remedy against the other Parties under the applicable law. 17.4 After the termination of this Agreement for any reason: (a) the JVC shall immediately change its name so that the word "Pacific" or its Korean equivalent is no longer used as a part of its corporate name, and neither the Korean Partner nor the JVC shall use the word "Pacific" or any other word or words that are confusingly similar to the word "Pacific" or any Korean equivalent thereof as its corporate name or a part thereof; (b) neither the Korean Partner nor the JVC shall use the word "Pacific" or any other word or words that are confusingly similar to the word "Pacific" or any Korean equivalent thereof as its trademark, service mark, trade name, business name, logo or other distinctive designation or a part thereof; -9- (c) neither the Korean Partner nor the JVC shall use any of PPV's trademark, service mark, trade name, business name, logo or other distinctive designation or any Korean equivalent thereof; and (d) the JVC shall immediately surrender or relinquish any rights it has with respect to or in connection with the intellectual property rights listed in Section 17.4(c). 17.5 If the Agreement is terminated by any Party pursuant to Section 16.2, 16.3 or 16.4, such Party shall have the right (without prejudice to any other right it may have) to the extent permissible under Korean law: (a) to require the Party who breached this Agreement or failed to perform its obligations(s) under this Agreement to sell all of its shares to the terminating Party or to its designee at their net worth as appraised by a reputable appraiser agreed to by the Parties; (b) to require the Party who breached this Agreement or failed to perform its obligations(s) under this Agreement to purchase all or any portion of the terminating Party's shares at their net worth as appraised by a reputable appraiser agreed to by the Parties; or (c) to require the other Parties to join with the terminating Party to cause the JVC's liquidation. 17.6 If any Party is unable to exercise the right set forth in Section 17.5(a) or 17.5(b) because the exercise of such right is prohibited or restricted under Korean law, such Party shall have the right to exercise the right set forth in Section 17.5(c). 17.7 If the Agreement is terminated by any Party pursuant to Section 18.4, such Party shall have the right (without prejudice to any other right it may have), to the extent permissible under Korean law, to require the other Parties to join with the terminating Party to cause the JVC's liquidation. 18. Miscellaneous. ------------- 18.1 Entire Agreement. This Agreement together with the Exhibits ---------------- hereto constitutes the entire understanding and agreement among all Parties and supersedes any and all prior or contemporaneous, oral or written, representations, communications, understandings and agreements among the Parties with respect to the subject matter hereof. 18.2 Modifications. This Agreement shall not be modified, amended, ------------- canceled or altered in any way, and may not be modified by custom, usage of trade or course of dealing, except by an instrument in writing signed by all Parties. All amendments or modifications of this Agreement shall be binding upon the Parties despite any lack of consideration so long as the same shall be in writing and executed by the Parties. -10- 18.3 Waiver. Performance of any obligation required of a Party ------ hereunder may be waived only by a written waiver signed by the other Parties, which waiver shall be effective only with respect to the specific obligation described. The waiver by each Party of a breach of any provision of this Agreement by any of the other Parties shall not operate or be construed as a waiver of any subsequent breach of the same provision or another provision of this Agreement. 18.4 Severability. If any provision hereof is found invalid or ------------ unenforceable pursuant to any executive, legislative, judicial or other decree or decision, the remainder of this Agreement shall remain valid and enforceable according to its terms, unless any Party deems the invalid or unenforceable provisions to be essential to this Agreement, in which case each Party may terminate this Agreement, effective immediately, upon written notice to the other Party. 18.5 Governing Law. This Agreement and all disputes arising out of or ------------- in connection with this Agreement shall be governed by, interpreted under, and construed and enforceable in accordance with, the laws of the Republic of Korea. 18.6 Arbitration. Any dispute, controversy or difference arising ----------- among the Parties out of or in relation to this Agreement or for the breach thereof, if irreconcilable after one hundred twenty (120) days of good-faith negotiations among the relevant Parties, shall be resolved by arbitra tion in Seoul, Korea, and such arbitration proceedings shall be conducted in the English language in accordance with the Rules of Conciliation and Arbitration of the International Chamber of Commerce by three (3) arbitrators. PPV shall appoint one (1) arbitrator and the Korean Partner shall appoint one (1) arbitrator. The two (2) arbitrators so appointed shall appoint the third arbitrator. The award made by the arbitrators shall be final and binding upon the Parties and may be enforced in any court of competent jurisdiction. 18.7 Expenses. Each Party shall pay all of its own expenses relating -------- to the transactions contemplated by this Agreement, including without limitation the fees and expenses of its counsel and financial advisers; provided, however, that the attorneys' fees and other expenses incurred in connection with obtaining the approval for PPV's foreign investment in the JVC and in connection with the establishment of the JVC shall be assumed by the JVC, to the extent permissible under the applicable law. 18.8 Assignment. No Party may assign this Agreement or any of the ---------- rights or obligations hereunder to any third party without the prior written consent of the other Parties. 18.9 Third Party Benefits. This Agreement shall be binding upon, and -------------------- inure to the benefit of, each of the Parties and their respective successors and permitted assigns. Nothing contained in this Agreement, express or implied, shall be deemed to confer any right or remedy upon, or obligate any Party to, any person or entity other than the Parties. 18.10 No Partnership or Agency. Nothing in this Agreement shall be ------------------------ construed as creating a partnership, agency, employment relationship, franchise relationship or taxable entity among the Parties, and no Party shall have the right, power or authority to create any obligation or -11- duty, express or implied, on behalf of the other Parties, it being understood that the Parties are independent contractors vis-a-vis one another. 18.11 Force Majeure. The failure or delay of any Party to perform any ------------- obligation under this Agreement solely by reason of acts of God, acts of civil or military authority, civil disturbance, war, strikes or other labor disputes or disturbances, fire, transportation contingencies, shortage of facilities, fuel, energy, labor or materials, or laws, regulations, acts or order of any governmental agency or official thereof, other catastrophes, or any other circumstance beyond its reasonable control ("Force Majeure") shall not be deemed to be a breach of this Agreement so long as the Party so prevented from complying with this Agreement shall not have contributed to such Force Majeure, shall have used its best efforts to avoid such Force Majeure or to ameliorate its effects, and shall continue to take all actions within its power to comply as fully as possible with the terms of this Agreement. In the event of any such default or breach, performance of the obligations shall be deferred until the Force Majeure ceases. 18.12 Notices. All notices, demands, requests, consents or other ------- communications hereunder shall be in writing and shall be deemed sufficiently given if personally delivered, in which case such notice shall be deemed given upon delivery, or sent by registered or certified mail, return receipt requested, in which case such notice shall be deemed given five (5) days after dispatch, or sent by telecopy, in which case such notice shall be deemed given upon acknowledgment of receipt by the recipient, to the Parties at the following addresses, or to such other address as may be designated by written notice given by each Party to the other Parties: To PPV: ------ Attn: Chief Financial Officer 405 Tasman Drive Sunnyvale, California 94043 U.S.A. To LEE: ------ Attn: Nag Yong Lee 82-102, Hyundai Apartment Apgujung-Dong, Kangnam-gu Seoul, Korea 18.13 Compliance with Law. The Parties shall at all times act to ------------------- assure that the JVC shall comply with the laws and regulations of Korea and other applicable authorities. 18.14 Counterparts. This Agreement may be executed in one (1) or more ------------ counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. -12- 18.15 Captions. The section headings and captions contained herein are -------- for purposes of reference and convenience only and shall not in any way affect the meaning or interpretation of this Agreement. 18.16 Confidentiality of Agreement. The Parties agree that they will ---------------------------- not disclose, disseminate or cause to be disclosed the terms and conditions of this Agreement, except insofar as disclosure is reasonably necessary to carry out and effectuate the terms of this Agreement, and insofar as any Party is required by law to respond to any demand for information from any court, governmental entity or governmental agency. 18.17 Language. The Parties agree that the English language shall be -------- the language used for the interpretation of this Agreement. IN WITNESS WHEREOF, the Parties executed this Agreement as of the date first above written. PACIFIC PAY VIDEO LIMITED By: /s/ James A. Barth ------------------------- Name: James A. Barth ---------------------- Title: Vice President and CFO ---------------------- NAG YONG LEE /s/ N.Y. Lee ----------------------------- March 1, 1995 -13- EX-10.31 7 1996 ANNUAL AGREEMENT WITH PHILIPS EXHIBIT 10.31 (Translated from German to English) PHILIPS 1996 ANNUAL AGREEMENT with Prodac GmbH Max-Planck-Str. 38 50858 Koln-Marsdorf Customer No. 19/13784
Products of the Philips Consumer Electronics Division, Hamburg (not including automobile radios, tapes and accessories, software, background music) for use in the commercial sector (hotels etc.) 1996 sales objective: Total CE > [***] DM Prices: net, as indicated in attached Price List (to be examined jointly each quarter) all other products from Net Price List - 12 % Annual bonus: on sales billed: [***] Payment: [***] discount 30 days, 45 days net (Items > [***] DM = [***]% discount 60 days) Service: 1.2 % lump-sum credit as reimbursement of costs for 12 month Philips warranty. 11% discount on Philips replacement parts. Replacement guarantee on warranty claims within 1 week after delivery. Disposal of packaging: From the hotel, all at once, in the context of regularly scheduled routes at no charge (separated by type of material and laid flat), or via "Gruner Punkt" [Green Dot - a German recycling system] --------------------------------------- Advertising/Promotion: See Appendix [handwriting] Hamburg, June 18, 1996 Cologne, June 19, 1996 Philips CE / Hotel TV Prodac GmbH Appendix to Annual Agreement
--------------------------------------------------------------------- [***] Confidential treatment requested pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission.
Net Price List Philips HOTEL-LINE PC PRODAC, Cologne 19/13784 April 15, 1996 APRIL 1, 1996 SPECIFICATION REMOTE DM NET - --------------------------------------------------------------------------------------------------------------------------------- 37 CM / 34 cm HiBn color picture tube each TV 14-3152 Basic - (available mid 1996) included [***] ----- TV 14-3252 Basic plus Videotext, clock, alarm included [***] ---------- TV 14-3302 Basic plus Videotext, clock, alarm, UKW Radio included [***] ---------- 45 CM / 41 cm Black-HiBn-FSQ color picture tube TV 17-3152 Basic - (available mid/late April 1996) included [***] ----- TV 17-3202 Basic Videotext included [***] ----- TV 17-3252 Basic plus Videotext, clock, alarm included [***] ---------- TV 17-3302 Basic plus Videotext, clock, alarm, UKW Radio included [***] ---------- TV 1340 System - [***] TV 17-3252 System System, clock and alarm ready - [***] ------ - interface installed, remote control included [***] TV 17-3402 System System, videotext, clock, alarm - [***] ------ 55 CM / 51 cm Blackline-FSQ-color picture tube TV 21-3152 Basic - (available late April 1996) included [***] ----- TV 21-3202 Basic Videotext included [***] ----- TV 21-3252 Basic plus Videotext, clock, alarm included [***] ---------- TV 21-3302 Basic plus Videotext, clock, alarm, UKW radio included [***] ---------- TV 1350 System - [***] - interface installed - [***] TV 21-3352 System System, clock and alarm ready* - [***] ------ - interface installed, remote control included [***] TV 21-3402 System System, videotext, clock, alarm* - [***] ------ Smart-Loader(TM) Fast Programmer Module (22AV1013) [***] RC 8611 Hotel Cursor Remote Control [***] (batteries not included) TVZ 9052 Master remote control with operating [***] instructions for Hotel-TV 45 cm / 55 cm Basic plus and System with second speaker connection (DIN) ---------- ------ All units with full Hyperband Tuner, fast programming capability, channel, volume lock, indicator for low battery in remote control, "Welcome Greeting." Initial programming with Smart-Loader(TM) within 10 seconds/unit. System with additional power supply for CE operation. All net prices, not including VAT, before discount, free delivery (CIF) to country of delivery Delivery: approximately 8 weeks, or on request. - ------------------------------------------------------------------------------------------- Philips GmbH, CE / Hotel-TV, Alexanderstr. 1, 20099 Hamburg, Tel: 040-2852-1508, Fax: -1509
--------------------------------------------------------------------- [***] Confidential treatment requested pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission. PLANNING, ORDER DEADLINES, DELIVERY For business and administrative reasons, we must closely coordinate our planning and scheduling of component purchases, production and shipment. For customer- specific products such as television sets with the interface integrated during the fabrication of the units, our objective is "near on demand" production, with only a minimum inventory maintained by Philips. Basically, the following planning procedures must be followed to achieve this objective: - - monthly projections for the following 3 months, to determine availability of the components, - - weekly orders every Thursday, for determination of the quantities required in Week 6 thereafter (delivery to the hotel). (for new models, the delivery date must be determined individually) Philips will not maintain significant inventories of customer-specific versions. The interface boards will be ordered by Philips Plant Purchasing in the context of the projections received from the customer and the definitive order. Until further notice, all projections and orders from Prodac must be routed via Philips Hotel-TV Hamburg. This procedure is necessary on account of the planning required, and to guarantee the smoothest possible handling of international shipments. Philips can only be held accountable for late deliveries if the delivery date has been confirmed in writing by Philips Hotel-TV not later than 3 days before the delivery deadline. Philips shall not be held liable in case of events of force majeure and delays caused by a cutoff of credit. On the other hand, Philips may demand reimbursement for any expenses incurred, in particular for any transportation arrangements which have been made, if said arrangements must be changed later than 3 days before the delivery deadline. This requirement also applies, where appropriate, to merchandise which has been ordered and is ready for shipment, but is not picked up on time. June 18, 1996 HJP /S/ Authorized signatures PHILIPS APPENDIX TO 1996 ANNUAL AGREEMENT CE CONFORMITY Philips products meet the requirements set forth in CE Specifications, have been appropriately tested and bear the CE symbol. Any intervention into the equipment not expressly authorized in writing by Philips voids this CE certification, unless the intervention in question is a repair based on the instructions contained in the corresponding Service Documentation. The obligations on the part of Philips set forth in the Guarantee or Warranty, as well as any product liability on the part of Philips shall become null and void in the event of an unauthorized intervention; in such cases, the CE certification applied for by Philips is also null and void. Even in the event of authorized interventions, Philips' contractual partner shall not sell the equipment without CE conformity testing and certification. DISPOSAL OF PACKAGING Philips complies with the packaging disposal requirements specified by the applicable laws and regulations. In the context of an industry-wide agreement, said disposal is carried out in cooperation with VfW, Cologne, which provides disposal of business and industrial waste materials in the context of its regularly scheduled routes. Notification of the disposal of items must be given to VfW 3-4 days in advance, using the appropriate form, in which case VfW shall make its best efforts to provide service on the date requested. The packaging materials must be made available to the disposal company ready for pickup, i.e. flattened, sorted by type, and collected at one location. Philips shall not pay any special charges, nor any costs which are incurred as a result of specified pick-up dates or additional trips. SERVICE Reimbursement of warranty costs shall be paid in the form of a lump sum to cover the conventional warranty risk. Reimbursement for the repair of frequent or epidemic defects for which Philips is responsible shall be paid separately. In such a case, both parties shall endeavor to reach a settlement which is economically and administratively reasonable for both parties. CREDIT LIMIT Philips will extend a merchandise credit limit which is appropriate to the scope of activity and the economic risk, although the customer has no legal entitlement to such a credit limit. If, in the estimation of Philips, the customer's economic situation changes between the date the order is accepted and the specified delivery date, such that a limitation of the supplier's risk is indicated, Philips shall not incur any liability for the consequences of any delay in delivery. These terms also apply if there are corresponding delays in payment for prior shipments. Hamburg, June 18, 1996 Cologne, ___________________ Philips CE / Hotel-TV Prodac GmbH, Cologne PHILIPS RECYCLING WITH SYSTEM for CE Products (television sets etc.) DISPOSAL OF PACKAGING MATERIAL WHICH COMES WITH THE ITEM Philips CE complies with the packaging disposal requirements set forth in the applicable laws and regulations. In the context of an industry-wide agreement, said disposal is carried out in cooperation with VfW, Cologne, which provides disposal of business and industrial waste materials in the context of its regularly scheduled routes. Notification of the disposal of items must be given to VfW 3-4 days in advance, using the appropriate form, in which case VfW shall make its best efforts to provide service on the date requested. The packaging materials must be made available to the disposal company ready for pickup, i.e. flattened, sorted by type, and collected at one location. Philips shall not pay any special charges, nor any costs which are incurred as a result of specified pick-up dates or additional trips. PROCEDURE The enclosed form (Recycling with System) must be completed and sent by telefax to VfW, Cologne. The form must indicate the types of units in question and the number of units of which the packaging materials must be disposed, as well as the amount of material in kilograms obtained by multiplying the individual weights - for each model and for each material (paper, film, Styrofoam) - again for each model and as a total including all models. Please note that the form must also include the desired pick-up date (approximately 5 working days after the form is filed), the complete address where the material is to be picked up, the name of a contact person, and a telephone number for additional information. The VfW will bill Philips CE on the basis of this form. The materials to be picked up must be prepared as follows: - - separated by type, into paper, film, Styrofoam - - flattened, with cardboard boxes laid flat - - Styrofoam must be in Styrofoam collection bags The disposal company is required to pick up only materials prepared as indicated above. All additional services may result in additional charges. These terms also apply for unnecessary trips for which the customer is responsible, additional trips which may be necessary to pick up small additional quantities, and for other materials which are not part of the CE scope of supply. Using this procedure, Philips CE shall be responsible for picking up the packaging materials in the context of a regular pickup schedule, but it does not guarantee that it will be able to comply with any requested or specified deadlines. Likewise, it will, under no circumstances, pay the costs of any disposal arranged outside this procedure. THIS PROCEDURE APPLIES TO PHILIPS-CE PRODUCTS SUCH AS TELEVISION SETS. EX-10.32 8 MANAGING DIRECTOR'S SERVICE AGREEMENT W/ KAESBACH -1- EXHIBIT 10.32 (Translated from German to English) MANAGING DIRECTOR'S SERVICE AGREEMENT ------------------------------------- Between PRODAC Prozessdatentechnik GmbH Max-Planck-Strasse 38 50858 Koln (hereinafter referred to as the "Company") and Mr. Reiner Kaesbach Schumannstrasse 10 53332 Bornheim (hereinafter referred to as "Managing Director") the following contract is concluded: (S) 1 DUTIES AND RESPONSIBILITY -2- 1. After the transfer of the Shares in the Company to MagiNet GmbH will have become effective, Mr. Reiner Kaesbach shall be employed as Managing Director of the Company on the basis of this Managing Director's Service Agreement. The managing director's service agreements so far in force and all related side agreements thereto - also to the extent that they are based on a shareholder's resolution - shall be terminated. This does not apply to the pension agreement between the company and the Managing Director in the version existing at the signing of this contract. 2. The Managing Director shall represent the Company both in and out of court always alone. He is released from the restrictions set forth in Sec. 181 German Civil Code. 3. Unless otherwise provided for in this Agreement, the rights and duties of the Managing Director shall be subject to the Articles of Association of the Company, as amended from time to time, the rules of procedure as amended from time to time, and the laws, particularly the Limited Liability Companies' Act. 4. The Company reserves the right at any time to appoint further managing directors and establish different rules of representation. Prior to December 31, 1999 the Managing Director shall only be removed and additional managing directors shall only be appointed, after the minimum targets - under exception of the category "average monthly net revenue per room" - of the Earnout-Plan stipulated between MagiNet GmbH, MagiNet Corp., the Company, Mr. Reiner Kaesbach and the Managing Director in the Share Purchase Agreement dated November 05, 1996 (Attachment 3 to the Share Purchase Agreement) for the preceding fiscal year were not achieved. The right to remove the managing director for important cause in respect of the person (in der Person) or the behaviour (im Verhalten) of the Managing Director and the right to newly appoint a managing director in this connection remain unaffected. -3- (S) 2 REMUNERATION 1. For his activities the Managing Director shall receive a gross annual salary in the amount of DM 26,000.-- (in words: twentysixthousand deutschmarks), to be paid in twelve equal monthly instalments in arrears at the end of each calendar month to a bank account designated by the Managing Director. The Managing Director shall receive a thirteenth monthly salary which shall be paid out with the November salary. The Managing Director shall participate in the same proportion as employees of the Company in general increases of the salary. 2. The Managing Director shall obtain a yearly bonus of up to 30% of the yearly base salary payable under para. 1, to the extent that the targets of the yearly business plan agreed between MagiNet Corporation, Sunnyvale, California, USA and the Company were met. The bonus is payable upon establishment of the annual accounts for the respective fiscal year. [The managing director's bonus claim for 1996 shall remain unaffected.] 3. The above remuneration covers all services rendered by the Managing Director, including any overtime. The Managing Director is obliged to work even beyond the usual business working hours if this is required by the commercial interests of the Company. 4. Additionally the Company shall pay to the Managing Director the legally prescribed employers' contributions to the health insurance, statutory pension insurance and unemployment insurance, which are to be borne by law in equal parts by the Managing Director and the Company. Should the Managing Director be exempted from his obligation to join the statutory health insurance, the Company shall pay to him 50% of his contributions to a private health insurance, at a maximum 50% of the contribution to the statutory health insurance, if respective proof is furnished. -4- 5. The assignment and pledge of claims to remuneration require the prior written approval of the shareholders. (S) 3 EXPENSES Upon submission of corresponding receipts, the Company will reimburse all reasonable and necessary expenses incurred by the Managing Director in the exercise of his duties for the Company. As a rule, however expenses can at most be allowed to the same extent in which they are tax deductible as operating expenses. (S) 4 COMPANY CAR 1. The Company will furnish the Managing Director with a company car which corresponds to the category of a BMW 7-model. The Managing Director is entitled to private usage of the company car. The Company shall bear all costs arising in connection with the use of the company car such as taxes, insurance, repairs, maintenance, gasoline and oil, except such gasoline costs which occur during the Managing Director's vacation outside the Federal Republic of Germany. 2. The Managing Director herewith explicitly waives all claims to which he or his family could be entitled in connection with the private use of the company car. He shall release the Company from any and all claims of his family or third parties, insofar as such claims are not included in the Company's insurance coverage. -5- 3. Income tax which accrues from the monetary value of the benefit of having the company car for private use shall be borne by the Managing Director. 4. The company car is to be returned including any and all accessories upon termination of the employment relationship. Any right of retention is excluded. In the event of a release pursuant to (S) 12.4, the company car is to be returned including any and all accessories, unless expressly agreed in writing or otherwise. In the event the company car is returned prior to the date of expiration of the employment relationship to the Company, the Managing Director cannot claim compensation for the lost financial benefit. (S) 5 SPECIAL ALLOWANCES The pension agreement dated January 1, 1983 and amended on January 2, 1990 and October 6, 1993 shall be continued. (S) 6 VACATION The Managing Director shall be entitled to a vacation of 30 working days per calendar year. The Managing Director shall coordinate his vacation with the other members of management in such way that it shall not affect the interests of the Company. (S) 7 DISABILITY -6- 1. The Managing Director shall immediately inform the Company about any work incapacity and the expected duration thereof as well as the reasons of such incapacity. In the event of illness, the Managing Director shall submit upon request a medical certificate attesting to his incapacity to work and the expected duration thereof. 2. In the event of illness the Company shall continue to pay the contractual remuneration for a period of 6 months, provided, however, that all benefits paid to the Managing Director by a statutory or private health insurance as compensation for the loss of salary shall be deducted. (S) 8 OUTSIDE ACTIVITIES 1. The Managing Director shall devote all his skills and working capacity exclusively to the Company. Any outside activities of the Managing Director for compensation during the term of this Agreement require the prior written approval of the shareholders. Publications and speeches relating to the activities of the Managing Director for the Company and for MagiNet Corp. require the prior coordination with the shareholders. 2. Furthermore any active, entrepreneurial participation in any other company or the running of his own business require the prior written approval of the shareholders. The foregoing shall not apply to the purchase of shares for investment purposes and to the participation in the Wirt & Kaesbach civil law partnership. (S) 9 CONFIDENTIALITY, NON-COMPETITION CLAUSE DURING THE TERM OF CONTRACT -7- 1. The Managing Director shall maintain strict confidentiality with respect to third parties and unauthorized staff members of the Company as to all confidential events or business matters of the Company or any affiliated company coming to his attention within the scope of his activities for the Company, irrespective of how he obtained such knowledge. This does not apply to such information, for which a disclosure is essential for the due performance of the functions delegated to the Managing Director or which has been approved by the shareholders in advance. This duty of confidentiality shall continue to be valid even after the termination of this Service Agreement. 2. Furthermore, the Managing Director shall require the prior written approval of the shareholders for assuming any positions on supervisory boards, advisory boards and similar institutions of non affiliated companies or professional organizations. 3. During the term of this Agreement the Managing Director undertakes not to carry out any activities for any other company competing in any way with the Company or an affiliated company. Any direct or indirect activity as employee, self-employed person or consultant, as well as any direct or indirect participation in such enterprise, is prohibited. (S) 15 of the Share Purchase Agreement between the Managing Director, Mr. Wirt, MagiNet GmbH, Koln and MagiNet Corporation is not affected. -8- (S) 10 POST-CONTRACTUAL COMPETITION PROHIBITION 1. For a period of two years after the termination of this Agreement the Managing Director undertakes not to become active in any way, neither directly or indirectly, as a self-employed person or as an employee for any domestic or foreign enterprise competing with the Company or with any of its affiliates. During the term of this post-contractual competition prohibition, the Managing Director shall not operate any own enterprise or participate in any form (manner) in an enterprise which competes with the Company or with any of its affiliates. 2. The geographical restriction covers the territory of the European Economic Area (Europaischer Wirtschaftsraum). 3. As compensation for the imposed restrictions the Company shall pay to the Managing Director for two years after the termination of the service relationship 50% of the remuneration last received by him. 4. The Company shall be released from the obligation under 3. if it waives the compliance with the competition restrictions by giving a three months written notice prior to the termination of the Service Agreement. 5. The Managing Director undertakes to pay to the Company for each instance of violation of the aforementioned competition restrictions a contractual penalty in the amount of DM 25,000.--. The assertion of further damages by the Company remains unaffected. 6. Unless otherwise provided for in this Agreement, Sec. 74 et seq. of the German Commercial Code shall in other respects be applicable mutatis mutandis. -9- (S) 11 RIGHTS OF USE AND INVENTIONS 1. All work results in connection with the activities of the Managing Director shall inure exclusively to the Company. Insofar as work results are protected by copyright, the Managing Director grants the Company the exclusive and unrestricted right of use for all present and future kinds of use. Such right of use shall remain valid even after the termination of the service relationship. There shall be no entitlement to special remuneration for the granted rights for use. These are rather fully compensated by the contractual remuneration. 2. Any inventions of the Managing Director and technical suggestions for improvement as well as methods of engineering, patents, utility models, design patents and the like developed by the Managing Director in connection with his activities for the Company inure exclusively to the Company. The Employee Inventions Act is not applicable. The Company shall have the unrestricted and exclusive right of use to the exclusion of the person of the Managing Director who shall not be entitled to any additional compensation. Insofar as this is necessary, the Managing Director shall transfer to the Company any respective right and claim which entitles the Company to register patents, utility models or design patents in its own name and for its own account. (S) 12 DURATION OF CONTRACT AND NOTICE OF TERMINATION 1. This Agreement comes into force upon transfer of the shares in the Company to MagiNet GmbH (condition precedent). It can be terminated by either party with a notice period of 6 months to the end of a calender year, for the first time as per December 31, 1999. Prior to December 31, 1999, the Company has the right to terminate this contract with a notice period of three months to the end of a month after the minimum targets - under -10- exception of the category "average monthly net revenue per room" - of the Earnout-Plan stipulated between MagiNet GmbH, MagiNet Corp., the Company, Mr. Reiner Kaesbach and the Managing Director in the Share Purchase Agreement dated November 05, 1996 (Attachment 3 to the Share Purchase Agreement) for the preceding fiscal year were not achieved. 2. The right to dismissal without notice for good cause remains unaffected. 3. Any termination must be in writing to be effective. 4. At any time the Company shall be entitled to release the Managing Director from his duties of service whilst continuing to pay his contractual salary and to grant the stock option right pursuant to the Agreement of September 9, 1996. Such period of release shall be offset from the Managing Director's remaining vacation entitlement. 5. The service relationship shall cease without the requirement of a notice of termination as of the end of the month in which the Managing Director attains the age of 65. (S) 13 RETURN OF PROPERTY Upon leaving the Company or after his release from his duties of service pursuant to (S) 12.4 the Managing Director shall immediately return to the Company any and all documents, correspondence, records, drafts and the like referring to Company's affairs, including any copies thereof, which are still in his possession. The obligation to return company property extends also to the company car provided to the Managing Director pursuant to (S) 4 including any accessories thereof. The Managing Director is not entitled to exercise a right of retention concerning the afore-mentioned documents and objects. (S) 14 MISCELLANEOUS 1. This contract contains all of the agreements between the parties with regard to the Managing Director service relationship. The parties hereto have not made any side agreements apart from the pension agreement and the bonus arrangements up to the fiscal year 1996. -11- 2. Amendments and supplements of this Agreement must be in writing to be effective. This also applies for an amendment of this provision. 3. As far as in this Agreement written form has been agreed upon, this form is also observed by the sending of a telegram, telex or telecopy if the author of a document is indicated. 4. Should any provision of this Agreement be or become invalid, the validity of the remaining provisions of this Agreement shall not be affected thereby. Such invalid provision shall be replaced by such provision which comes closest to the economic intention of the parties. 5. This Agreement is governed by the laws of the Federal Republic of Germany. 6. The Managing Director confirms to have received today an executed copy of this Agreement signed by the Company. Frankfurt am Main, November 05, 1996 PRODAC Prozessdatentechnik GmbH durch: /s/ Reiner Kaesbach /s/ Reiner Kaesbach ___________________________________ ___________________________________ Reiner Kaesbach Reiner Kaesbach -12- /s/Heinrich R. Wirt __________________________________ Heinrich R. Wirt EX-10.33 9 MANAGING DIRECTOR'S SERVICE AGREEMENT W/ WIRT EXHIBIT 10.33 (Translated from German to English) -1- MANAGING DIRECTOR'S SERVICE AGREEMENT ------------------------------------- Between PRODAC Prozessdatentechnik GmbH Max-Planck-Strabe 38 50858 Koln (hereinafter referred to as the "Company") and Mr. Heinrich R. Wirt Schumannstrabe 10 53332 Bornheim (hereinafter referred to as "Managing Director") the following contract is concluded: (S) 1 DUTIES AND RESPONSIBILITY -2- 1. After the transfer of the Shares in the Company to MagiNet GmbH will have become effective, Mr. Heinrich R. Wirt shall be employed as Managing Director of the Company on the basis of this Managing Director's Service Agreement. The managing director's service agreements so far in force and all related side agreements thereto - also to the extent that they are based on a shareholder's resolution - shall be terminated. This does not apply to the pension agreement between the company and the Managing Director in the version existing at the signing of this contract. 2. The Managing Director shall represent the Company both in and out of court always alone. He is released from the restrictions set forth in Sec. 181 German Civil Code. 3. Unless otherwise provided for in this Agreement, the rights and duties of the Managing Director shall be subject to the Articles of Association of the Company, as amended from time to time, the rules of procedure as amended from time to time, and the laws, particularly the Limited Liability Companies' Act. 4. The Company reserves the right at any time to appoint further managing directors and establish different rules of representation. Prior to December 31, 1999 the Managing Director shall only be removed and additional managing directors shall only be appointed, after the minimum targets - under exception of the category "average monthly net revenue per room" - of the Earnout-Plan stipulated between MagiNet GmbH, MagiNet Corp., the Company, Mr. Heinrich R. Wirt and the Managing Director in the Share Purchase Agreement dated November 05, 1996 (Attachment 3 to the Share Purchase Agreement) for the preceding fiscal year were not achieved. The right to remove the managing director for important cause in respect of the person (in der Person) or the behaviour (im Verhalten) of the Managing Director and the right to newly appoint a managing director in this connection remain unaffected. -3- (S) 2 REMUNERATION 1. For his activities the Managing Director shall receive a gross annual salary in the amount of DM 26,000.-- (in words: twentysixthousand deutschmarks), to be paid in twelve equal monthly installments in arrears at the end of each calendar month to a bank account designated by the Managing Director. The Managing Director shall receive a thirteenth monthly salary which shall be paid out with the November salary. The Managing Director shall participate in the same proportion as employess of the Company in general increases of the salary. 2. The Managing Director shall obtain a yearly bonus of up to 30% of the yearly base salary payable under para. 1, to the extent that the targets of the yearly business plan agreed between MagiNet Corporation, Sunnyvale, California, USA and the Company were met. The bonus is payable upon establishment of the annual accounts for the respective fiscal year. [The managing director's bonus claim for 1996 shall remain unaffected.] 3. The above remuneration covers all services rendered by the Managing Director, including any overtime. The Managing Director is obliged to work even beyond the usual business working hours if this is required by the commercial interests of the Company. 4. Additionally the Company shall pay to the Managing Director the legally prescribed employers' contributions to the health insurance, statutory pension insurance and unemployment insurance, which are to be borne by law in equal parts by the Managing Director and the Company. Should the Managing Director be exempted from his obligation to join the statutory health insurance, the Company shall pay to him 50% of his contributions to a private health insurance, at a maximum 50% of the contribution to the statutory health insurance, if respective proof is furnished. -4- 5. The assignment and pledge of claims to remuneration require the prior written approval of the shareholders. (S) 3 EXPENSES Upon submission of corresponding receipts, the Company will reimburse all reasonable and necessary expenses incurred by the Managing Director in the exercise of his duties for the Company. As a rule, expenses can be allowed to the same extent in which they are tax deductible as operating expenses. (S) 4 COMPANY CAR 1. The Company will furnish the Managing Director with a company car which corresponds to the category of a BMW 7-model. The Managing Director is entitled to private usage of the company car. The Company shall bear all costs arising in connection with the use of the company car such as taxes, insurance, repairs, maintenance, gasoline and oil, except such gasoline costs which occur during the Managing Director's vacation outside the Federal Republic of Germany. 2. The Managing Director herewith explicitely waives all claims to which he or his family could be entitled in connection with the private use of the company car. He shall release the Company from any and all claims of his family or third parties, insofar as such claims are not included in the Company's insurance coverage. -5- 3. Income tax which accrues from the monetary value of the benefit of having the company car for private use shall be borne by the Managing Director. 4. The company car is to be returned including any and all accessories upon termination of the employment relationship. Any right of retention is excluded. In the event of a release pursuant to (S) 12.4, the company car is to be returned including any and all accessories, unless expressly agreed in writing or otherwise. In the event the company car is returned prior to the date of expiration of the employment relationship to the Company, the Managing Director cannot claim compensation for the lost financial benefit. (S) 5 SPECIAL ALLOWANCES The pension agreement dated January 1, 1983 and amended on January 2, 1990 and October 6, 1993 shall be continued. (S) 6 VACATION The Managing Director shall be entitled to a vacation of 30 working days per calendar year. The Managing Director shall coordinate his vacation with the other members of management in such way that it shall not affect the interests of the Company. (S) 7 DISABILITY -6- 1. The Managing Director shall immediately inform the Company about any work incapacity and the expected duration thereof as well as the reasons of such incapacity. In the event of illness, the Managing Director shall submit upon request a medical certificate attesting to his incapacity to work and the expected duration thereof. 2. In the event of illness the Company shall continue to pay the contractual remuneration for a period of 6 months, provided, however, that all benefits paid to the Managing Director by a statutory or private health insurance as compensation for the loss of salary shall be deducted. (S) 8 OUTSIDE ACTIVITIES 1. The Managing Director shall devote all his skills and working capacity exclusively to the Company. Any outside activities of the Managing Director for compensation during the term of this Agreement require the prior written approval of the shareholders. Publications and speeches relating to the activities of the Managing Director for the Company and for MagiNet Corp. require the prior coordination with the shareholders. 2. Furthermore any active, entrepreneurial participation in any other company or the running of his own business require the prior written approval of the shareholders. The foregoing shall not apply to the purchase of shares for investment purposes and to the participation in the Wirt & Kasbach civil law partnership. (S) 9 CONFIDENTIALITY, NON-COMPETITION CLAUSE DURING THE TERM OF CONTRACT -7- 1. The Managing Director shall maintain strict confidentiality with respect to third parties and unauthorized staff members of the Company as to all confidential events or business matters of the Company or any affiliated company coming to his attention within the scope of his activities for the Company, irrespective of how he obtained such knowledge. This does not apply to such information, for which a disclosure is essential for the due performance of the functions delegated to the Managing Director or which has been approved by the shareholders in advance. This duty of confidentiality shall continue to be valid even after the termination of this Service Agreement. 2. Furthermore, the Managing Director shall require the prior written approval of the shareholders for assuming any positions on supervisory boards, advisory boards and similar institutions of non affiliated companies or professional organizations. 3. During the term of this Agreement the Managing Director undertakes not to carry out any activities for any other company competing in any way with the Company or an affiliated company. Any direct or indirect activity as employee, self-employed person or consultant, as well as any direct or indirect participation in such enterprise, is prohibited. (S) 10 of the Share Purchase Agreement between the Managing Director, Mr. Wirt, MagiNet GmbH, Koln and MagiNet Corporation is not affected. -8- (S) 10 POST-CONTRACTUAL COMPETITION PROHIBITION 1. For a period of two years after the termination of this Agreement the Managing Director undertakes not to become active in any way, neither directly or indirectly, as a self-employed person or as an employee for any domestic or foreign enterprise competing with the Company or with any of its affiliates. During the term of this post-contractual competition prohibition, the Managing Director shall not operate any own enterprise or participate in an enterprise which competes with the Company or with any of its affiliates. 2. The geographical restriction covers the territory of the European Economic Area (Europaischer Wirtschaftsraum). 3. As compensation for the imposed restrictions the Company shall pay to the Managing Director for two years after the termination of the service relationship 50% of the remuneration last received by him. 4. The Company shall be released from the obligation under 3. if it waives the compliance with the competition restrictions by giving a three months written notice prior to the termination of the Service Agreement. 5. The Managing Director undertakes to pay to the Company for each instance of violation of the aforementioned competition restrictions a contractual penalty in the amount of DM 25,000.--. The assertion of further damages by the Company remains unaffected. 6. Unless otherwise provided for in this Agreement, Sec. 74 et seq. of the German Commercial Code shall in other respects be applicable mutatis mutandis. -9- (S) 11 RIGHTS OF USE AND INVENTIONS 1. All work results in connection with the activities of the Managing Director shall inure exclusively to the Company. Insofar as work results are protected by copyright, the Managing Director grants the Company the exclusive and unrestricted right of use for all present and future kinds of use. Such right of use shall remain valid even after the termination of the service relationship. There shall be no entitlement to special remuneration for the granted rights for use. These are rather fully compensated by the contractual remuneration. 2. Any inventions of the Managing Director and technical suggestions for improvement as well as methods of engineering, patents, utility models, design patents and the like developed by the Managing Director in connection with his activities for the Company inure exclusively to the Company. The Employee Inventions Act is not applicable. The Company shall have the unrestricted and exclusive right of use to the exclusion of the person of the Managing Director who shall not be entitled to any additional compensation. Insofar as this is necessary, the Managing Director shall transfer to the Company any respective right and claim which entitles the Company to register patents, utility models or design patents in its own name and for its own account. (S) 12 DURATION OF CONTRACT AND NOTICE OF TERMINATION 1. This Agreement comes into force upon transfer of the shares in the Company to MagiNet GmbH (condition precedent). It can be terminated by either party with a notice period of 6 months to the end of a calender year, for the first time as per December 31, 1999. Prior to December 31, 1999, the Company has the right to terminate this contract with a notice period of three months to the end of a month after the minimum targets - under -10- exception of the category "average monthly net revenue per room" - of the Earnout-Plan stipulated between MagiNet GmbH, MagiNet Corp., the Company, Mr. Reiner Kasbach and the Managing Director in the Share Purchase Agreement dated November 05, 1996 (Attachment 3 to the Share Purchase Agreement) for the preceding fiscal year were not achieved. 2. The right to dismissal without notice for good cause remains unaffected. 3. Any termination must be in writing to be effective. 4. At any time the Company shall be entitled to release the Managing Director from his duties of service whilst continuing to pay his contractual salary and to grant the stock option right pursuant to the Agreement of September 9, 1996. Such period of release shall be offset from the Managing Director's remaining vacation entitlement. 5. The service relationship shall cease without the requirement of a notice of termination as of the end of the month in which the Managing Director attains the age of 65. (S) 13 RETURN OF PROPERTY Upon leaving the Company or after his release from his duties of service pursuant to (S) 12.4 the Managing Director shall immediately return to the Company any and all documents, correspondence, records, drafts and the like referring to Company's affairs, including any copies thereof, which are still in his possession. The obligation to return company property extends also to the company car provided to the Managing Director pursuant to (S) 4 including any accessories thereof. The Managing Director is not entitled to exercise a right of retention concerning the afore-mentioned documents and objects. (S) 14 MISCELLANEOUS 1. There are no written or oral agreements with regard to the Managing Director service relationship. The parties hereto have not made any side agreements apart from the pension agreement and the bonus arrangements up to the fiscal year 1996. -11- 2. Amendments and supplements of this Agreement must be in writing to be effective. This also applies for an amendment of this provision. 3. As far as in this Agreement written form has been agreed upon, this form is also observed by the sending of a telegram, telex or telecopy if the author of a document is indicated. 4. Should any provision of this Agreement be or become invalid, the validity of the remaining provisions of this Agreement shall not be affected thereby. Such invalid provision shall be replaced by such provision which comes closest to the economic intention of the parties. 5. This Agreement is governed by the laws of the Federal Republic of Germany. 6. The Managing Director confirms to have received today an executed copy of this Agreement signed by the Company. Frankfurt am Main, November 05, 1996 PRODAC Prozessdatentechnik GmbH durch: /s/ Heinrich R. Wirt /s/ Heinrich R. Wirt ___________________________________ ___________________________________ Heinrich R. Wirt Heinrich R. Wirt -12- /s/ Reiner Kasbach __________________________________ Reiner Kasbach EX-10.34 10 PRODAC LEASE CONTRACT EXHIBIT 10.34 (Translated from German to English) LEASE CONTRACT The following lease contract is hereby concluded by and between Kasbach + Wirt GbR Max-Planck-Str. 38 50858 Cologne - Lessor - and PRODAC GmbH Max-Planck-Str. 38 50858 Cologne - Lessee - This lease contract shall replace the lease contract dated March 27, 1992, the lease contract dated October 1, 1992, and the lease contract between Kasbach + Wirt GbR and Protronic GmbH dated March 27, 1992. (S) 1 SUBJECT MATTER OF THE CONTRACT 1. Leased pursuant hereto shall be the following rooms on the ground floor, 2nd floor, 3rd floor, 4th floor and 5th floor of the office building located at Max Planck Str. 38, 50858 Cologne (Marsdorf); usable floor space of 2,176 m/2/ and 1,634 m/2/ in workshop and hall space exclusively for commercial use. 2. Wall surfaces on or in the building outside of the leased rooms shall not be included in the lease. The attachment and design of advertising facilities by the Lessee shall require separate written approval by the Lessor. 3. Any deviation from the type of use stipulated above shall require the prior written consent of the Lessor. (S) 2 LEASE TERM 1. The lease relationship shall begin on January 1, 1994. The lease relationship is entered into for a term of 15 years. Following that period, the lease relationship shall be extended for consecutive 1 year terms, unless it is terminated in advance upon notice of 6 months. 2. The right to receive rent shall lapse on December 31, 2008. Page 2 of the lease contract between Kasbach + Wirt GbR/PRODAC GmbH (S) 3 RENT, ANCILLARY CHARGES AND SECURITY DEPOSIT
1. The monthly rent shall be 1,928 m/2/ office space DM 23.00 per m/2 /= DM 44,344.00 248 m/2/ office space DM 26.00 per m/2/ = DM 6,448.00 1,168 m/2/ workshop space DM 17.00 per m/2/ = DM 19,856.00 466 m/2/ hall space DM 11.00 per m/2/ = DM 5,126.00 ------------ Subtotal: DM 75,774.00 50 parking spaces DM 65.00 per m/2/= DM 3,250.00 ------------ Total: DM 79,024.00 ============
The statutory value-added tax (currently 15%) and the heating and ancillary cost advance shall be added thereto. Rent adjustment shall be made in the amount of the Federal Office of Statistics' officially established price index for the maintenance of a 4- person middle income working household compared to the level at the time of the last rent adjustment, based in each instance on the status 12 months earlier. In the event that the Federal Office of Statistics discontinues this index in whole or in part, said index shall be replaced by the corresponding successor or an index which will guarantee rent value as intended by the parties to the same extent as the index which had governed previously. 2. The Lessee may offset the rent claim against counterclaims or assert a right to reduce or retain rent only if the counterclaim or the right to reduce or retain rent has been acknowledged or established by final judicial determination. An offset or the assertion of a right to reduce or retain rent shall be announced to the Lessor in writing upon one month's notice. 3. All payments by the Lessee shall be charged to outstanding rents in the following sequence: -outstanding ancillary charges, -current rent, -current ancillary costs, -interest, -costs, particularly legal prosecution costs. 4. The ancillary costs for the property shall correspond to the 2nd Calculation Regulations and shall be paid separately in addition to rent in accordance with the administrative invoice which shall be prepared annually. Page 3 of the lease contract between Kasbach + Wirt GbR/PRODAC GmbH Among other things, said ancillary costs shall relate to a pro rata share of the following: -custodian, if any -multiple protection building insurance -glass breakage insurance with DM 1,000.00 deductible -liability insurance -municipal fees and charges, including local property tax -water -waste water disposal -garbage pick-up -chimney and street cleaning -operation, maintenance and service of elevators and other facilities used by the Lessee -community antenna facility -building cleaning In addition, the Lessee shall bear a pro rata portion of the costs of building management. Pursuant to the heating cost regulations, ancillary costs shall also include the cost for the operation and service of the heating equipment, as well as the annual heating costs allocation and invoicing by a specialized firm. The ancillary costs shall be allocated to the Lessee according to the size of its heatable leased space in relation to overall leased space. The allocation shall be carried out by means of a heating quantity meter. 5. The billing for ancillary costs shall be made at the end of each calendar year. In the event that the heating costs invoice is issued separately through a specialized firm, the time of billing may change. THE LESSEE SHALL MAKE A MONTHLY ANCILLARY AND HEATING COST PREPAYMENT OF DM 3.50 PER M/2/ OF LEASED SPACE, PLUS VALUE-ADDED TAX at the statutory rate, TOGETHER WITH ITS RENT PAYMENT. This sum may be raised or lowered by the Lessor in a reasonable manner at any time depending on the amount of actual costs. 6. Rent, along with the aforementioned ancillary and heating costs prepayments, shall be transferred to the account of the Lessor on a monthly basis in advance, but no later than the 5th working day of each month. ACCOUNT NO. 4362463 AT STADTSPARKASSE KOLNBANK WIRE NO. 370 501 98 All increased charges which arise in connection with the aforementioned ancillary costs after the conclusion of the contract may be allocated by the Lessor on a pro rata basis. Fire insurance premium surcharges to the basic premium shall be borne by the lessee for whose company they were required. Page 4 of the lease contract between Kasbach + Wirt GbR/PRODAC GmbH (S) 4 STRUCTURAL CHANGES AND MAINTENANCE BY THE LESSOR The Lessor shall be entitled to make improvements or structural changes in the leased rooms aimed solely at maintaining the building or averting impending dangers. The Lessee shall keep the relevant rooms accessible. He shall not be entitled to impede or delay the work in this connection. The Lessee may only demand a rent reduction if the work in question completely precludes or substantially impairs the use of the relevant rooms. Additional use and consumption costs associated herewith shall be allocated to the Lessee pursuant to (S) 3 sec. 5. In the case of larger renovation measures, the Lessor shall obtain the consent of the Lessee. (S) 5 MAINTENANCE BY THE LESSEE 1. The repainting of the interior walls and doors, the replacement of the wallpaper and the cleaning and--if necessary-- replacement of the carpet, etc. (cosmetic repairs), which become necessary at regular intervals, shall be up to the Lessee. Damage to or in the building, as well as in the leased rooms, shall be reported to the Lessor or its agent immediately. 2. The Lessee shall be liable for damages culpably caused by its violation of -------- the duty of care, specifically in the event that the service and the outlet pipes, toilets, heating equipment, etc., are handled in an unprofessional manner or the rooms are not sufficiently ventilated, heated or adequately protected against frost. The Lessee shall remedy pipe clogs up to the main pipe at its own expense. 3. In the same way, the Lessee shall be liable for damages which are [handwritten interlinear insertion: illegible] caused by its relatives, workers, white-collar employees, sublessees, visitors, suppliers, carriers, artisans, etc. 4. The Lessee shall keep the equipment for electricity, sanitation facilities, locks, intercom equipment and hot water devices in a serviceable condition. In any case, damages to the aforementioned objects caused by the Lessee or employees of the Lessee within the meaning of (S) 5 par. 3 shall be compensated at the Lessee's expense. The Lessor shall assign to the Lessee any claims against guilty third parties. 5. The Lessee shall immediately remedy damages for which he must take responsibility. If he fails to comply with this obligation within a reasonable period even after written warning, the Lessor may cause the necessary work to be performed at the Lessee's expense. If the damage is potentially dangerous or the whereabouts of the Lessee are unknown, the written warning and imposition of a deadline shall not be required. 6. In any case, the Lessee shall perform minor repairs at its own expense up to a net amount of DM 300.00 p.a. per individual instance, but limited to a maximum of 5% of the annual rent. [handwritten note in right-hand margin:illegible] Page 5 of the lease contract between Kasbach + Wirt GbR/PRODAC GmbH (S) 6 HEATING OF PROPERTY 1. The building has collective heating. It shall be operated outside of the heating period (which is generally the period from 10/1 of the year until 4/30 of the following year) at the request of the majority of the users of the overall property. 2. Partial or complete shutdown of the heating equipment due to a shortage of fuel shall not entitle the Lessee to assert rent reduction or compensatory damage claims. The same shall apply to other necessary interruptions of operation. (S) 7 DELIVERY OF POSSESSION OF THE LEASED ROOMS 1. Possession of the leased rooms shall be delivered in the existing condition, which is hereby acknowledged to be in accordance with the contract. 2. Delivery of possession shall not be prevented by residual uncompleted work or defects which do not substantially impair the use of the leased property for the contractually intended purpose. 3. The Lessee may not derive claims on the basis of defects in driveways or external facilities, unless such defects substantially impair the use of the leased property. In such a case, a right to reduce rent shall exist if the Lessor is in default in the performance of its services. If the Lessee suffers demonstrable damages arising from any defects, the Lessor shall be liable. 4. The Lessor solely guarantees that the leased property can be used in a commercial manner. No guarantee is undertaken by the Lessor hereby with respect to the permissible use the leased property as defined in (S) 1 sec. 1 of a lease contract. The satisfaction of any official requirements and conditions imposed concerning the use in question shall be solely up to the Lessee. All costs associated herewith shall be charged exclusively to the Lessee. (S) 8 INSPECTION OF THE LEASED ROOMS The Lessor or its agent may, after setting an appointment by telephone, enter the leased rooms in the company of parties, experts or witnesses on work days between 10:00 to 12:00 p.m. and between 4:00 p.m. to 5:00 p.m. for the purpose of checking the structural conditions of the leased rooms, further renting or selling the property or similar reasons. Following termination, the Lessor shall further be entitled to attach a lease or sale sign to the property. Page 6 of the lease contract between Kasbach + Wirt GbR/PRODAC GmbH (S) 9 STRUCTURAL MODIFICATIONS BY THE LESSEE 1. Structural modifications by the Lessee, particularly renovations and installations, including the barring of the windows from the inside and the construction or modification of fireplaces, may be undertaken only with the written consent of the Lessor. If the Lessor grants such permission, the Lessee shall be responsible for obtaining the necessary official permits and shall bear all costs in connection therewith. The Lessor may make the grant of consent conditional upon the Lessee entering into an unconditional obligation to restore the original condition in the event that the lease relationship ends. 2. The Lessee shall be entitled to remove facilities which he has placed in the rooms. However, the Lessor may demand that the property be left in the rooms at the end of the lease relationship, provided that the Lessor pay an amount which corresponds to the current value (taking into account technical obsolescence and economic wear and tear). The Lessee and Lessor shall mutually declare in a timely manner that the agreements in this regard may be entered into prior to removal. If the Lessor does not take over the facilities installed by the Lessee, the latter shall restore the previous condition, including all necessary ancillary work in connection therewith, by the time of expiration of the contract. 3. The Lessee shall be liable for all damages which arise in connection with the construction activities which he has undertaken. (S) 10 USE OF THE LEASED ROOMS; SUBLEASING 1. Subleasing or other use by third parties shall require the prior written consent of the Lessor. Subleasing is possible in principle. A copy of the subleasing contract shall be delivered to the Lessor. 2. In the event of unauthorized subleasing, the Lessor may demand that the Lessee end the sublease relationship promptly, by no later than one month. If that does not occur, the Lessor may terminate the primary lease relationship without compliance with a termination notice period. 3. In the event of subleasing or other third-party use, the Lessee shall be liable for all acts and omissions by the sublessee or the party whom he has permitted to use the leased rooms. 4. In the event of subleasing, the Lessee hereby assigns to the Lessor all claims against the sublessee to which the Lessee is entitled, along with a lien for security purposes up to the amount of the Lessor's claims. 5. If the business organization situation of the Lessee changes--resulting, for example, from conversion to a limited liability business association form or reduction of capital subject to liability--this must be reported to the Lessor promptly. Page 7 of the lease contract between Kasbach + Wirt GbR/PRODAC GmbH 6. If the aforementioned measures result in a legal switch of lessee or a total or partial sale of the Lessee's operation, a prior written agreement with the Lessor shall be required concerning the passage of the rights and duties arising from the lease contract to the legal successor of the Lessee. The Lessor may make the conclusion of such agreement conditional upon the Lessee separately confirming the continued existence of its liability for all duties arising from the lease relationship. (S) 11 ELECTRICITY, GAS, WATER 1. The Lessee may use the existing network of electricity, gas and water mains only to such a degree that no overload occurs. The Lessee may cover additional needs through expansion of the supply line at its own expense with the written consent of the Lessor. Applications for current meters and telephone connections shall be made by the Lessee at its own expense. He shall also bear the installation expense associated therewith. 2. Water may be drawn from the water lines for in-house needs only. In the case of water consumption for commercial purposes, the Lessee shall attach a water sub-meter at its own expense and bear the water and waste water costs according to the information of the Lessor. 3. A change in energy supply, particularly a change in voltage, shall not entitle the Lessee to compensatory damage claims against the Lessor. 4. The Lessee shall not be entitled to a rent reduction right or compensatory damage claims against the Lessor if the power, gas or water supply or the waste water disposal are interrupted by circumstances for which the Lessor is not responsible, or if floods or other catastrophes occur. (S) 12 PROMOTIONAL MEASURES 1. By agreement with and with the written consent of the Lessor, the Lessee shall be entitled to attach a lit sign of normal size on the surface area designated by the Lessor. No legal right to the grant of consent shall exist. 2. The Lessor shall be entitled to have a collective sign unit attached to the building and shall be entitled to allocate the cost to the lessees according to the ancillary cost key. 3. It shall be up to the Lessee to observe all general technical and official regulations concerning the type, placement and maintenance of advertising installations which can permissibly be attached. Page 8 of the lease contract between Kasbach + Wirt + GbR/PRODAC GmbH (S) 13 END OF THE LEASE TERM 1. The lease relationship shall end upon expiration of the lease according to (S) 2 or by termination without notice. The Lessor shall be entitled to terminate without notice following prior written warning by registered mail if the Lessee is in default on its payment obligations in the amount of one month's gross rent. Moreover, termination without notice may be effected by either party for good cause. Excepted shall be termination without notice due to in-house needs of the Lessor during the contractual term. 2. In the event that the lease relationship ends, the leased rooms shall be returned to the Lessor with all keys (including any keys obtained by the Lessee) in a renovated condition following satisfaction of any duty to restore the original condition--with respect to the facilities mentioned in (S) 9, a duty on the part of the Lessee to restore the original condition shall exist in any case. Included within renovation shall be shampooing or--to the extent necessary--replacement of the carpet. The replacement of carpet shall relate to damage and not to normal wear and tear. The Lessor shall decide concerning the scope of renovation work based on its reasonable discretion on the basis of the possession transfer protocol. The parties shall prepare and sign a protocol on the occasion of the return of the leased property. 3. In the event of a premature end of the lease relationship for a reason for which the Lessor is not responsible, the Lessee shall be liable for loss of rent on the part of the Lessor and for any rent difference arising during the period before the first possible opportunity to properly end the lease relationship. (S) 14 MISCELLANEOUS AGREEMENTS 1. The Lessee hereby acknowledges that the condition of the property is 100% in accordance with the contract and accepts the possibility that structural measures will be taken and that, in such an event, Lessee shall not be able to assert rent reduction claims. 2. The complete office building is provided with a lock system. A separate agreement shall be included concerning the lock system. (S) 15 FINAL PROVISIONS 1. The building by-laws which are attached to the lease contract shall constitute an integrated component of the lease contract; the Lessor shall be entitled to amend said house by-laws based on its reasonable discretion, subject to the proviso that the amendment to the house by- laws shall be effective starting from the point in time at which the amended building by-laws are received by the Lessee. 2. The place of performance and exclusive place of venue for all obligations arising from this contract shall be Cologne. 3. All agreements concluded by the parties concerning the lease contract are conclusively contained in this contract. In order to be effective, amendments and addenda to the contract shall require inclusion in a uniform document signed by both parties. Page 9 of the lease contract between Kasbach + Wirt + GbR/PRODAC GmbH 4. In the event that a provision of the contract is or should become invalid, the validity of the remaining provisions shall not be affected thereby. An invalid provision shall be deemed to be replaced by a permissible provision which comes as close as possible to the former from an economic standpoint. Cologne, 12/15/93 Cologne, 12/15/93 ---------- ---------- Kasbach + Wirt GbR PRODAC GmbH Max Planck Str. 38 Max Planck Str. 38 50858 Cologne 50858 Cologne R. Kasbach/H. Wirt R. Kasbach/H. Wirt /s/ R. Kasbach /s/ R. Kasbach - -------------------- ---------------------- - - Signature of Lessor - - Signature of Lessee - /s/ H. Wirt /s/ H. Wirt EX-10.35 11 MODIFICATION AGREEMENT OF PRODAC LEASE CONTRACT EXHIBIT 10.35 (Translated from German to English) "VT_PRODAC.Ii" LEASE CONTRACT by and between Kasbach + Wirt GbR Max-Planck-Str. 38 50858 Cologne - Lessor - and PRODAC GmbH Max-Planck-Str. 38 50858 Cologne - Lessee - The parties entered into a lease contract dated December 15, 1993. In the following, (S) 3 of said lease contract is rendered more precise and redrafted hereby. The provision shall take effect starting January 1, 1994. This modification agreement shall become an integrated component of the contract dated December 15, 1993. The contract dated 12/15/93 shall otherwise remain in effect without modification. 2 (S) 3 RENT, ANCILLARY CHARGES AND SECURITY DEPOSIT 1. The monthly rent shall be
1,928 m/2/ office space DM 23.00 per m/2/ DM 44,344.00 248 m/2/ office space DM 26.00 per m/2/ DM 6,448.00 1,168 m/2/ workshop space DM 17.00 per m/2/ DM 19,856.00 466 m/2/ hall space DM 11.00 per m/2/ DM 5,126.00 ------------ Subtotal: DM 75,774.00 50 parking spaces DM 65.00 per m/2/ DM 3,250.00 ------------ Total:; DM 79,024.00 ============
The statutory value-added tax (currently 15%) and the heating and ancillary cost advance shall be added thereto. 2. If the cost of living index determined by the Federal Office of Statistics (4-person middle-income working household with a head of household who is the sole provider, basis 1985 = 100) increases or decreases by more than 10 points, the rent shall change in accordance with the change which has occurred in the standard of living index. The basis for the calculation shall be the index on [crossed out by hand:] December 15, 1993. [handwritten interlinear insertion: 1/1/94 W] 3 The change in rent shall take effect without any action by the parties at the beginning of the following month for which the change of the cost of living index is determined by the Federal Office of Statistics. A new rent change shall take place if, following a rent adjustment, the index once again changes by 10 points. The rent change may be asserted retroactively. The contracting parties are in agreement that this value security clause shall require the approval of the competent Central State Bank. If such approval is denied, this provision shall be replaced by an agreement which comes as close as possible to the economic intent of the lapsed provision. 3. The Lessee may set counterclaims off against the rent claim or assert a right to reduce or retain rent only if the counterclaim or the right to reduce or retain rent has been acknowledged or established by final judicial determination. An offset or the assertion of a right to reduce or retain rent shall be announced to the Lessor in writing upon one month's notice. 4. All payments by the Lessee shall be charged to outstanding rents in the following sequence: - outstanding ancillary charges - current rent - current ancillary costs - interest - costs, particularly legal prosecution costs. 4 5. The ancillary costs for the property shall correspond to the 2nd Calculation Regulations and shall be paid separately in addition to rent in accordance with the administrative invoice which shall be prepared annually. 6. Among other things, said ancillary costs shall relate to a pro rata share of the following: - custodian, if any - multiple protection building insurance - glass breakage insurance with DM 1,000.00 deductible - liability insurance - municipal fees and charges, including local property tax - water - waste water disposal - garbage pick-up - chimney and street cleaning - operation, maintenance and service of elevators and other facilities used by the Lessee - community antenna facility - building cleaning In addition, the Lessee shall bear a pro rata portion of the costs of building management. Pursuant to the heating cost regulations, ancillary costs shall also include the cost for the operation and service of the heating equipment, as well as the annual heating costs allocation and invoicing by a specialized firm. 5 The ancillary costs shall be allocated to the Lessee according to the size of its heatable leased space in relation to overall leased space. The allocation shall be carried out by means of a heating quantity meter. 6. [crossed out by hand] Billing for ancillary costs shall be made at the end of each calendar year. [handwritten interlinear insertion:] The billing period for ancillary costs shall correspond to the calendar year. W In the event that the heating costs invoice is issued separately through a specialized firm, the time of billing may change. THE LESSEE SHALL MAKE A MONTHLY ANCILLARY AND HEATING COST PREPAYMENT OF DM 3.50 PER M/2/ OF LEASED SPACE, PLUS VALUE-ADDED TAX AT THE STATUTORY RATE, TOGETHER WITH ITS RENT PAYMENT. This sum may be raised or lowered by the Lessor in a reasonable manner at any time depending on the amount of actual costs. 7. Rent, along with the aforementioned ancillary and heating costs prepayments, shall be transferred to the account of the Lessor on a monthly basis in advance, but no later than the 5th working day of each month. ACCOUNT NO. 4362463 AT STADTSPARKASSE KOLN BANK WIRE NO. 370 501 98 All increased charges which arise in connection with the aforementioned ancillary costs after the conclusion of the contract may be allocated by the Lessor on a pro rata basis. Fire insurance premium surcharges to the basic premium shall be borne by the lessee for whose company they were required. 6 Cologne, October 7 , 1996 --- Kasbach + Wirt GbR PRODAC GmbH Max Planck Str. 38 Max Planck Str. 38 50858 Cologne 50858 Cologne R. Kasbach/H. Wirt R. Kasbach/H. Wirt /s/ R. Kasbach /s/ R. Kasbach /s/ H. Wirt /s/ H. Wirt - - Signature of Lessor - - Signature of Lessee - EX-10.36 12 AGREEMENT BETWEEN PRODAC & UNITED INT'L PICTURES EXHIBIT 10.36 (Translated from German to English) COPY AGREEMENT dated February 8, 1996 ---------------- effective starting April 1, 1996 (effective date) ------------- between UNITED INTERNATIONAL PICTURES GmbH, P.O. Box 71 08 48, 60498 Frankfurt/Main (hereinafter referred to as "LICENSOR") and PRODAC GmbH, Max-Planck-Strasse 38, 50858 Cologne (hereinafter referred to as "LICENSEE") 1. the LICENSOR hereby grants the LICENSEE a time-limited non-exclusive license within the scope of the prevailing copyright provisions and other applicable provisions to distribute FILMS for the purpose of hotel guest display in the HOTELS within the contract territory for the relevant presentation period. 2. (a) As consideration for the LICENSE granted hereinafter, the LICENSEE shall pay the LICENSOR a monthly license fee of DM [***] (in words: [***]) plus VAT; beginning on the above-captioned date (effective date of this agreement), the LICENSEE shall present films of the LICENSOR for at least 6 months of the contract term of 12 months. The LICENSEE may select a maximum of 30 titles from the respective program of the LICENSOR--dependent, however, on the latter's availability. This number shall increase by the number of titles which are selected by the LICENSEE which the LICENSOR is not able to deliver. Within one month, calculated from the effective date of this agreement, the LICENSOR shall also provide the LICENSEE with 20 films for the LICENSEE's "Videoquest" system for a period of 12 months. In consideration thereof, the LICENSEE shall pay the LICENSOR a license fee in the amount of [***] % of the net revenues--which are to be documented by the LICENSEE--for the months in which it presents no films by way of hotel guest presentation (as defined in this contract). The LICENSEE shall settle with regard to the relevant net revenues by the 15th of the month for the preceding calendar month. -------------------------------------------------------------------- [***] Confidential treatment requested pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission. - 2 - The license fee shall be paid by the LICENSEE on a monthly basis immediately following receipt of the relevant invoices from the LICENSOR. Payment for the aforementioned films made available for use in the LICENSEE's Videoquest system shall be made together with settlement. (b) The LICENSEE shall pay the LICENSOR a license fee in accordance with appendix C on the basis of the total number of rooms communicated to the LICENSOR by the LICENSEE pursuant to sec. 3 (b) of the Standard Contract Terms; increases shall apply starting from the point in time at which additional rooms are added. (c) Immediately after the time of the addition of rooms, or upon the LICENSOR's consent to the possible expansion to include additional rooms in a new HOTEL pursuant to sec. 5 (a) of this agreement, the LICENSEE shall pay the LICENSOR the portion of the additional license fee allocable to the current month. For the following months, the LICENSEE shall pay the additional license fee in advance, together with the minimum license fee pursuant to sec. 2 (a), above. (d) All payments shall be made by wire transfer to the bank account communicated by the LICENSOR. The license fees allocable to the LICENSOR shall be understood to exclude value-added tax and other taxes. Customs duties or other charges or fees which are imposed on the delivery and presentation of films pursuant to this contract. The value-added tax payable by the LICENSEE pursuant hereto shall be listed in addition in the invoice by the LICENSOR for the relevant license fee payment. Invoices of the LICENSOR shall be payable immediately without deduction upon receipt by the LICENSEE. 3. (a) Subject to sec. 3 (b), below, the LICENSOR hereby promises to deliver 30 titles per year. It is hereby clarified in this connection that, to the extent that use rights to a title are granted in more than one language, this shall be deemed to constitute one title for purposes of this provision. (b) Subject to availability, the LICENSOR shall make available to the LICENSEE a number of video cassettes of films coordinated by the parties in advance; however, the LICENSOR hereby reserves the right to make the final decision based on its discretion. - 3 - (c) At the end of each contract year, the LICENSEE shall have the elective right to return--all or part of--the video cassettes delivered during the expired contract year or destroy them in accordance with sec. 5 (e) of the Standard Contract Terms. Moreover, the LICENSEE may retain the video cassettes for one or more titles, but subject to the proviso that said titles shall be counted toward the titles to be delivered during the following year (maximum of 30 in the absence of agreement to the contrary) and the number of video cassettes which are to be provided therefor. 4. This agreement shall have a term of one year, calculated from the effective date thereof. It shall be extended by consecutive one-year terms, unless one of the parties terminates it in writing upon compliance with a notice period of 90 days effective at the end of a contract year. 5. A hotel guest presentation may only take place in one of the HOTELS communicated to the LICENSOR pursuant to sec. 3 (b) of the attached Standard Contract Terms upon written clearance of the HOTEL by the LICENSOR. The LICENSOR may only refuse to grant said clearance for good cause. To the extent possible, the LICENSOR shall submit its declaration in this regard within two weeks of receipt of the relevant information from the LICENSEE pursuant to sec. 3 (b) of the Standard Contract Terms. Upon clearance, appendix A shall be deemed amended mutatis mutandis. 6. Notwithstanding sec. 5 (b) of the Standard Contract Terms, the LICENSEE shall be entitled to pulse transmission with regard to the video cassette, provided that the final version of the films on the video cassettes is not impaired thereby. 7. The use rights granted pursuant hereto shall apply to the countries of Germany, Austria, Belgium, Luxembourg, the Netherlands, Spain, France, Poland, the Czech Republic, the United Kingdom, Switzerland, Hungary and Russia (hereinafter referred to as the "contract territory"). Use rights for additional countries in connection with this agreement shall require the prior written consent of the LICENSOR. If the LICENSEE applies for the grant of use rights for additional countries, the LICENSOR shall, if at all possible, communicate its decision to the LICENSEE within two weeks of receipt of the application. 8. This agreement shall be governed by the laws of the Federal Republic of Germany. 9. The attached General Contract Terms and appendices shall constitute substantial components if this agreement. To the extent that the provisions of this agreement are in conflict with those of the Standard Contract Terms, the provisions of the agreement text shall take precedence. - 4 - 10. The definition of terms in the Standard Contract Terms shall also apply to this agreement. Conversely, definitions of terms contained herein shall also apply to the Standard Contract Terms. In witness thereof, the parties executed this agreement on the date stated at the outset. UNITED INTERNATIONAL PICTURES GmbH by: /s/ Paul Steinschulte Paul Steinschulte PRODAC GmbH by: /s/ Heinz Wirt Heinz Wirt HOTEL VIDEO STANDARD CONTRACT TERMS ----------------------- The following Standard Contract Terms shall supplement the special terms and conditions in the attached agreement (hereinafter referred to as the "agreement") between the LICENSOR and the LICENSEE named therein. DEFINITIONS OF TERMS - -------------------- The following definitions shall apply to the agreement and these Standard Contract Terms: "Availability date": The time at which the LICENSOR is able to make the video cassettes of the FILM in the stipulated format available to the LICENSEE for contractual use within the contract territory. The availability dates of the individual FILMS shall be set by the LICENSOR's end supplier, taking into account his interests and rights, as well as the relevant technical requirements for manufacture in the appropriate format, and shall not be subject to the influence of the LICENSOR. "Beginning of presentation": For each hotel, the point in time at which the hotel guest presentations pursuant to appendix A are scheduled to begin in the version modified according to sec. 3 (b); in the absence of an indication of a time, the date on which the agreement takes affect. "Presentation period": With regard to each individual FILM, the period during which presentation is permitted in accordance with the agreement--beginning on the date of actual delivery of the video cassettes to the LICENSEE (no earlier, however, than the date on which the agreement takes effect)--and ending either (i) at the end time, (ii) the point in time at which the rights of the LICENSOR to grant use rights lapse or (iii) the point in time at which the LICENSOR's suppliers--for whatever reason-- adopt a provision to the effect that distribution of the FILM in connection with the agreement shall end; the earliest point in time shall govern. - 2 - "Hotels": The hotel(s) within the contract territory as described (name and location) in appendix A in the version amended in accordance with Sec. 3 (b), provided that the hotels are hotel facilities in the true sense of the word (i) whose rooms are let to guests exclusively for the primary purpose of short-term temporary lodging and (ii) in which the presentation of FILMS represents a merely ancillary service for guests in relation to lodging. "Hotel guest presentation": Presentations exclusively in the respective hotel rooms or suites, to which only lodging guests of the hotel have access; presentation shall take place using video cassettes over a hotel distribution facilities. The term "hotel guest presentation" shall not include presentations in rooms or areas to which the general public (i.e., persons, including conference participants who are not lodging guests of the hotel) have access; the term shall also be understood to exclude presentation by means of devices or media other than those expressly stated in the preceding sentence. "Films": The feature films listed in appendix B (including--to the extent that the terms and conditions of the agreement and these Standard Contract Terms can be applied mutatis mutandis-- the FILMS provided in sec. 2 (a) of the agreement for the LICENSEE's Videoquest system.) "Rooms": The individual hotel rooms or suites of a hotel which (i) are available for use by hotel guests (regardless of actual occupancy) and (ii) equipped with devices for hotel guest presentations. The number of rooms in each hotel is stated in appendix A. "End time": The point in time at which the contract ends in accordance with sec. 4 of the agreement or according to sec. 13 below, depending on which is earlier. "Video cassettes": Video cassettes (in the stipulated format and standard) of the FILMS with (at the discretion of the LICENSOR) subtitles and/or - 3 - synchronized in a contract territory language and otherwise in a final version which are delivered to the LICENSEE by the LICENSOR either directly or through a contract laboratory pursuant to sec. 5 (a) for hotel guest presentations in connection with the agreement.The quality of the video cassettes shall conform to the purposes of the agreement. LICENSE - ------- 1. (a) The LICENSOR shall grant the LICENSEE a time-limited non-exclusive license within the scope of prevailing copyright provisions and other applicable positions to distribute FILMS for hotel guest presentations in hotels within the contract territory for the respective presentation period. (b) The LICENSOR shall arrange for the delivery of video cassettes to the LICENSEE or its agent, subject to the availability dates of the relevant FILMS and subject to the timely payment of license fees and other sums owed pursuant to this agreement. The LICENSEE shall not be permitted to permit a presentation of the FILMS prior to the relevant availability date or deliver video cassettes of the relevant FILMS to the hotels. (c) The LICENSEE shall be obligated to ensure that the FILMS are presented exclusively in the manner intended pursuant hereto, at the location defined herein and exclusively during the presentation periods. Moreover, the LICENSEE shall be obligated not to permit any presentation of the LICENSOR's FILMS concerning which the LICENSEE has not been granted express presentation rights hereby. (d) The LICENSOR hereby reserves all rights with respect to all FILMS, except where license rights have been expressly granted to the LICENSEE herein; the LICENSOR shall be free to exercise the rights which he reserves pursuant hereto without regard to whether, or the extent to which, such exercise of right establishes a competitive relationship vis a vis the LICENSEE or the use licensed hereby. - 4 - (e) The agreement shall end at the end time. All rights to the FILMS shall revert to the LICENSOR upon expiration of the presentation period or at the end time--whichever comes first. BOOKS AND AUDIT RIGHT - --------------------- 2. (a) The LICENSEE shall be obligated to maintain complete and accurate books and records concerning the payments and revenues which it receives in connection with the agreement. Such books and records shall be retained for a period of two years starting from the end of the contract, but for not longer than a period of five years from the end of the accounting year in which the books and records were created. The foregoing shall always be subject to the proviso that the LICENSEE shall only be entitled to destroy such books and records if he has notified the LICENSOR in writing of such intention upon compliance with a notice period of at least 30 days. (b) Upon prior agreement with the LICENSEE, the LICENSOR shall have the right--which shall be exercisable by its (outside or internal) auditors, agents, representatives and/or employees--to audit, make copies or prepare excerpts of the books and records identified in letter (a), above, relating to the agreement and may do so at any time during normal business hours within the term of the agreement (including any extension thereto) and for a period of two years starting from the end of the contract. The LICENSEE's auditors shall be obligated to make their own audit documents relating to the agreement available to the LICENSOR's auditors. The LICENSEE shall ensure for the LICENSOR and its auditors that complete audits (i.e., to the extent defined for the LICENSEE under this sec. 2 with regard to books, accounts and records of third parties, completely regardless of whether they are affiliated with or independent of the LICENSEE) can be conducted with regard to the services provided for the LICENSEE by third parties for purposes of this agreement. (c) The LICENSOR shall bear the costs incurred in connection with the inspection, creation of copies and/or audit pursuant to letter (b). If, on the other hand, it is determined that the LICENSEE has set the payments to be made to the LICENSOR pursuant hereto excessively low or, conversely, set the amounts payable by the LICENSOR excessively high, the LICENSOR may, without prejudice to other rights to which he is entitled, demand that the LICENSEE pay the sums set forth below in addition to making payment of the full difference amount (provided that the sum of all deviations affecting the payable amount which are detected exceeds 5% of - 5 - the amounts allocable to the LICENSOR at the time of the audit or at least the equivalent of US$ 1,000 in local currency): (i) all costs incurred by the LICENSOR or in its name for the purpose of ascertaining the deviation (particularly all directly allocable travel and maintenance costs, as well as the assignable salary expense on the part of the LICENSOR) and (ii) interest on the entire difference amount on a cumulative basis in the amount of 4% above FIBOR starting from the first due date for the payment relating to the relevant owed sum. (d) Examinations pursuant to the foregoing shall be conducted (following announcement) at reasonable times during ordinary business hours within the term of the agreement (including any extension thereto) or within two years of the end of the agreement. REPORTS - ------- 3. (a) On the closing date of June 30 of each year or other point in time set by mutual agreement of the parties, the LICENSEE shall give the LICENSOR an inventory list in a form acceptable to the latter which lists the title of the FILMS, as well as the format and place of use of all video cassettes in the possession of the LICENSEE. The foregoing shall be sent to the LICENSEE by no later than July 30. The LICENSOR reserves the right to check the inventory lists on a random basis at any time during normal business hours during the term of this agreement. (b) Within 30 days from the end of the month, the LICENSEE shall give the LICENSOR a monthly list of: (i) changes in the number of rooms of the hotels; (ii) new hotels in which the installation of technical facilities for hotel guest presentations is impending during the upcoming months, as well as the planned start of hotel guest presentations and the planned number of rooms for each new hotel--without prejudice to the requirement of prior consent of the LICENSOR pursuant to sec. 5 (a) of the agreement; - 6 - (iii) existing hotels in which an end to hotel guest presentations is pending during the following months; (iv) the titles played pursuant to this agreement during the relevant month. As a request of the LICENSOR, the LICENSEE shall be obligated to submit to the LICENSOR a written confirmation of the hotels concerning the number of rooms in the relevant hotel and/or the actual beginning or actual ending of hotel guest presentations in the hotel. TAXES - ----- 4. The LICENSEE shall assume all present and future taxes (particularly including transfer, source and value-added tax), import duties, other taxes and inspection office fees (including interest and penalty surcharges allocable thereto) in connection with the licensing, leasing, delivery, import, presentation, possession or use of the FILMS or video cassettes or the payments made and received in accordance with the agreement. DELIVERY AND RETURN - ------------------- 5. (a) The LICENSOR shall provide the LICENSEE or its agent with video cassettes in the quantity stipulated in the agreement. Delivery shall be made either by the LICENSOR directly or--at its election and with its prior written consent--by a laboratory cleared by the LICENSOR and the Motion Picture Expert Association of America (MPEAA). In the latter case, the LICENSEE shall submit its purchase orders for video cassettes directly to the LICENSOR, who shall forward them to the laboratory in question. The LICENSEE shall not be permitted to order directly from the laboratory. (b) The LICENSEE may only use video cassettes in accordance with the agreement. The LICENSEE shall be prohibited from duplicating video cassettes--in their entirety or in part. All cutting, editing and title changes or other modifications of the video cassettes shall require the written consent of the LICENSOR and shall be carried out solely at the expense of the LICENSEE. - 7 - (c) The LICENSOR shall bear the costs of manufacturing the master copy of the video cassettes and (if delivery is made by a cleared laboratory) the shipping and handling costs in connection with the delivery of the video cassettes to the laboratory. All other costs and outlays, including the costs of manufacture and duplication of video cassettes and the costs of transportation and insurance in connection with the delivery of video cassettes in the final format to the LICENSEE within the contract territory, shall be charged to the LICENSEE. The LICENSEE shall be free to dictate to the LICENSOR the manner of transportation desired by the LICENSEE. If the LICENSEE fails to do so, the LICENSOR shall select the manner transport at its reasonable discretion. The LICENSEE shall be obligated to promptly settle the invoices concerning the costs and outlays which he must bear pursuant to the foregoing, particularly transport and related costs. If the LICENSOR is guilty of delay in delivery and increased transport costs arise in--wholly or partially--making up for the delay, the additional costs in question shall be charged to the LICENSOR. if the LICENSOR delivers the video cassettes directly to the LICENSEE, the latter shall be charged with all costs and outlays which he must bear pursuant to the foregoing. the LICENSEE shall be obligated to settle the relevant invoices promptly. (d) Upon expiration of the presentation period, but not later than the end time, the LICENSEE shall return the relevant video cassettes to the LICENSOR or another person or office designated by the LICENSOR. (e) If, during the term of the agreement, the LICENSEE is of the opinion that video cassettes should be erased or destroyed, he shall be obligated to obtain the prior written consent of the LICENSOR, which shall also extend to the proposed procedure and location of erasure or destruction. In the case of erasure of the video cassettes, the LICENSEE shall ensure complete erasure of the contents of the cassettes. For each erased or destroyed cassette, he shall be obligated to submit a destruction record to the LICENSOR in the form jointly defined with the LICENSOR. Notwithstanding sec. 6 (a), the LICENSEE shall be entitled to retain all blank video cassettes following erasure. (f) A violation by the LICENSEE of the provisions of this sec. 5-- including, in particular, the use of video cassettes of FILMS which are not video cassettes under the contract--this shall establish the elements of a violation of substantial obligations of the agreement. - 8 - OWNERSHIP RIGHTS - ---------------- 6. (a) All video cassettes delivered pursuant to the agreement shall remain the property of the LICENSOR or its suppliers who shall hold all of the following rights arising from ownership. (b) The LICENSEE shall not be permitted to remove copyright notices or trademarks from the video cassettes or promotional material for the FILMS or permit removal by third parties. The LICENSEE shall be prohibited from presenting video cassettes or permitting a presentation without a copyright notice in the form of appendix D or other form permitted in advance by the LICENSOR in advance. (c) The LICENSEE shall acquire no personal rights in the trademark of the LICENSOR and the LICENSOR's suppliers. The LICENSEE shall be permitted to use said trademarks solely in connection with the FILMS. (d) The LICENSEE shall be obligated to use the video cassettes in accordance with the agreement and shall be obligated not use other video cassettes of the FILM products of the LICENSOR or its suppliers for purposes (including program preview) which are not expressly named in the agreement. (e) The LICENSEE shall take all available measures to ensure that the video cassettes delivered to the hotels are not used by third parties for non-contractual purposes. The LICENSEE shall be further obligated to obtain a declaration of obligation from its customers to the effect that they will use their best efforts to endeavor to protect the video cassettes from unauthorized use and unauthorized exploitation and/or commercial use. The LICENSEE shall confirm that it shall reject a delivery from customers which violate this obligation. Moreover, the LICENSEE shall use its best efforts to ensure that no video cassette recorder or other AV equipment can be connected to television sets in the rooms of the hotels in which the presentation of FILMS is received by in-house TV sets and shall use its best efforts to ensure that all video cassettes are stored and transported in such a manner that they are protected against theft, loss and/or damage in the best manner possible. - 9 - (f) The LICENSEE shall notify the LICENSOR promptly if it becomes aware of the violation of a copyright or trademark in conjunction with the FILMS or a trademark used in connection with the FILMS. (g) A violation of the provisions of this sec. 6 on the part of the LICENSEE shall establish the elements of the violation of substantial duties of the agreement. GUARANTEES - ---------- 7. (a) The LICENSOR hereby guarantees that the exercise of the rights granted herein shall require no additional permission and that the rights of third parties are not violated, excluding rights of public performance and mechanical duplication of copyright-protected material contained in the FILMS. However, the LICENSOR shall make no guarantee or promise concerning local statutes or regulations which apply in a certain country to the exercise of the rights granted herein; accordingly, it shall be deemed agreed that compliance with statutes and/or regulations shall be exclusively up to the LICENSEE and that the LICENSEE shall indemnify the LICENSOR on any claims relating to compliance with local statutes and/or regulations and/or shall be obligated to compensate the LICENSOR for any damages incurred. (b) The LICENSOR hereby guarantees that it is or will be in possession of all permits and licenses which will be necessary for the importation, utilization and presentation of the FILMS in the hotels within the contract territory during the presentation period and for making payments in accordance with the agreement. (c) Moreover, the LICENSEE hereby guarantees that it has concluded binding contracts with the hotels concerning the presentation of FILMS starting from the start of presentation according to appendix A--in the amended version set forth in sec. 3 (b)--and that it is not and shall not be in default during the term of the agreement with regard to the performance of its obligations pursuant to the contracts which have been concluded. COMPENSATORY DAMAGES - -------------------- 8. The LICENSEE shall be obligated to compensate or indemnify the LICENSOR for all costs, liability, outlays and/or damages, including lost profits, which the LICENSOR suffers due to a violation or asserted violation of the terms of the agreement by the LICENSEE, the hotel or other natural person or legal entities acting in the name of or by authority of the LICENSEE or the hotel or its employees, decision-making representatives. - 10 - INSURANCE - --------- 9. (a) It shall be up to the LICENSEE to insure all video cassettes against theft, loss and/or damage. (b) In the event of theft, damage, loss or destruction of a video cassette, the LICENSEE shall present the LICENSOR with a sworn declaration concerning the facts in a form which is acceptable to the LICENSOR. PERFORMANCE, PRESENTATIONS, ADVERTISING - --------------------------------------- 10. (a) The FILMS shall be presented in their original sequence in synchronized version with sound reproduction. Cuts or other changes, including changing the titles, shall be impermissible. (b) Without prejudice to the provision of the foregoing letter (a), presentation of the FILMS in connection with advertising--excluding the advertising of services of the hotel--shall not be permitted without the prior written consent of the LICENSOR. (c) The LICENSEE shall be obligated to pay, or cause the hotel to pay, all license fees and other fees and taxes which are incurred in connection with the distribution and presentation of the FILMS, including sound reproduction, in the hotels. (d) The LICENSEE may use only the original material provided by the LICENSOR for advertising or announcement purposes. (e) The LICENSEE shall be permitted to present FILMS for presentation purposes, particularly at technical trade shows and in promoting its deliveries/services, provided that it obtains the prior written consent of the LICENSOR therefor. Consent shall be denied only for good cause. - 11 - RELATIONSHIPS OF THE PARTIES TO ONE ANOTHER - ------------------------------------------- 11. The LICENSEE is neither an agent nor a representative of the LICENSOR, and the agreement shall establish no corporate/partnership(1) relationship or joint venture. Declarations by the LICENSEE shall not bind the LICENSOR, nor shall the LICENSOR be liable for acts or omissions on the part of the LICENSEE. BEARING OF RISKS - ---------------- 12. The LICENSEE shall be fully responsible for all costs and shall bear all risks in connection with: (a) the transport of video cassettes into and within the contract territory; (b) the reasonable and safe storage of the video cassettes within the contract territories; (c) compliance with import provisions and tax restrictions within or in connection with the contract territory; (d) acquisition of clearance certificates from inspection offices in the contract territory and acquisition of all other certificates of non- objection and permits which are necessary in or in connection with the contract territory. DEFAULT - ------- 13. (a) The following events shall establish default in connection with performance of this agreement: (i) if the LICENSEE applies for the opening of an insolvency proceeding or commits an act relevant with respect to insolvency law, applies for a debt regulation or (if the LICENSEE is a corporation/partnership(2)) a resolution is adopted or an order is issued pursuant to which the corporation/partnership is dissolved; (ii) if the LICENSEE violates a substantial provision of the agreement, particularly sections 5 or 6; ___________________________ (1) DEPENDING ON THE CONTEXT--WHICH IS NON-EXISTENT IN THIS CASE--THE GERMAN BUSINESS ASSOCIATION GESELLSCHAFT MAY MEAN EITHER CORPORATION OR PARTNERSHIP. (2) See previous note. - 12 - (iii) if the LICENSEE violates another provision contained herein and the violation is not remedied within 10 days following receipt of a warning by the LICENSOR. (b) Upon occurrence of a case of default, the LICENSOR may--without prejudice to other rights to which it is entitled--terminate the agreement without notice at its election, with the consequence that the outstanding license fee and other sums payable to the LICENSOR pursuant hereto shall be due and payable immediately. In the event of such an ending, the LICENSEE shall be obligated to return all video cassettes to the LICENSOR immediately--which shall not establish a duty on the part of the LICENSOR to first refund payments received from the LICENSEE. The LICENSOR shall have the right to notify the hotels of such an end to the contract. He shall not be liable for damage or detriment suffered by the LICENSEE as a result of such end to the contract. (c) At the election of the LICENSOR, the violation of provisions of other contracts between the LICENSEE and the LICENSOR shall be deemed to be an event establishing defaults for purposes of the agreement if said violation does not establish default under the other contracts. (d) The foregoing rights shall apply in addition to all other rights and legal remedies to which the LICENSOR is entitled by statute or elsewhere. ACTS OF GOD - ----------- 14. Notwithstanding other provisions of the agreement, if the performance of obligations pursuant hereto is impossible, restricted, delayed or prevented for reasons which one party is, in good faith, wholly or partially not responsible--particularly as a result of impediment due to fire, storm, war, invasions, acts of enemies of state, hostile acts (regardless of whether a declaration of war is issued), civil war, revolt, strike or industrial acts, due to the provisions of a statute, regulation, decree, order or other governmental measure or due to transport delays--the affected party shall be excused from the obligation of contractual performance and released without sanction provided that the restriction, delay or prevention of contractual performance is attributable thereto; however, this shall apply subject to the proviso that neither all nor part of the license fee shall be refunded and that the LICENSEE shall be entitled to no other payment claims against the LICENSOR arising from the fact that--for a reason for which the LICENSOR is not, in good faith, responsible--it is impossible for the LICENSEE to present the FILMS in the hotels or otherwise fully satisfy the LICENSEE's expectations concerning presentation within the contract territory. - 13 - RULES OF CONDUCT - ---------------- 15. (a) The LICENSEE hereby acknowledges that it is not permissible to offer, send or promise all or part of the counterperformance effected pursuant to this agreement--indirectly or directly--to public employees, a political party or office holder therein or a candidate for a political office for the purpose of (i) exercising influence on an act or decision of the person or party in question; or (ii) causing a person or party to exercise his or its influence on or affect acts or decisions of a federal, state or municipal government or one of its agencies. For purposes of this section, the term "public employees" shall mean all officials and employees in a federal, state or municipal government or their ministries/departments or one of their agencies or offices and any and all persons who act in an official capacity for or in the name of the aforementioned. (b) In performing the obligations to which it is subject pursuant hereto, the LICENSEE shall comply with all applicable statutes and regulations in the contract territory and shall be obligated to demand that its employees, representatives and other persons with whom it enters into contracts for the purpose of performance of its obligations pursuant hereto act likewise; this shall apply subject to the proviso that omissions on the part of the representatives and employees of the LICENSEE shall not release the LICENSEE from its obligations pursuant hereto. COMPLIANCE WITH MPEAA PROVISIONS - -------------------------------- 16. At the request of the LICENSOR, the LICENSEE shall be obligated to satisfy all orders or resolutions which affect the contract territory in whole or in part and are issued or adopted by the MPEAA or a successor organization which represents the interest of distributors of American FILM works, except to the extent that local law or pre-existing contractual obligations of the LICENSEE would be violated thereby. - 14 - GENERAL - ------- 17. (a) Unless otherwise provided, all communications required pursuant hereto shall be made in writing by personal delivery, registered mail, fax or telex (the identification of the recipient must appear at the beginning and end of the sender's copy). Communications shall be deemed to have been received at the time of personal delivery, seven days following surrender to the post office in the case of shipment via registered mail or at the point in time at which a fax or telex is transmitted. (b) The waiver of the exercise of rights in the case of a contractual breach shall not be deemed a waiver of rights in the case of other contractual breaches. (c) Without the prior written consent of the LICENSOR, the LICENSEE shall not be entitled to assign this agreement--in whole or in part. The LICENSOR may assign the agreement in whole or in part to corporations affiliated with the LICENSOR or to third parties in connection with a corresponding transfer of the LICENSOR's business operation. (d) The LICENSEE shall not be permitted to grant sub-licenses with regard to rights granted to it pursuant to this agreement or use a representative, unless the LICENSOR has consented thereto in writing; the LICENSOR shall be entitled to refuse consent for any reason without indicating the grounds therefor. (e) The agreement contains the entire agreement between the parties. Any earlier oral or written arrangements concerning the performance provided pursuant hereto are repeated in the agreement. To the extent that this has not occurred, they shall be canceled hereby. The LICENSOR has undertaken no assurances beyond those expressly contained in the agreement. (f) Modifications to or the rescission of the agreement must be in writing and signed by both parties in order to be effective. - 15 - (g) It shall be prohibited for the LICENSEE to offset rights and/or claims held by the LICENSOR pursuant to the agreement on the basis of other legal relationships, unless the LICENSEE's counterclaims are undisputed or established by final legal determination. (h) The headings contained in the agreement text serve strictly reference purposes and shall not be taken into account in the application and construction of the relevant provision. (i) To the extent that reference to specific sections is made herein, this shall refer to sections of these Standard Contract Terms, unless otherwise indicated. (j) In the event that provisions of the agreement are or should be found to be invalid, this shall not affect the validity of the remaining provisions; instead, the latter shall remain fully in affect. UNITED INTERNATIONAL PICTURES GmBH By: 3/2/96 /s/ Paul Steinschulte Name: Paul Steinschulte Title: General Manager United International Pictures GmbH Hahnstrasse 31/35 60528 Frankfurt am Main LICENSEE By: /s/ Heinz Wirt Name: Heinz Wirt Title: General Manager Prodac Prozessdatentechnik GmbH - Electronicsysteme - Max-Planck-Str. 38 50858 Cologne APPENDIX A ---------- NO. NAME OF HOTEL ADDRESS COUNTRY NO. OF ROOMS - --- ------------- -------- ------- ------------ Immediately upon conclusion of the contract (signing of the contract) the LICENSEE shall give the LICENSOR a complete list of all its contract hotels, including the hotels of its sublicensees. VERSION: FEBRUARY 1996 APPENDIX A HOTEL LIST
POS. HOTEL NAME CITY COUNTRY ROOM [***]
Page 1 of 6 -------------------------------------------------------------------- [***] Confidential treatment requested pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission. VERSION: FEBRUARY 1996 APPENDIX A HOTEL LIST
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Page 2 of 6 -------------------------------------------------------------------- [***] Confidential treatment requested pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission. VERSION: FEBRUARY 1996 ANHANG A HOTEL LIST
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Page 3 of 6 -------------------------------------------------------------------- [***] Confidential treatment requested pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission. VERSION: FEBRUARY 1996 APPENDIX A HOTEL LIST
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Page 4 of 6 -------------------------------------------------------------------- [***] Confidential treatment requested pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission. VERSION: FEBRUARY 1996 APPENDIX A HOTEL LIST
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Page 5 of 6 -------------------------------------------------------------------- [***] Confidential treatment requested pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission. APPENDIX B ---------- The maximum of 30 feature films, plus 20 feature films for "Videoquest" in accordance with the more specific terms of the agreement, each based on the LICENSOR's availability. APPENDIX C ----------
NO. OF HOTEL ROOMS ANNUAL LICENSE FEE in DM - ------------------ ------------------------ Pursuant to AGREEMENT (S) 2a [***] Plus value-added tax
-------------------------------------------------------------------- [***] Confidential treatment requested pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission. APPENDIX D ---------- The license rights to the film recorded on this video cassette (including language and music) shall apply only to utilization outside of film theaters. Presentation in hotels shall be permitted only for guests in the hotel rooms via the hotel in-house distribution facility. Presentation in private rooms or rooms to which the general public has access, such as hotel halls, salons, bars, restaurants, discotheques or the like, shall not be permissible under any circumstances. All other rights shall remain reserved. Title to the video cassette shall be held by the LICENSOR in accordance with the rights granted to him. The unauthorized duplication, editing, performance, leasing, exchange, loan, public dissemination and/or broadcast of this video cassette--in whole or in part--is strictly prohibited. Violations shall be subject to civil and/or criminal prosecution. APPENDIX E ---------- SUBLICENSE - ---------- The LICENSOR hereby permits the LICENSEE to grant the following firms and hotels (see appendix A) sublicenses to the video feature films provided to LICENSEE by the LICENSOR under this agreement, with its Standard Contract Terms: [***] -------------------------------------------------------------------- [***] Confidential treatment requested pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission. APPENDIX E Version: February '96 ---------- [***]
NO. HOTEL NAME CITY COUNTRY ROOMS [***]
-------------------------------------------------------------------- [***] Confidential treatment requested pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission. EX-10.37 13 1996 BONUS AGREEMENT WITH PHILIPS EXHIBIT 10.37 (Translated from German to English) [logo] PHILIPS PHILIPS MIETSYSTEM GmbH Philips Mietsystem GmbH . P.O. Box 10 02 29 . D-20001 Hamburg PMG 1996 Bonus Agreement between Philips Mietsystem GmbH Steindamm 55 20099 Hamburg and Prodac Prozessdatentechnik GmbH Max-Planck-Str. 38 50858 Cologne As an incentive for steady cooperation--conclusion of sale and lease back contracts or brokerage of lease or rent-to-own contracts--it is intended that a bonus be paid for 1996 based on the following conditions: Basis: Purchase value of all leasing or rent-to-own contracts in 1996 received at PMG from Prodac with lease starting dates which also fall within 1996; in the case of contracts focused abroad, [***]% of their purchase value shall flow into the bonus calculation. Scale: [***] PHILIPS MIETSYSTEM GMBH Prodac Prozessdatentechnik GmbH [stamp] Prodac Prozessdatentechnik GmbH - Electronicsysteme - Max-Planck-Str. 38 . 50858 Cologne /S/P. Mager /s/Authorized signature P. Mager G.F.K. [illegible] Management: Steindamm 55-59 Leipzig branch Wilhelm Zeller 20099 Hamburg Bruhl 76 Paul Mager Telephone: (040) 284 32-0 04109 Leipzig Fax: (040) 286 32-299 Telephone: (0341) 2 11 52 58 Telegram: [illegible] (0341) 2 11 52 02 --------------------------------------------------------------------- [***] Confidential treatment requested pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission. Chairman of the Hamburgische Landesbank Fax: (0341) 2 11 63 74 Supervisory Board: (bank wire number Banking connection: BW Bank, Leipzig Karl [illegible] 700 500 00) 306 555 (bank wire number 960 200 70) 110 18004 00 Corporate domicile: Hamburg Register Court, Hamburg: HRB [illegible] Register Court, Leipzig: HRB [illegible]
[logo] PHILIPS PHILIPS MIETSYSTEM GMBH - -------------------------------------------------------------------------------- Philips Mietsystem GmbH . P.O. Box 10 02 29 . D-20001 Hamburg PMG Side agreement concerning leasing contract no. [handwritten:] 95 02219 157 - ---------------------------------------------- ------------ I. Financing shall be carried out using the sale and lease back procedure (purchase price DM [***] net). The contract shall be focused on partial amortization: The customer hereby confirms that he is the owner of the products and that third-party rights do not exist. Title shall pass to PMG upon payment of --- the invoice amount by PMG (the customer shall document the value by means of an original invoice); the products shall remain in the possession of the customer. II. Notwithstanding (S) 11.2, the purchase price shall be DM [***] net. III. Ownership and possession situation ---------------------------------- Notwithstanding (S) VIII.3, we hereby grant the customer a right to sublease. The sublessees can be seen under paragraph IV. Subleasing or other third-party use which deviates from paragraph I shall require the prior consent of PMG. (S) 549 par. 1 sentence 2 BGB [German Civil Code] shall not apply. In all cases of subleasing and/or third-party use, the --- customer hereby assigns his rights against the third party to PMG (particularly his payment claims arising from the sublease contract). PMG may take drastic measures against the sublessee in the --------------------------------------------------------------------- [***] Confidential treatment requested pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission. event of payment default on the part of the customer in excess of 3 months. The customer shall provide a corresponding provision in his sublease contract or comparable use document and shall document it for PMG upon request. IV. The locations of the individual products shall be listed by the customer by means of the operator contract and delivery protocols. The locations are as follows: 1.) [***] 2.) 3.) [stamp] PRODAC Date: 10/25/96 Prozessdatentechnik GmbH - - Electronicsysteme - PHILIPS MIETSYSTEM GMBH Max-Planck-Str. 38 . 50858 Cologne /s/Authorized signature /s/Authorized signature - ---------------------------------- Company stamp and legally binding signature of the customer Management: Steindamm 55-59 Leipzig branch Wilhelm Zeller 20099 Hamburg Bruhl 76 Paul Mager Telephone: (040) 284 32-0 04109 Leipzig Fax: (040) 286 32-299 Telephone: (0341) 2 11 52 58 Telegram: [illegible] (0341) 2 11 52 02 Chairman of the Hamburgische Landesbank Fax: (0341) 2 11 63 74 Supervisory Board: (bank wire number Banking connection: BW Bank, Leipzig Karl [illegible] 700 500 00) 306 555 (bank wire number 960 200 70) 110 18004 00 Corporate domicile: Hamburg Register Court, Hamburg: HRB [illegible] Register Court, Leipzig: HRB [illegible]
--------------------------------------------------------------------- [***] Confidential treatment requested pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission. PHILIPS [logo] PHILIPS PHILIPS MIETSYSTEM GMBH LEASING CONTRACT NO.: 05 022219 157 PMG Steindamm 55 Bruhl 76 20099 Hamburg 04109 Leipzig To: Prodac Prozessdatentechnik GmbH Max-Planck-Str. 38 50858 Cologne (Customer) (PMG) - ---------- ----- By jointly signing this document, the parties enter into a leasing contract concerning the products listed herein. The leasing terms attached to this contract shall apply (3rd + 7th pages of the form). The prevailing statutory value-added tax shall be added to all of the listed sums. - -------------------------------------------------------------------------------- Pos. Quantity Product No./title Use DM/MO. - -------------------------------------------------------------------------------- 1 1 Hotel video communications system see also the supplemental terms in the side agreement [***] - -------------------------------------------------------------------------------- One-time costs (payable in addition to Total sum for the use the first monthly payment) DM: - (payable monthly in [***] - -------------------------------------------------------------------------------- Imputed term: 54 months System: [illegible] Tentative delivery date: 11/1/96 - -------------------------------------------------------------------------------- Location: see side agreement - -------------------------------------------------------------------------------- UNTIL REVOCATION, THE CUSTOMER HEREBY AUTHORIZES PMG TO CHARGE THE COMPENSATION PAYABLE PURSUANT TO THE LEASE CONTRACT--PLUS THE PREVAILING STATUTORY VALUE- ADDED TAX--FROM THE ACCOUNT DESIGNATED BELOW. IN THE ABSENCE OF A DEBIT AUTHORIZATION, WE WILL TAKE THE LIBERTY OF INCREASING THE USE CHARGE BY DM 7.00. - -------------------------------------------------------------------------------- Exact name of bank, bank wire number, account number: Deutsche Bank AG Cologne, bank wire no. 370 700 60, acct. no. 3273109 - -------------------------------------------------------------------------------- [stamp] PRODAC Date: [illegible] Prozessdatentechnik GmbH - - Electronicsysteme - Philips Mietsystem GmbH --------------------------------------------------------------------- [***] Confidential treatment requested pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission. Max-Planck-Str. 38 . 50858 Cologne Company stamp and legally binding signature of the customer [footer information] PHILIPS PHILIPS PHILIPS MIETSYSTEM GMBH LEASING CONTRACT NO.: 95 02219 097 LEASE TERMS I. SUBJECT MATTER OF CONTRACT: 1. Pursuant to this contract, PMG shall permit the customer to engage in paid use of the products listed on the front page. 2. The customer is aware that PMG acquires the products specifically for the individual contract in order to make them available for use by the customer for the term of the contract in exchange for payment of monthly compensation. II. DELIVERY: 1. The delivery of the operationally ready products shall be defined in a delivery protocol, of which the customer shall receive a copy. 2. The delivery period shall be extended in a reasonable manner, if PMG is prevented from performing this contract in a timely manner due to strike, lock- out, Act of God or delivery disruptions with the manufacturer, supplier or subcontractor. The customer may terminate the contract if PMG is in default and does not perform within a reasonable grace period. Deadline imposition and notice of termination must be in writing. If PMG is in default with respect to a portion of the delivery, and the customer is able to use the other products independently, the customer shall be solely entitled to a corresponding partial termination of the contract. 3. If it is impossible for PMG to perform the contract in whole or in part due to the reasons stated in section 2, PMG shall be released from its duty to deliver and the customer shall be released from its duty to pay. 4. PMG shall be entitled to make partial deliveries and render partial services. 5. As long as the customer is in default with respect to payment of the monthly compensation or payment on a delivery or service which PMG provided pursuant to this contract, PMG shall be entitled to withhold deliveries or services without incurring an obligation to make compensation for any damages which arise. III. CONTRACT TERM: 1. The use relationship shall begin on the date of delivery of the operationally ready products. If PMG makes partial deliveries which can be used by the customer independent of the still outstanding deliveries, and pro rata compensation can be seen from the contract or delivery protocol, the use period shall begin separately for each sub-product upon operationally ready delivery. 2. The contract is concluded for an indefinite term. 3. The customer may terminate the use relationship or the individual sub-use relationships upon notice of 6 months no earlier than the end of the imputed term. The imputed term (in months) shall begin at the beginning of contractual payment. 4. PMG hereby irrevocably offers the customer the opportunity to rescind the contract on a mutually agreeable basis in exchange for a compensation payment. The customer may accept this offer upon declaration notice of 6 months effective no earlier than the end of the month following the respective beginning of contractual payment which corresponds to half of the stipulated imputed term-- rounded up to full months. This offer shall only apply if 40% of the ordinary operational useful life has been fulfilled. A settlement payment shall be due upon acceptance of the contract. It shall be calculated based on the total of the compensation still outstanding through the expiration of the imputed term. Upon acceptance of this offer, the remaining sum shall accrue interest at the prevailing Bundesbank discount rate at the time of premature end of the contract. The sum, plus the prevailing value-added tax, shall be due without deduction on the date of the premature end of the contractual relationship. (In addition, the costs of return pursuant to section XV shall be due). In the event of the sale of the products returned to PMG within 90 days, 90% of the net sales proceeds--but not more than the amount of the compensation payment therefor--shall be credited to the customer. IV. PAYMENT: 1. The customer shall pay compensation on a monthly basis in advance starting from the first day of the month following delivery of the operationally ready products. The compensation shall not include any fees payable to the Deutsche Bundespost or other agency. 2. If the customer defaults on a payment, PMG shall be entitled to charge interest in the amount of 3% above the respective discount rate of the Deutsche Bundesbank. 3. The customer may only assert a right of retention if said right is based on claims arising from this leasing contract. He shall be entitled to an offset against the claims of PMG if PMG has acknowledged the customer's counter claim or if said counter claim has been established by final judicial determination. V. CHANGE IN COMPENSATION: 1. The monthly compensation may be adjusted accordingly if the delivery of products pursuant to the agreement takes place more than 4 months following the conclusion of the contract and the sales prices for the products charged by the suppliers changes during this period. 2. If the cost factors which influence the compensation change following conclusion of the contract, or if the taxes payable in connection with this contract are changed, revoked or reintroduced, the monthly compensation may be adjusted in accordance with the changed circumstances. 3. The adjustment shall be made in writing and shall include communication of the amount and the point in time from which the change of compensation shall apply. 4. If, as a result of the adjustment pursuant to section 2--in relation to the overall leasing period to date--the compensation increases by more than an annual average of 5%, the customer shall be entitled to terminate the contract within a period of 4 weeks following receipt of the written notice of modification; said termination shall be effective on the date on which the new compensation would become effective in the absence of termination. Said termination right on the part of the customer shall not exist if new or modified taxes were the reason for the increase of compensation. EX-10.38 14 FORM OF STANDARD LEASING CONTRACT FOR PHILIPS EXHIBIT 10.38 (Translated from German to English) PHILIPS PHILIPS PHILIPS MIETSYSTEM GmbH LEASING CONTRACT NO.: 05 02219 097 PMG Steindamm 55 Bruhl 76 20099 Hamburg 04109 Leipzig Prodac Prozessdatentechnik GmbH Max-Planck-Str. [unclear] [unclear] Cologne (Customer) (PMG) - ---------- ----- By jointly signing this document, the parties enter into a leasing contract concerning the products listed herein. The leasing terms attached to this contract shall apply (3rd + 7th pages of the form). The prevailing statutory -------------------------------------------------------- value-added tax shall be added to all of the listed sums. - -------------------------------------------------------- Pos. Qty. Product No./title Use DM/MO. ------ [illegible] One-time costs (payable Total sum for the use in addition to first monthly ------- (payable monthly in advance) [sum unclear] payment) DM: - ------------------------------------ Imputed term: 34 months System: 3.0 Tentative delivery date: [illegible] - ------------- --------- ----------- ------------------------------------ Location: see side agreement - --------- ------------------ UNTIL REVOCATION, THE CUSTOMER HEREBY AUTHORIZES PMG TO CHARGE THE COMPENSATION PAYABLE PURSUANT TO THE LEASE CONTRACT--PLUS THE PREVAILING STATUTORY VALUE- ADDED TAX--FROM THE ACCOUNT DESIGNATED BELOW. IN THE ABSENCE OF A DEBIT AUTHORIZATION, WE WILL TAKE THE LIBERTY OF INCREASING - ------------------------------------------------------------------------------- THE USE CHARGE BY DM 7.00. - -------------------------- Exact name of bank, bank wire number, account number: [illegible] AG Cologne, bank wire no. [illegible] - ------------------------------------------------- [stamp] Prodac Date: [illegible] Prozessdatentechnik GmbH - - Electronicsysteme - Philips Mietsysteme GmbH Max-Planck-Str. 38 50858 Cologne - ---------------------------------- Company stamp and legally binding signature of the customer - -------------------------
Management: Steindamm 55-59 Leipzig branch Wilhelm [illegible] 20099 Hamburg Bruhl 76 Paul [illegible] Telephone: (040) 284 32-0 04109 Leipzig Fax: (040) 286 32-299 Telephone: (0341) 2 11 52 58 Chairman of the Supervisory Board Telegram: [illegible] (0341) 2 11 52 02 [illegible] Fax: (0341) 2 11 63 74 Corporate domicile: [illegible] Bank connection: Bank connection: [illegible]: HRB [illegible] Hamburgische Landesbank BW Bank Leipzig
PHILIPS PHILIPS PHILIPS MIETSYSTEM GmbH LEASING CONTRACT NO.: 95 02219 097 Prodac Prozessdatentechnik GmbH Max-Planck-Str. 38 50858 Cologne LEASE TERMS I. SUBJECT MATTER OF CONTRACT: 1. Pursuant to this contract, PMG shall permit the customer to engage in paid use of the products listed on the front page. 2. The customer is aware that PMG acquires the products specifically for the individual contract in order to make them available for use by the customer for the term of the contract in exchange for payment of monthly compensation. II. DELIVERY: 1. The delivery of the operationally ready products shall be defined in a delivery protocol, of which the customer shall receive a copy. 2. The delivery period shall be extended in a reasonable manner, if PMG is prevented from performing this contract in a timely manner due to strike, lock- out, Act of God or delivery disruptions with the manufacturer, supplier or subcontractor. The customer may terminate the contract if PMG is in default and does not perform within a reasonable grace period. Deadline imposition and notice of termination must be in writing. If PMG is in default with respect to a portion of the delivery, and the customer is able to use the other products independently, the customer shall be solely entitled to a corresponding partial termination of the contract. 3. If it is impossible for PMG to perform the contract in whole or in part due to the reasons stated in section 2, PMG shall be released from its duty to deliver and the customer shall be released from its duty to pay. 4. PMG shall be entitled to make partial deliveries and render partial services. 5. As long as the customer is in default with respect to payment of the monthly compensation or payment on a delivery or service which PMG provided pursuant to this contract, PMG shall be entitled to withhold deliveries or services without incurring an obligation to make compensation for any damages which arise. III. CONTRACT TERM: 1. The use relationship shall begin on the date of delivery of the operationally ready products. If PMG makes partial deliveries which can be used by the customer independent of the still outstanding deliveries, and pro rata compensation can be seen from the contract or delivery protocol, the use period shall begin separately for each sub-product upon operationally ready delivery. 2. The contract is entered into for an indefinite term. 3. The customer may terminate the use relationship or the individual sub-use relationships upon notice of 6 months no earlier than the end of the imputed term. The imputed term (in months) shall begin at the beginning of contractual payment. 4. PMG hereby irrevocably offers the customer the opportunity to rescind the contract on a mutually agreeable basis in exchange for a compensation payment. The customer may accept this offer upon declaration notice of 6 months effective no earlier than the end of the month following the respective beginning of contractual payment which corresponds to half of the stipulated imputed term-- rounded up to full months. This offer shall only apply if 40% of the ordinary operational useful life has been fulfilled. A settlement payment shall be due upon acceptance of the contract. It shall be calculated based on the total of the compensation still outstanding through the expiration of the imputed term. Upon acceptance of this offer, the remaining sum shall accrue interest at the prevailing Bundesbank discount rate at the time of premature end of the contract. The sum, plus the prevailing value-added tax, shall be due without deduction on the date of the premature end of the contractual relationship. (In addition, the costs of return pursuant to section XV shall be due). In the event of the sale of the products returned to PMG within 90 days, 90% of the net sales proceeds--but not more than the amount of the compensation payment therefor--shall be credited to the customer. IV. PAYMENT: 1. The customer shall pay compensation [underlined by hand] on a ---- monthly basis in advance starting from the first day of the month following - ------------------------ delivery of the operationally ready products. The compensation shall not include any fees payable to the Deutsche Bundespost or other agency. 2. If the customer defaults on a payment, PMG shall be entitled to charge interest in the amount of [circled by hand] 3% above the respective [underlined by hand] discount rate of the Deutsche Bundesbank. ------------- 3. The customer may only assert a right of retention if said right is based on claims arising from this leasing contract. He shall be entitled to an offset against the claims of PMG if PMG has acknowledged the customer's counter claim or if said counter claim has been established by final judicial determination. V. CHANGE IN COMPENSATION: 1. The monthly compensation may be adjusted accordingly if the delivery of products pursuant to the agreement takes place more than 4 months following the conclusion of the contract and the sales prices for the products charged by the suppliers changes during this period. 2. If the cost factors which influence the compensation change following conclusion of the contract, or if the taxes payable in connection with this contract are changed, revoked or reintroduced, the monthly compensation may be adjusted in accordance with the changed circumstances. 3. The adjustment shall be made in writing and shall include communication of the amount and the point in time from which the change of compensation shall apply. 4. If, as a result of the adjustment pursuant to section 2--in relation to the overall leasing period to date--the compensation increases by more than an annual average of 5%, the customer shall be entitled to terminate the contract within a period of 4 weeks following receipt of the written notice of modification; said termination shall be effective on the date on which the new compensation would become effective in the absence of termination. Said termination right on the part of the customer shall not exist if new or modified taxes were the reason for the increase of compensation. VI. LIST, DELIVERY: PMG hereby assumes all transport of the products. The customer shall bear the expense of installation. The customer shall establish empty pipes, line networks and rooms intended for setting up the products in a timely manner at its own expense in accordance with the regulations of the manufacturer or supplier. VII. GUARANTEE/ASSIGNMENT OF CLAIMS: PMG hereby extends to the customer a guarantee against material and legal defects on the part of the products in such a manner that it assigns to the customer all claims, particularly guarantee, remedial measures, guarantee and compensatory damage claims under its contract with the supplier. The user hereby accepts said assignment and waives the assertion of such claims against PMG. With regard to the product, the customer shall therefore hold claims solely against the supplier; specifically, the customer shall not be entitled to reduce or withhold compensation payable to PMG by asserting defects with respect to the product. VIII. OWNERSHIP AND POSSESSION: 1. The products shall remain the property of PMG. 2. The customer may not move the products or portions thereof [underlined by hand] to a location other than that stated in the contract without the prior ---------------------------------------------------- written consent of PMG. The customer shall cause Philips experts to perform (at the customer's expense) the transport and installation work necessary in connection with the change in location. The foregoing shall not apply to products which are intended for mobile use. In this instance, the consent of PMG shall be required if said products are to be removed from the territory of the Federal Republic of Germany. 3. The customer [underlined by hand] shall not permit third parties to use ------------------------------------- the products without the prior written consent of PMG. The customer shall not be entitled to terminate the (sub)contract if PMG refuses to give its permission. 4. [underlined by hand] The customer shall keep the products free from ---------------------------------------------- encumbrances of any kind. The customer shall notify PMG promptly of any third- - ------------------------ party seizure of the products and shall provide PMG with all necessary information. The customer shall bear the costs in connection with all measures which are necessary in order to prevent third-party seizure and shall assist PMG in every way in securing PMG's ownership. IX. LIABILITY OF THE CUSTOMER FOR DAMAGE TO THE PRODUCT: 1. The customer shall treat the products in a careful manner, store them in a secure manner in order to prevent damage and theft and only use them in accordance with the intended use. 2. The customer shall bear the risk of all damage to the products. [underlined by hand] At the request of PMG, the customer shall enter into ---------------------------------------------------- appropriate insurance contracts and document the conclusion of such contracts. - ------------------------------------------------------------------------------ 3. In the event of loss, the customer shall, according to his election, - - return the affected portions to their contractual condition at his own expense, - - replace the products with products of equivalent value or replace the affected parts, with the replacement parts taking the place of the original products. The occurrence of damage shall not release the customer from his obligation to pay compensation or from his other contractual obligations. 4. The customer shall report the loss event to PMG promptly. He shall simultaneously report fire, explosion and theft damages to the police authorities. X. LIABILITY OF PMG: Compensatory damage claims of the customer, regardless of the type and legal basis, shall be barred [underlined by hand] unless PMG is ------------- charged with intentional conduct or gross negligence, is mandatorily liable on - ---------------------------------------------------- the grounds of the absence of promised characteristics or violates a contractual duty which is substantial for purposes of achieving the contractual purpose. XI. TENDER TO PURCHASE: 1. If the contract is terminated by the customer in a timely manner or if he accepts the offer of mutually agreeable premature contractual rescission (III. 4), the customer, at PMG's request, shall be obligated to purchase the products without any guarantee in the condition in which they existed at the end of the contract. 2. The purchase price shall be a monthly payment plus the prevailing value- added tax and, if applicable, a settlement payment pursuant to section III. 4. XII. TERMINATION BY PMG: PMG may notice regular termination of the (sub-)use relationship no earlier than the first possible date of mutually agreeable contractual recession (III. 4) following the respective beginning of contractual payment; in the event of ordinary termination by PMG, the customer shall have no obligation to make a compensation payment. XIII. EXTRAORDINARY TERMINATION: 1. The contract may be terminated without notice by either party for good cause. 2. Good cause shall specifically exist for PMG if: - - the customer violates the provisions of this contract in a substantial manner or continues his [underlined by hand] contractually violative conduct or maintains the contractually violative condition despite having been warned by PMG; - - the customer is in default on his [underlined by hand] payment for more ---------------- than two months; --------------- - - the asset situation of the customer deteriorates, specifically, if insolvency proceedings are opened or forced execution measures are introduced against him; - - the customer moves his place of business/residence [underlined by hand] abroad; ------ - - the customer, or an unauthorized third party directed by the customer, makes unauthorized [underlined by hand] maintenance or repair work or -------------------------- other operations on the products. 3. If the grounds for termination relate only to a part of the product, and the other products are usable independently therefrom, the customer shall be solely entitled to corresponding partial termination. 4. If the customer ends a portion of the contract, and the products from the remaining portions of the contract become unusable for the customer as a result of the return of the products in question, the customer shall not be entitled to extraordinary termination of the remaining portions of the contract. The customer shall be free to accept the respective offer for mutually agreeable contractual recision in this connection in exchange for a settlement payment. The same shall apply in the case of the end of an independent contract concerning products which are related to the products under this contract. 5. The offer of early mutually agreeable contractual rescission may be accepted at any time by the heirs of the customer. Their right to early termination shall be barred. In the case of multiple customers, this shall also apply to the heirs of each individual customer. XIV. COMPENSATORY DAMAGES IN THE EVENT OF EXTRAORDINARY TERMINATION: If the contract is ended in whole or in part by extraordinary termination declared by PMG, the customer shall compensate PMG for all damage which is incurred as a result of or in connection with the early end of the contractual relationship. Interest accruing on the statement of damages shall be computed at an interest rate of 3% above the prevailing Bundesbank discount rate at the time of termination. XV. RETURN OF THE PRODUCTS: 1. The customer shall return the products to PMG in an orderly condition at his own expense. The customer shall order disassembly by Philips experts at his own expense. 2. If the customer uses a product after expiration of his right to do so, he shall--without prejudice to further claims--owe a sum in the amount of the monthly compensation for each month of use which is started. XVI. DATA CONFIDENTIALITY PROTECTION: THE PERSONAL DATA OF THE CUSTOMER OBTAINED IN CONNECTION WITH THE BUSINESS RELATIONSHIP SHALL BE PROCESSED AT PMG OR THE ENTERPRISES AFFILIATED THEREWITH IN COMPLIANCE WITH THE STATUTORY PROVISIONS. XVII. FINAL PROVISIONS: 1. PMG shall have the right to delegate to third parties the performance of the contractual duties which it owes to the customer, specifically the transport of the products. 2. Ancillary agreements, modifications and/or addenda to the contract, termination declarations etc., must be in writing in order to be effective. The formal requirements may only be waived by written agreement. 3. If one of the foregoing provisions is or should become invalid--regardless of the legal ground--the validity of the remaining provisions shall not be affected thereby. 4. The place of venue shall be Hamburg, if the customer is a statutory "merchant," a legal entity organized under public law or a public law special fund. 5. The law of the Federal Republic of Germany shall apply. EX-10.39 15 FRAMEWORK DISTRIBUTOR CONTRACT WITH DORINT EXHIBIT 10.39 (Translated from German to English) Original -------- FRAMEWORK DISTRIBUTOR CONTRACT Between Dorint Aktiengesellschaft Kaldenkirchener Strasse 2 41063 Monchengladbach for the Dorint Hotels listed in the appendix to this contract hereinafter referred to as "Hotel" and Prodac GmbH Max-Planck-Str. 38 50858 Cologne hereinafter referred to as "Prodac" (S) 1 BASIC ITEMS This framework contract shall govern the collaboration of the contracting parties in connection with Prodac's equipping Dorint Hotels with trend-setting audio-visual information, entertainment and communications technology. Prodac hereby guarantees the highest quality standard with regard to the equipment features and the implementation of the outfitting. Prodac shall install a hotel video communications system for four paid channels in the Hotel at no charge. For this purpose, a device shall be installed in each TV set, by means of which the hotel guests can choose between the free general television programs which are offered and the pay programs and can also use the in-house information and communications system. In addition, Prodac shall provide the Hotel with the following: * remote controls suitable for hotels, with individual buttons for TV, Pay- TV, information, radio, check-out/message, etc. * four central radio channels for radio reception through the televisions * check-out/message system with personal welcome, View Bill, message, Express Checkout * multi-lingual info menus for targeted and rapid access (via the television remote control) to the function desired by the guest (for example, View Bill local flight information, -------------------------------------------------------------------- [***] Confidential treatment requested pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission. stock exchange), including software for the generation of hotel infotext pages * CD1 player with up to 30 pictures with text and music--excellent pictorial information for the guests concerning the advantages of Dorint and a sales- promoting medium for the Hotels (initial creation at no cost to the Hotel in the case of use of the "Hotel Text" system) * video text of television programs and a comprehensive information opportunity for the guests (for example, news, health service, weather, road conditions) * long-distance data transmission modem for monitoring the overall system. The Hotel shall provide a place for the lockable video center, which shall be capable of being locked, if possible, and shall be dust-free and cool, in order that long-term disruption-free operation can be guaranteed. In addition, a 220- volt connection and an antenna connection socket is necessary in this room and must be provided at the site. The feeding of paid programs into the existing antenna system shall be performed by Prodac. A prerequisite to the operation of the Prodac system is an impeccably functioning community antenna system in accordance with the prevailing postal provisions and, in particular, an impeccable high-frequency line network in all rooms. Prodac shall notify the Hotel and Dorint headquarters of any necessary repairs or modifications to the antenna system following the technical hotel check which shall be conducted by Prodac at no charge. The following shall apply with regard to the assumption of "antenna" costs: a) for existing buildings; in the case of an otherwise impeccable antenna, Prodac shall bear the costs of Pay-TV modification of the antenna system; b) for new construction; an early/timely coordination shall take place between the erector of the antenna equipment and Prodac. If documented additional costs arise, they shall be borne by Prodac upon prior written coordination with the principal. In general, any costs which will be incurred by the Hotel as a result of eliminating antenna defects shall be submitted to the Hotel and Dorint headquarters for decision by Prodac. With regard to the assumption of "Radio" costs, the following shall apply: In the case of new construction, the investor shall assume DM [***]. The Hotel hereby guarantees impeccable reception of all television programs in the rooms. It is hereby agreed that lodging opportunities, parking places, service telephones and personnel catering shall, upon consultation with the Hotel, be made available to the employees of Prodac to the extent necessary for the duration of the installation and any repair work. (S) 2 VIDEO PROGRAM -------------------------------------------------------------------- [***] Confidential treatment requested pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission. Prodac shall provide the Hotel with a monthly film program. Selection shall be made by Prodac. The feature film titles shall be updated constantly and shall, as a rule, be presented in the Hotel prior to the TV broadcast thereof. The top titles shall be presented in the Hotels shortly after video license clearance. In the case of the use of HC erotic films, each Hotel shall have a right of intervention up to 4 weeks prior to the beginning of installation. Following intervention by the Hotel, Prodac shall use CV erotic films. Prodac currently offers the following programs: Channel 1 - --------- A German-language feature film program. Channel 2 - --------- Erotic films in German/English language. Channel 3 - --------- An English-language feature film program. Channel 4 - --------- Erotic films in German/English language. The program package shall be changed monthly. The films shall be returned monthly. The Hotel shall charge the guest the fee of DM [***] per night of lodging (time period: 12:00 p.m. to 12:00 p.m.) for tuning in to all of the paid channels. Price adjustments shall be made in consultation with the Hotel. The programs supplied by Prodac shall be broadcast in all rooms of the Hotel. The Hotel expressly promises that the programs shall not be broadcast beyond the Hotel property and shall not be made accessible to any receiver who is not a guest or user of the Hotel system. Specifically, the Hotel shall ensure that the Prodac programs cannot be received in areas which are connected to the Hotel antenna network but are not part of the Hotel. In addition, the Hotel shall ensure that the videocassettes delivered to the Hotel cannot be used by third parties for non-contractual purposes. The Hotel further promises that it shall use its best efforts to protect the videocassettes against unauthorized use, as well as unauthorized utilization and/or commercial exploitation. If Prodac proves that the Hotel has delivered videocassettes from the program supplied by Prodac to a third party which does not have a contractual relationship with Prodac or proves that a third party affiliated with the Hotel has effected such a delivery or that a film is being, or has been, used in the Hotel following the expiration of the stipulated use period, Prodac shall be entitled to demand that the Hotel pay a contractual penalty in the amount of DM [***], payable independent of fault for each ascertained case of contractual breach, or terminate the contract without notice--to the extent even possible in light of the passage of time. In the case of contract -------------------------------------------------------------------- [***] Confidential treatment requested pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission. termination for the aforementioned or other reasons, as well as the case of expiration of the stipulated use period, the Hotel shall be obligated to return to Prodac within a period of 14 days all cassettes entrusted to the Hotel on the basis of this agreement. If the Hotel fails to comply with this obligation in a timely manner, it shall be obligated to pay Prodac a contractual penalty in the amount of DM 10.00 per cassette for each day by which the deadline is exceeded. Further compensatory damages shall be barred. (S) 3 TERM/TERMINATION This contract is concluded for a period of 7 years. The contracts with the individual hotels shall begin upon Prodac's delivery (date of the delivery protocol) of the operationally-ready system. After the contract expires, it shall be extended by consecutive one-year terms, unless it is terminated upon notice of 6 months effective on the expiration date. If new TV sets are used, the contract shall be extended by an additional 7 years starting from the time at which the new sets are used. The Hotel may terminate the contract upon notice of 6 months, if Prodac is shown to have failed to provide the services provided or failed to provide such services in full. In addition, the Hotel may terminate the contract upon notice of 6 months if an appropriate building, which had not yet been intended for installation pursuant to the framework contract, has later been equipped by Prodac in lieu of the terminated building. In all other cases, termination on the basis of the investment and cost statement shall be possible in consultation with Prodac in the spirit of a partnership relationship. In the event that the lease contract for the Hotel ends prior to the term of this contract, Prodac may demand an installation in another Dorint Hotel for the residual contract term (complete calendar years) if an appropriate Dorint Hotel is available. If Prodac is unable to use up-to-date technology ((S) 8), Prodac hereby grants Dorint AG a right of extraordinary termination of the framework contract upon compliance with a notice period of 6 months. Prodac and the Hotel shall be entitled to transfer their rights arising from this contract to third parties. (S) 4 PROCEDURE Prodac shall provide the Hotel with VHS program cassettes and/or encoded composite signals from cable or satellite transmission intended solely for broadcast in connection with the hotel television programs. 4.1 The programs are protected by copyright. Any use of the programs other than that intended is prohibited. The play permit shall be limited to the contractual broadcast of the programs in the Hotel. Prodac expressly promises that it holds the rights to the programs offered for contractual use and that no obligations or costs arising from potential claims of third parties may be incurred by the Hotel. Prodac hereby releases the Hotel from copyright claims of third parties. At the request of the Hotel, Prodac shall document the licensing of the rights by means of appropriate declarations of the licensor. 4.2 If necessary, Prodac shall obtain the "certificate of non-objection" required for operation of hotel video television pursuant to the resolution of German state broadcasting departments. Prodac shall also obtain the postal permit for the Prodac system. 4.3 Any fees arising in connection with the postal system or GEMA [Association for Musical Performance and Mechanical Duplication Rights] shall be paid by Prodac. (Exception: GEMA for CDI). (S) 5 RETENTION OF TITLE The Hotel shall acquire no ownership rights in the components provided by Prodac. The Hotel hereby promises to promptly report to Prodac in writing any encroachment upon Prodac's ownership right. (S) 6 EXCLUSIVITY During the term of this agreement, the Hotel shall offer no other commercial programs which are in direct competition with the Pay-TV system. (S) 7 OPERATION A permanent Pay-TV operation is necessary to finance and maintain the video communications system. The Pay-TV operation shall be commenced if Prodac's scope of supply is complete. The firm of Prodac shall retain the right to finance the video communications system through third parties (leasing contract, investment credit, etc.). In such a case, the claims arising from operator revenues shall be assigned (financing source: see delivery protocol). Measures which disrupt the operation of the system in whole or in part shall be reported to Prodac in writing in a timely manner (renovation work in the Hotel, for example). The Hotel hereby promises to offer the program supplied by Prodac according to the Prodac program scheme and as set forth in (S) 2 and promises to switch the film cassettes according to the program plan. Quality defects which arise with respect to the videocassettes must be promptly reported to Prodac, in order that a replacement can be delivered. Moreover, the Hotel shall place in every room the informational material which Prodac provides with reference to the hotel television program and shall change said informational material on a monthly basis. (S) 8 MAINTENANCE Prodac hereby guarantees the use of up-to-date technology and promises to keep the software for the system up-to-date on a regular basis. Prodac shall be responsible for the maintenance and repair of the Prodac system. The equipment shall be maintained, cleaned and/or refurbished at periodic intervals. Various activities in this connection may also be performed in the Hotel. In this connection, the Hotel shall make it possible for the service technicians to switch and clean the equipment and shall, by agreement with the Hotel, provide the employees of Prodac with lodging opportunities, parking places, service telephones and catering at no charge for the duration of the work. When the system is placed in operation, the Hotel shall receive instructions and an operations manual from Prodac. In the case of disruptions, it shall be necessary to proceed according thereto. In the event that it is not possible to remedy the disruption, the Hotel must contact Prodac promptly in order to eliminate the disruption; Prodac shall then ensure repairs and/or replacement. Maintenance and repair work shall be without charge to the Hotel. Prodac shall equip all replacement TV sets in the Hotel with the fee recording unit--likewise at no charge. In order to optimize impeccable operation, the Prodac system shall be monitored by Prodac by means of long-distance data transmission. For this purpose, the Hotel shall provide a separate telephone line or extension at no charge. Said line or extension shall be located in the same room as the video rack. (S) 9 INSURANCE The devices made available by Prodac and the films which are to be used shall be insured by Prodac. (S) 10 BILLING The Hotel shall bill the guests for tuning in to the paid programming on the basis of the record printouts from the central computer. Connections to the program shall be billed by the Hotel only once within a period of 24 hours--from 12:00 p.m. to 12:00 p.m. on the following day. Settlement with Prodac shall begin when the system is placed in operation. As noted on the billing coupon, billing is executed in the name of and for the account of Prodac. For up to [***] connections per room/per month, the Hotel shall receive [***]% of the Pay-TV --------------------------------------------------------------------- [***] Confidential treatment requested pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission. revenues (according to the computer printout) as compensation for expenses. Starting at [***] connections per room, the Hotel shall receive [***] % of the Pay-TV revenues (according to the computer printout) as compensation for expenses. Starting at [***] connections per room, the Hotel shall receive [***] % of the Pay-TV revenues (according to the computer printout) as compensation for expenses. Starting at [***] connections per room, the Hotel shall receive [***] % of the Pay-TV revenues (according to the computer printout) as compensation for expenses. For licensing reasons (Prodac is the presenter), it shall not be possible to offset the Hotel commission against the revenues. Cancellations for which Prodac is clearly responsible may be deducted. If the Hotel incurs a bad debt on video revenues from the Hotel guest, Prodac shall acknowledge said cancellation if subsequent demands on the part of the Hotel have been unsuccessful. At the request of Prodac, the Hotel shall declare its willingness to document bad debts using records from financial bookkeeping. The cancellations must be documented for Prodac, i.e., explained in detail. All cancellations for the preceding month shall be submitted to Prodac by fax for the purpose of examination and settlement by the 5th of the following month. Prodac transfers the current 15% VAT to the Cologne Tax Office from the gross revenues received from the guests. Prodac must receive 100% of the Pay-TV revenues by deposit-only check by the 10th of the month. A credit in the amount of the compensation for expenses shall be sent to the Hotel immediately. It is hereby agreed that the Hotel shall retain no other sums from Pay-TV revenues or offset any other sums against Pay-TV revenues. (S) 11 COMPUTER COUPLING Prodac shall place the interface line on the Hotel computer. Any software and/or hardware modifications or expansions in the Hotel computer shall be charged to the Hotel. The basis for the interface coupling shall be the Prodac interface protocol. In the event of a time delay resulting from interface coupling, Pay-TV operation shall remain unaffected. In the case of Hotels which receive a new installation of Fidelio software, the Hotel shall bear the Fidelio costs. In already existing Fidelio installations, Prodac shall assume the costs of the Fidelio interface software and installation. (S) 12 FINAL PROVISIONS Unless otherwise provided under this agreement, the statutory provisions (particularly (S) 598 ff. -------------------------------------------------------------------- [***] Confidential treatment requested pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission. BGB [German Civil Code] shall have supplemental application. In the event that a provision of this contract is legally invalid, the entire contract shall not be void. The provision in question shall be replaced by a provision which at least comes as close as possible to the desired economic effect in a legally valid manner. To the extent permissible by law, it is hereby agreed that Cologne shall be the place of venue for any disputes arising from this agreement. Monchengladbach, 4/20/94 Cologne, May 5, 1994 Prodac GmbH - - Legally valid signature - - Legally valid signature - /S/ Heinz Wirt /S/ Burger /S/Bierwirth BURGER BIERWIRTH HEINZ WIRT DORINT PRODAC AKTIENGESELLSCHAFT PROZESSDATENTECHNIC GmbH Kaldenkirchener Str. 2 - Electronicsysteme - 41063 Monchengladbach Max-Planck-Str. 38 . 50858 Cologne Company stamp - Company stamp- Appendix (to the framework contract) dated 4/20/94 ------------- HOTELS TO BE EQUIPPED BY PRODAC: EXISTING BUILDINGS - ------------------ [***] New construction Planned opening - -------------------------- [***] [***] -------------------------------------------------------------------- [***] Confidential treatment requested pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission. Due to additional costs which are necessary as a result of the Prodac system but which are not approved by Dorint, the number of buildings may change. For hotels which are run as management operations (for example, Nurburgring, Gera, etc.), the introduction of a Prodac system may be rejected in individual cases without citing grounds therefor; this, however, may be done not later than 8 weeks prior to the beginning of installation. Otherwise, the decision in favor of an installation shall rest with the owners of the management operations. Notwithstanding the foregoing, a maximum of 2 hotels may be deleted from the list of hotels to be equipped without citing grounds therefor; however, this may be done not later than 8 weeks prior to the beginning of installation. EX-10.40 16 FRAMEWORK OPERATOR AGREEMENT WITH NOVOTEL EXHIBIT 10.40 (Translated from German to English) FRAMEWORK OPERATOR AGREEMENT between Novotel Hotelbetriebs GmbH Ungsteinerstrasse 33 81539 Munich for all Novotels in Germany pursuant to Annex hereinafter referred to as "Hotel" and Prodac GmbH Max-Planck-Strasse 38 50858 Cologne hereinafter referred to as "Prodac" (S) 1 FUNDAMENTALS This agreement governs the cooperation of the parties to the agreement for the equipping of the Hotel with up-to-date audiovisual information and entertainment technology. The parties to the agreement assume a relationship based on trust. Prodac shall provide continuous information concerning the most recent state of the art. Prodac shall install in the Hotel without charge a hotel video communication system for paid channels. For this Prodac shall install in each guest room in the television set a fee recording unit by means of which the hotel guest can choose among the free general television channels offered and the paid channels. Within the framework of the operator agreement Prodac shall deliver or install the following components per Hotel: - - A pay-TV center in 8-player operation for the transmission of 8 top films per day - - A radio center to receive and convert 3 channels - - A personal welcome - - Message transmission - - Billing view - - Quick check out - - Multilingual system - German, English - - VT infochannel for airline data, stock exchange, restaurant, leisure offerings, etc. - - Hotel channel for hotel and/or city film (the Hotel provides the film) - - Childproofing through password and through reception - - Guest-controlled remote controls - - Separate statement for the hotel guest - - Monthly changing movie program --------------------------------------------------------------------- [***] Confidential treatment requested pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission. FRAMEWORK OPERATOR AGREEMENT NOVOTEL GERMANY Page 2 - - 1 TV set for the Hotel lobby - - Video games (see Annex to the agreement) - - Feed of a children's TV channel (if receivable at the location) Moreover, Prodac provides - - Advertising (see Annex) The valid proof of the components delivered is the acceptance protocol. (S) 2 VIDEO PROGRAM Prodac shall offer Novotel the following programs: Channel 1 2 German-language feature films Channel 2 2 erotic films in the German/English language, Hard-Core Non-Stop Channel 3 2 English/French language feature films Channel 4 2 erotic films in the German/English language, Hard-Core Non-Stop The program package shall be changed monthly. The return shipment of the movies shall take place quarterly by mail only. For each unreturned cassette, Prodac shall charge DM10.00. Alternatively, the Hotel shall pledge delivery of a written oath to destroy the cassettes. The Hotel shall bill the guests according to the printout of the central computer for connection to all paid channels at DM[***]. Within a period of 24 hours, beginning at 12 noon through 12 noon of the next day, the connections to the program of the Hotel shall be calculated only once. Prodac reserves the right to adapt the fee to current costs. If the Hotel should rent to minors/children guest rooms in which video films not authorized for children are accessible through the Prodac program to, the Hotel is obligated to block access in the relevant guest rooms. The video channels may be partially or completely blocked by the video center for each guest room so that children cannot tune into the video program. The films delivered by Prodac shall be broadcast in all guest rooms of the Hotel. The Hotel expressly guarantees that the programs shall not be broadcast beyond the boundaries of the Hotel grounds and shall not be made accessible to any recipient who is not a guest or user of the Hotel establishment. Specifically, the Hotel guarantees that the Prodac programs cannot be received in areas which are connected to the antenna network of the Hotel and do not belong to the Hotel. --------------------------------------------------------------------- [***] Confidential treatment requested pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission. FRAMEWORK OPERATOR AGREEMENT NOVOTEL GERMANY Page 3 The Hotel must likewise ensure that the video cassettes delivered to the Hotel cannot be used by third parties for purposes outside the scope of the agreement. The Hotel further ensures that it shall make its best efforts to protect the video cassettes against unauthorized use as well as unauthorized exploitation and/or commercial use. If Prodac has evidence that the Hotel has delivered video cassettes, from the program delivered by Prodac, to a third party which is not contractually bound to Prodac, or that a third party associated with the Hotel has caused such a delivery, or that after expiration of the period of exploitation agreed to, a film is being used or has been further used in the Hotel, Prodac is entitled to demand a contractual penalty independent of monies owed in the amount of DM10,000.00 for each case of a breach of contract discovered or - if still possible in light of the time lapsed - to terminate the agreement without advance notice. (S) 3 DURATION/TERMINATION The agreement takes effect on the date signed. It ends on October 1, 2001, without requiring any special notice of termination from Novotel. The parties shall meet 6 months before expiration of the agreement to discuss the conditions of extending or renewing the agreement. Prodac is entitled to finance the entire delivery through a leasing agreement with Philips Mietsystem GmbH (hereinafter referred to as PMG) and likewise, to assign the rights from this operator agreement, in particular to transfer the sales from the pay TV operation to PMG by assignment. The company Prodac is entitled to assign its rights from this agreement to third parties. (S) 4 COURSE Prodac shall make available to the Hotel VHS program cassettes and/or scrambled total transfers of signals from cable broadcasting or direct satellite broadcast, which are intended exclusively for broadcast within the framework of the Hotel TV program. The programs are copyright protected. Any use of the programs other than that specified is prohibited. The playback permit is restricted to the contractual broadcast of the programs in the Hotel. The company Prodac expressly ensures that it owns the rights in the programs offered for the use according to the contract and that the Hotel can incur no obligations and costs from the claims of any third parties. Prodac exempts the Hotel from copyright claims of third parties. Prodac shall provide the Hotel, upon request of the same, evidence of the licensing of the rights through appropriate declarations of the licensors. Any GEMA [German music rights organization] fees for the broadcasts of the feature film videos with background music in the Hotel are handled by Prodac. The contractual and payment agreement must in any event be concluded directly between GEMA and Prodac. FRAMEWORK OPERATOR AGREEMENT NOVOTEL GERMANY Page 4 (S) 5 RETENTION OF TITLE The Hotel acquires no ownership rights in the components provided by Prodac. The Hotel pledges to inform Prodac immediately of any infringements on Prodac's title. (S) 6 EXCLUSIVITY During the period of this agreement, the Hotel shall offer no other commercial programs which are in direct competition with the pay-TV system. (S) 7 OPERATION For the video center, the Hotel makes available an area which is lockable, dustfree, and cool so that trouble-free continuous operation may be guaranteed. Likewise, a 220 volt connection and an antenna connection must be provided in this area and must be built in. The feed of the pay programs into the existing antenna system is carried out by Prodac. A prerequisite for the operation of the Prodac system is a properly functioning master antenna television system according to the current postal stipulations and in particular a problem-free HF network. Any necessary repairs or modifications to the antenna system shall be indicated to the Hotel by Prodac and performed according to agreement or upon request of the Hotel at the expense of the Hotel. The Hotel guarantees problem-free reception of all television channels in all guest rooms. It is agreed that employees of Prodac shall be provided, for the duration of the installation and any repairs under contract with the Hotel, with free lodging, parking, service telephone calls, and meals. For the financing and maintenance of the video communications system, a permanent pay-TV operation is essential. The pay-TV operation is taken over when the full delivery by Prodac is complete. Measures which completely or partially disrupt the operation of the system must be reported in a timely manner to Prodac (e.g., renovation measures in the Hotel). The Hotel is obligated to check the daily billing and to inform Prodac immediately in writing by fax in the event of malfunctions of a technical nature. The Hotel pledges to offer the program delivered by Prodac according to the Prodac program schedule and according to (S) 2, and to change the film cassettes according to the program schedule. Any defects in the quality of the feature film programs must be reported immediately to Prodac so that a replacement can be delivered immediately. Moreover, the Hotel shall display the information material provided by Prodac in reference to the Hotel video program in each room, and shall change it on a monthly basis. If, after installation of the system, the Hotel acquires new additional channels, pay-TV operation undisrupted by this is the responsibility of the Hotel. FRAMEWORK OPERATOR AGREEMENT NOVOTEL GERMANY Page 5 (S) 8 MAINTENANCE Prodac is responsible for the maintenance and repair of the Prodac system. The systems shall be maintained or cleaned and overhauled at periodic intervals. Various activities for this may even take place in the Hotel. The Hotel shall enable the service technicians to carry out the replacement and cleaning of the systems and provide Prodac employees lodging, parking, service telephone calls, and meals free of charge for the duration of the work, per agreement with the Hotel. At the time of commissioning of the system, the Hotel shall receive instructions from Prodac. They must be followed in the event of malfunctions. If it is impossible to remedy the malfunction, the Hotel must contact Prodac without delay for elimination of the malfunction. Prodac shall then take care of repairs or replacement. Maintenance and repair work on the system are free of charge to the Hotel. Service and maintenance costs for the TV sets as well as the remote controls are the responsibility of the Hotel. Prodac shall also equip all replacement TV sets located within the Hotel with a fee recording unit at no charge. If, during the period of the agreement, TV sets are replaced by the Hotel or new sets purchased, compatibility of the boards must be taken into account. Deviations from the existing TV sets must be agreed to with Prodac. The Prodac system shall be monitored for optimization of trouble-free operation by Prodac by means of remote data transmission. For this, the Hotel shall provide at no charge a separate telephone connection or a direct-access exchange for free access, either of which must be located in the same room as the video rack. (S) 9 INSURANCE The equipment provided by Prodac as well as the films to be provided are insured by Prodac. However, this insurance does not cover the following occurrences of damage: - - Damage caused intentionally or by gross negligence - - Damage for which compensation may be claimed from liability insurance - - Water vapor or acid vapor which result from the nature of the operation - - Earthquakes - - Nuclear energy - - Incidents of war of any nature, civil war or internal unrest. FRAMEWORK OPERATOR AGREEMENT NOVOTEL GERMANY Page 6 (S) 10 SETTLEMENT OF ACCOUNTS WITH PRODAC Settlement of accounts with Prodac begins upon commissioning of the system. As noted on the printed pay-TV documents, billing is handled in the name of and to the account of Prodac. The Hotel shall receive expense reimbursement (including the legal value-added tax) based on the following scale: - - up to 2.5 connections per room per month - [***]% of the actual net proceeds per the computer printout, and - - more than 2.5 connections per room per month - [***]% of the actual net proceeds per the computer printout, minus cancellations. This expense reimbursement is paid to the Hotel for the following activities: - - Handling of collections for Prodac - - Handling of the daily and monthly accounting - - Checking the error listing and archiving the service reports - - Handling of minor service tasks such as replacement of the video player, replacement of the modulator, and changing the color tape with telephone instruction from Prodac. If the settlement procedure is handled by direct bank debit authorization, the commission rate is increased by 2%. Only those cancellations for which Prodac is clearly responsible may be deducted. These cancellations must be documented to Prodac, i.e., justified in detail. Any cancellations must be reported to Prodac for verification by the 10th of the month for the preceding month. For this, the printed pay-TV receipt as well as cancellation report completely filled in by the guest are essential. Prodac shall pay the valid VAT from the gross proceeds obtained from the guest to the tax office in Cologne. Prodac must receive 100% of the pay-TV proceeds as well as the filled-out settlement form no later than the 10th of the month. The Hotel shall immediately be sent a credit notice in the amount of the expense reimbursement. The expense reimbursement shall be transferred to the following bank account: Owner of the account ............................... (Name and address) ............................... ............................... Credit institution: ............................... (Name and address) ............................... ............................... Account number: ............................... Bank wire number ............................... --------------------------------------------------------------------- [***] Confidential treatment requested pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission. FRAMEWORK OPERATOR AGREEMENT NOVOTEL GERMANY Page 7 This payment transaction must be handled in this manner for tax purposes. It is hereby agreed that the Hotel shall withhold no other sums or make offsets. (S) 11 COMPUTER LINK Prodac makes the interface connection to the hotel computer. Any software and/or hardware changes or expansions of the hotel computer are at the expense of the Hotel. The basis for the interface link is the Prodac interface protocol. If a connection is impossible due to external control (Hotel electronic data processing), Prodac can provide no warranty for this. In the event of a time delay due to the interface link, pay-TV operation must not be affected. (S) 12 FINAL PROVISIONS Unless otherwise indicated in this agreement, the provisions of the law also apply (in particular (S) 598 ff of the BGB [German Civil Code]). If a provision of this agreement is legally inoperable, the entire agreement shall not become void. The provision in question is replaced by the legally valid arrangement which most nearly approaches the desired economic effect. The legal venue for possible disputes arising from this agreement is agreed to be Cologne, to the extent legally permissible. Dusseldorf, October 10, 1996 Cologne, October 10, 1 ............................ Prodac GmbH /s/ J. Klein /s/ Heinz Wirt J. KLEIN HEINZ WIRT - - Printed Name - - Printed Name - NOVOTEL Hotel-Betriebs GmbH Prodac Ungsteinerstrasse 33 Prozessdatentechnik GmbH 81539 Munich - Electronic Systems - - - Company stamp - Max-Planck-Strasse 38, 50858 Cologne - Company stamp - FRAMEWORK OPERATOR AGREEMENT NOVOTEL GERMANY Page 8 DIRECT BANK DEBIT AUTHORIZATION FOR THE OPERATOR AGREEMENT FOR DEBITING OF PAYMENTS BY MEANS OF DEBIT NOTICES The company Prodac Prozessdatentechnik GmbH of Cologne hereby revocably authorizes, as of the date the agreement takes effect, the taking of debits when payable (10th of the month) based on the pay TV operation of the following party to the agreement from the current account indicated below. If the account does not have the necessary funds, the institution handling the account has no obligation for payment. Partial payments are not made in the direct debit procedure. Owner of the account ............................... (Name and address) ............................... ............................... Credit institution: ............................... (Name and address) ............................... ............................... Account number: ............................... Bank code: ............................... Place, Date: ............................... Legally authorized signature ............................... and company stamp FRAMEWORK OPERATOR AGREEMENT NOVOTEL GERMANY Page 9 ANNEX TO THE FRAMEWORK OPERATOR AGREEMENT NOVOTEL GERMANY
Location Number of rooms - -------- --------------- [***]
This Annex is an integral part of the agreement. --------------------------------------------------------------------- [***] Confidential treatment requested pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission. ANNEX TO THE FRAMEWORK OPERATOR AGREEMENT NOVOTEL GERMANY between Novotel Hotelbetriebs GmbH Ungsteinerstrasse 33 81539 Munich for all Novotels in Germany pursuant to Annex hereinafter referred to as "Hotel" and Prodac GmbH Max-Planck-Strasse 38 50858 Cologne Prodac shall initially equip the Cologne-West Novotel with games by mid-1997 as a test hotel to gather information concerning the mutual advantage. The number of game devices, the mode of accounting, the handling of the game devices in the Hotel, and the sharing of the proceeds from this test shall be mutually agreed to with Novotel by the end of 1996. The test period shall be 4 months. The information gained from the test shall be the basis of further action which Prodac shall coordinate with Novotel. Novotel shall permit Prodac to show Novotel-specific advertising via the TV sets in all hotels included in this agreement. Novotel shall receive no share of the advertising proceeds. The two parties shall agree on the concept by the end of 1996. This Annex to the Agreement does not affect the other contractual agreements. Dusseldorf, October 10, 1996 Cologne, October 10, 1996 ............................ Prodac GmbH /s/ J. Klein /s/ Heinz Wirt J. KLEIN HEINZ WIRT - - Printed Name - - Printed Name - NOVOTEL Deutschland GmbH Prodac Ungsteinerstrasse 33 Prozessdatentechnik GmbH 81539 Munich - Electronic Systems - - - Company stamp - Max-Planck-Strasse 38, 50858 Cologne - Company stamp - EX-10.41 17 FRAMEWORK DISTRIBUTOR CONTRACT WITH MARITIM EXHIBIT 10.41 (Translated from German to English) Original -------- FRAMEWORK DISTRIBUTOR CONTRACT between Maritim Hotelgesellschaft mbH Herforder Str. 2 32105 Bad Salzuflen, hereinafter referred to as "Hotel," and Prodac GmbH Max-Planck-Str. 38 50858 Cologne hereinafter referred to as "Prodac." This framework contract shall govern the collaboration of the contracting parties in connection with equipping Maritim Hotels with up-to-date audio-visual information and entertainment technology. As set forth in appendix 1, Prodac shall install a hotel video communications system for paid programs at no charge in all of the existing rooms of the Maritim chain, with the possibility of expansion to the VIDEOQUEST system for all hotel rooms if the Hotel so desires. There shall be no charge to the Hotel for the installation of the VIDEOQUEST system. In this connection, Prodac shall install a fee recording unit in the television set in every room, by means of which the hotel guest can choose between the general free television programs which are offered and the paid programs. For all hotel rooms equipped with a Prodac system, Prodac shall equip the TV sets with diagonal screens of 45 cm, 55 cm and--in the suites--71 cm at no charge. In addition, Prodac shall give the sum of DM [***] plus VAT, for the return of each existing TV set. In addition, Prodac shall provide the following: - hotel channel for hotel or city film - hotel information channel - message/information sign - general greeting page - radio broadcast via the TV set (4 channels with blank screen) - video text for all TV sets The Hotel shall provide a place for the Video Central which is capable of being locked, dust-free and cool, in order that disruption-free long-term operation can be guaranteed. In addition, a 220-volt connection and an antenna socket is necessary in this room and must be provided at the site. -------------------------------------------------------------------- [***] Confidential treatment requested pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission. [Header:Framework distributor contract Maritim/Prodac--continues throughout] Page 2 The feeding of paid programs into the existing antenna system shall be performed by Prodac. A prerequisite to the operation of the Prodac system is an impeccably functioning community antenna system in accordance with the prevailing postal provisions and, in particular, an impeccable high-frequency line network. Prodac shall notify the Hotel of any necessary repairs or modifications to the antenna system and shall make said repairs or modifications by agreement with, or at the request of, the Hotel. In the event that reverse-channel-capable antenna [ruckkanaltauglich] sockets become necessary for the Prodac system, Prodac shall - ------------------- provide them at no charge. The Hotel hereby guarantees impeccable reception of all television programs in the rooms. It is hereby agreed that lodging opportunities, parking places, service telephones and catering shall, by agreement with the Hotel, be made available to the employees of Prodac for the duration of the installation and any repair work. (S) 2 VIDEO PROGRAM 1. Standard Pay-TV program: - --------------------------- Channel 1 - --------- A German-language feature film program. Channel 2 - --------- Erotic films in German/English language. Channel 3 - --------- An English-language feature film program. Channel 4 - --------- Erotic films in German/English language. The program package shall be changed monthly. The films shall be returned monthly. The Hotel shall charge the guest the fee of DM [***] per night of lodging (time period: 12:00 p.m. to 12:00 p.m.) for tuning in to all of the paid channels. 2. VIDEOQUEST program - --------------------- The films which are offered are classified into four categories: - - mystery - - comedy - - family entertainment - - drama -------------------------------------------------------------------- [***] Confidential treatment requested pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission. Page 3 Up to twelve films per category may be offered. The make-up of the film offerings shall be flexible and individually variable. A monthly exchange of four films shall take place. This guarantees a constantly up-to-date offering. The erotic films shall be broadcast as non-stop offerings. The connection fees for VIDEOQUEST shall be graduated within the hotel day (12:00 p.m. to 12:00 p.m.). The first film during this period shall be charged at a rate of DM [***] Only DM [***] shall be charged for each additional connection. The video channels can be blocked by central administration in whole or in part for each guest room. Prodac reserves the right to adjust the fee to conform to current cost trends. The programs supplied by Prodac shall be broadcast in all rooms of the Maritim Hotel. The Hotel expressly promises that the programs shall not be broadcast beyond the Hotel property and shall not be made accessible to any receiver who is not a guest or user of the Hotel system. Specifically, the Hotel shall ensure that the Prodac programs cannot be received in areas which are connected to the Hotel antenna network but are not part of the Hotel. In addition, the Hotel shall ensure that the videocassettes delivered to the Hotel cannot be used by third parties for non-contractual purposes. The Hotel further promises that it shall use its best efforts to protect the videocassettes against unauthorized use, as well as unauthorized utilization and/or commercial exploitation. (S) 3 TERM/TERMINATION This contract is concluded for a period of 10 years. The contract shall begin upon delivery (date of the delivery protocol) of the operationally-ready system for the respective hotel by Prodac. The firm of Prodac shall be entitled to transfer its rights arising from this contract to third parties. (S) 4 PROCEDURE Prodac shall provide the Hotel with VHS program cassettes and/or encoded composite signals from cable or satellite transmission which are intended solely for broadcast in connection with the hotel television programs. The programs are protected by copyright. Any use of the programs other than that intended is prohibited. The play permit shall be limited to the contractual broadcast of the programs in the Hotel. Prodac expressly promises that it holds the rights to the programs offered for contractual use and that no obligations or costs -------------------------------------------------------------------- [***] Confidential treatment requested pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission. Page 4 arising from potential claims of third parties may be incurred by the Hotel. Prodac hereby releases the Hotel from copyright claims of third parties. At the request of the Hotel, Prodac shall document the licensing of the rights by means of appropriate declarations by the licensor. Any fees arising in connection with GEMA [Association for Musical Performance and Mechanical Duplication Rights] shall be paid by Prodac. (S) 5 RETENTION OF TITLE The Hotel shall acquire no ownership rights in the components provided by Prodac. The Hotel hereby promises to promptly report to Prodac in writing any encroachment upon Prodac's ownership right. Following ordinary expiration of the contract (10 years), the Hotel shall become owner of the TV sets. Upon request, the Hotel may purchase title to the TV sets early in exchange for the payment. Following the end of a seven-year term, a sum of DM [***] (plus VAT) shall be charged. Following an eight-year term, said sum shall be reduced to DM [***] (plus VAT), and after a concluded nine-year term, said sum shall be DM [***] (plus VAT). (S) 6 EXCLUSIVITY During the term of this agreement, the Hotel shall offer no other commercial programs which are in direct competition with the Pay-TV system. (S) 7 OPERATION A permanent Pay-TV operation is necessary to finance and maintain the video communications system. The Pay-TV operation shall be commenced if Prodac's scope of delivery is complete. The firm of Prodac shall retain the right to finance the video communications system through third parties (leasing contract, investment credit, etc.). In such a case, the claims arising from operator revenues shall be assigned (financing source: see delivery protocol). Measures which disrupt the operation of the system in whole or in part (renovation work in the Hotel, for example) shall be reported to Prodac in writing in a timely manner. The Hotel hereby promises to offer the program supplied by Prodac according to the Prodac program scheme and as set forth in (S) 2 and promises to switch the film cassettes according to the program plan. Quality defects which arise with respect to the videocassettes must be promptly reported to Prodac, in order that a replacement can be delivered. Moreover, the Hotel shall place in every room the informational material which Prodac provides with reference to the hotel television program and shall change said informational material on a monthly basis. -------------------------------------------------------------------- [***] Confidential treatment requested pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission. Page 5 (S) 8 MAINTENANCE Prodac shall be responsible for the maintenance and repair of the Prodac system. The equipment shall be maintained, cleaned and/or refurbished at periodic intervals. Various activities in this connection may also be performed in the Hotel. In this connection, the Hotel shall make it possible for the service technicians to switch and clean the equipment and shall, by agreement with the Hotel, provide the employees of Prodac with lodging opportunities, parking places, service telephones and catering at no charge for the duration of the work. When the system is placed in operation, the Hotel shall receive instructions from Prodac. In the case of disruptions, it shall be necessary to proceed according thereto. In the event that it is not possible to remedy the disruption, the Hotel must contact Prodac promptly in order to eliminate the disruption. Prodac shall then ensure repairs and/or replacement. Maintenance and repair work shall be without charge to the Hotel. Repair work on the TV set (without the Prodac board) shall be charged to the Hotel. Prodac, in consultation with the Hotel, shall hire a specialized dealer for the TV repairs. The Hotel shall be billed directly. If the Hotel exchanges television sets or purchases new sets during the contract term, care shall be taken with respect to compatibility with the installed boards. Deviations from the existing television sets shall be arranged with Prodac. (S) 9 INSURANCE The devices made available by Prodac and the films which are to be used shall be insured by Prodac. (S) 10 BILLING The Hotel shall bill the guests for tuning in to the paid programming on the basis of the record printouts from the central computer. Connections to the program shall be billed by the Hotel only once within a period of 24 hours--from 12:00 p.m. to 12:00 p.m. on the following day. Settlement with Prodac shall begin when the system is placed in operation. As noted on the billing coupon, billing shall be executed in the name of and for the account of Prodac. In consideration of the activities named in the contract, the Hotel shall receive compensation for expenses from the gross revenues from Pay-TV according to the following scale: Page 6
CONNECTIONS PER COMMISSION PAYMENT BONUS TOTAL ROOM/MONTH HOTEL CENTRAL COMMISSION ADMINISTRATION [***]
Only the cancellations for which Prodac is clearly responsible may be deducted. Such cancellations must be documented for Prodac, i.e., explained in detail. Any cancellations for the preceding month shall be submitted to Prodac for the purpose of checking by the 10th of the following month. Prodac shall accept cancellation records for up to 5% of total connections. For technical reasons, cancellation records are not limited. Prodac transfers the prevailing VAT to the Cologne Tax Office from the gross revenues received from the guests. Prodac must receive 100% of the Pay-TV revenues by the 10th of the month. A credit in the amount of the compensation for expenses shall be sent to the Hotel immediately. The expense compensation shall be transferred to the Hotel at the bank account stated below: Account holder: _____________________________________________ (name and mailing address) _____________________________________________ _____________________________________________ Credit institution: _____________________________________________ (name and mailing address) _____________________________________________ _____________________________________________ Account no.: _____________________________________________ Bank wire no.: _____________________________________________ This transaction is to be handled in this manner for tax reasons. It is hereby agreed that the Hotel shall retain no other sums from Pay-TV revenues or offset any other sums against Pay-TV revenues. (S) 11 COMPUTER COUPLING Prodac shall place the interface line on the Hotel computer. Any software and/or hardware modifications or expansions in the Hotel computer shall be charged to Prodac. -------------------------------------------------------------------- [***] Confidential treatment requested pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission. Page 7 The basis for the interface coupling shall be the Prodac interface protocol. In the event of a time delay resulting from interface coupling, Pay-TV operation shall remain unaffected. (S) 12 FINAL PROVISIONS Unless otherwise provided under this agreement, the statutory provisions (particularly (S) 598 ff. BGB) [German Civil Code] shall have supplemental application. In the event that a provision of this contract is legally invalid, the entire contract shall not be void. The provision in question shall be replaced by a provision which at least comes as close as possible to the desired economic effect in a legally valid manner. To the extent permissible by law, it is hereby agreed that Cologne shall be the place of venue for any disputes arising from this agreement. Bad Salzuflen, 9/18/95 Cologne, 9/21/95 Maritim Hotelgesellschaft mbH Prodac GmbH /s/ Authorized Signatures /s/ Heinz Wirt - - Legally valid signature - - Legally valid signature - /s/ Authorized Signatures /s/ Heinz Wirt - - name in block letters - HEINZ WIRT MARITIM HOTELGESELLSCHAFT mbH PRODAC TIMMENDORFER STRAND PROZESSDATENTECHNIC GmbH Herforder Strasse 2 - Electronicsysteme - 32102 Bad Salzuflen Max-Planck-Str. 38, 50858 Cologne - - Company stamp - - Company stamp -Appendix I Appendix I LIST OF ROOMS FOR PAY-TV
Hotel Rooms Mailing address Note Priority [***] Total
-------------------------------------------------------------------- [***] Confidential treatment requested pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission.
Appendix II MARITIM Bank Acount Bank no. wire no. [***]
5/18/95 -------------------------------------------------------------------- [***] Confidential treatment requested pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission. EX-10.42 18 AGREEMENT FOR THE SALE & PURCHASE OF PRODAC UK EXHIBIT 10.42 DATED 1996 (1) PRODAC PROZESSDATENTECHNIK GmbH AND (2) PRODAC HOTELVIDEO COMMUNICATIONSYSTEMS LIMITED AND (3) UK CONSUMER ELECTRONICS LIMITED ______________________________________________________________________________ AGREEMENT FOR THE SALE AND PURCHASE OF PART OF THE BUSINESS OF PRODAC PROZESSDATENTECHNIK GmbH AND PRODAK HOTELVIDEO COMMUNICATIONSYSTEMS LIMITED ______________________________________________________________________________ ______________________________________________________________________________ DIBB LUPTON ALSOP 125 LONDON WALL LONDON EC2Y 5AE TEL: 0345 26 27 28 FAX: 0171 600 1727 THIS AGREEMENT is made on 1996 ----------------------------- BETWEEN: (1) PRODAC PROZESSEDATENTECHNIK GmBH, a company incorporated in Germany of Max- Planck-Strasse 38 D-50858 Koln Germany ("GmbH"); (2) PRODAC HOTELVIDEO COMMUNICATIONSYSTEMS LIMITED, a company incorporated in England and Wales (registered no. 2733394), whose registered office is at 25 Shenley Pavilions, Chalkdell Drive, Shenley Wood, Milton Keynes MK5 6LB, England ("PRODAC"); and (3) UK CONSUMER ELECTRONICS LIMITED, a company incorporated in England and Wales (registered no. 532857), whose registered office is at Granada House, Ampthill Road, Bedford MK42 9QQ, England ("PURCHASER"). THE PARTIES AGREE as follows: 1. INTERPRETATION 1.2 In this Agreement: "ACCOUNTS" means the audited profit and loss account of Prodac for the accounting period ended on the Last Accounting Date, and the audited balance sheet of Prodac as at, the Last Accounting Date and all notes, reports and other documents annexed thereto in accordance with any legal requirement or otherwise; "ASSETS" means all the property and assets agreed to be sold and purchased under this Agreement; "BUSINESS" means the business of supplying the Prodac System carried on by Prodac at the date of this Agreement under the name Prodac in the Territory; "BUSINESS DAY" means a day (other than a Saturday or Sunday) on which clearing banks are open for business in London; "BUSINESS RECORDS" means all books and records of Prodac (whether computerised or in any other form) other than Financial Records; "COMPLETION" means completion of the sale and purchase of the Business and Assets in accordance with this Agreement; "COMPLETION STATEMENT" means the statement of certain assets and liabilities of the Business as at the date of Completion agreed between the Vendor and the Purchaser in accordance with Clause 5; "CONSULTANCY AGREEMENTS" means the agreements dated 1 January 1995 and 2 October 1995 and made between Prodac and Nicholas Reynell and Harley-Robinson Associates in relation to the services of Dr. Robinson respectively; "CONTRACTS" means all contracts, undertakings, arrangements and engagements of Prodac relating to the Business which are wholly or partly unperformed at the date of Completion including, without limitation, the Operating and Finance Leases, the Consultancy Agreements, supply and distribution agreements, Customer Agreements and supplier contracts, lease, hire and hire purchase agreements but excluding contracts of employment with the Employees, leases of any real property and loan agreements (any of these being a "CONTRACT"); "CUSTOMER AGREEMENTS" means the agreements between Prodac and the customers of the Business details of which are set out in the Disclosure Letter; "CUSTOMER PREPAYMENTS" means all amounts paid to Prodac or GmbH on or before Completion in respect of goods or services to be supplied pursuant to any Contract after Completion; "DISCLOSURE BUNDLE" means the bundle of documents a list of which is annexed to or set out in the Disclosure Letter; "DISCLOSURE LETTER" means the letter of today's date from the Vendor to the Purchaser in relation to the Warranties; "DISPUTE" means any matter in connection with or arising in relation to Mr. Scully including (without limitation) any injunction or claim by Mr. Scully or Prodac in connection with or in relation to this Agreement or the matters contemplated in this Agreement or the carrying on of the Business; "EFFECTIVE DATE" means 1 August 1996; "EMPLOYEES" means the employees employed in the Business at the date of this Agreement whose names are set out in Schedule 2; "ENCUMBRANCE" means any mortgage, charge, pledge, lien, option, restriction, right of first refusal, right of pre-emption, third party right or interest, any other encumbrance or security interest of any kind, and any other type of preferential arrangement (including, without limitation, title transfer and retention arrangements) having a similar effect; "ESCROW AGREEMENT" means the agreement in the agreed form to be made between GmbH and the Purchaser relating, amongst other things, to the holding of source code information and related documentation; "EXCLUDED ASSETS" means the assets set out in Schedule 1; -2- "FINANCIAL RECORDS" means all bought and sold ledgers, purchase and sales day books, other books of account and purchase and sales invoices of Prodac (whether computerized or in any other form); "GmbH CONFIDENTIAL INFORMATION" means all information not at present in the public domain used in or otherwise relating to the business of GmbH or customers or financial or other affairs of the business of GmbH including, without limitation, information relating to: (a) the marketing of any goods or services including, without limitation, customers names and lists and any other details of customers, sales targets, sales statistics, market share statistics, prices, market research reports and surveys and advertising or other promotional materials; or (b) future projects business development or planning, commercial relationships and negotiations; "GmbH KNOW HOW" means all information not at present in the public domain owned by GmbH or used, or required to be used, by GmbH in, or in connection with its business held in any form (including, without limitation, that comprised in or derived from drawings, data, formulae, specifications, component lists, instructions, manuals, brochures, catalogues and process descriptions) and relating to: (a) the provision of services; (b) the selection procurement, instructions, installation or use of any equipment or processes; (c) the supply, storage, assembly or packing of components; (d) quality control and trading; and/or (e) the rectification, repair or service of equipment; "GOODWILL" means the goodwill of the Business together with the right for the Purchaser to use the name "Prodac" in connection with the Business subject to the terms of this Agreement and to represent itself as carrying on the Business in continuation of and in succession to Prodac; "GRANADA MAINTENANCE CONTRACT" means an agreement dated 13 February 1995 made between Prodac and the Purchaser for the maintenance of the hotel film systems of Prodac; "GROUP" means in relation to a company any subsidiary any holding company or any subsidiary of any holding company of such company; "HOTEL BILLING SYSTEM" means the system for automated polling and billing of hotel services; "INTELLECTUAL PROPERTY" means patents, trade marks, service marks, registered designs, applications for any of the foregoing, trade and business names, unregistered trade marks and service marks, copyrights, rights in designs, inventions, rights under licences, consents, orders, statute or otherwise howsoever in relation to any such rights, and rights of the same or similar effect or nature; -3- "INTELLECTUAL PROPERTY RIGHTS" means such Intellectual Property as is used or required to be used by Prodac in, or in connection with, the Business at date of this Agreement. "LAST ACCOUNTING DATE" means 31 December 1995; "MANAGEMENT ACCOUNTS" means the unaudited profit and loss account of Prodac for the period 1 January 1996 to 31 August 1996 and the unaudited balance sheet of Prodac as at 30 June 1996; "OPERATING AND FINANCE LEASES" means the operating and finance leases to which Prodac and/or GmbH, as the case may be, is a party in relation to the Business details of which are set out in the Disclosure Letter. "PRODAC'S ACCOUNTANTS" means Jervis & Partners of 3 Market Square, Higham Ferrers, Northants NN10 8BP. "PRODAC CONFIDENTIAL INFORMATION" means all information not at present in the public domain used in or otherwise relating to the Business or customers or financial or other affairs of the Business including, without limitation, information relating to: (a) the marketing of any goods or services including, without limitation, customer names and lists and any other details of customers, sales targets, sales statistics, market share statistics, prices, market research reports and surveys and advertising or other promotional materials; (b) future projects, business development or planning, commercial relationships and negotiations; "PRODAC KNOW-HOW" means all information not at present in the public domain owned by Prodac or used, or required to be used, by Prodac in, or in connection with, the Business held in any form (including, without limitation, that compromised in or derived from drawings, data, formulae, specifications, component lists, instructions, manuals, brochures, catalogues and process descriptions) and relating to: (a) the provision of services; (b) the selection, procurement, construction, installation or use of any equipment or processes; (c) The supply, storage, assembly or packing of components; (d) quality control and testing; and/or (e) the rectification, repair or service of equipment; "PRODAC SYSTEM" means the pay for view systems and hotel information systems supplied by GmbH from time to time; -4- "PROPERTY" means any interest of the Vendor in 25 Shenley Pavilions, Chalkdell Drive, Shenley Wood, Milton Keynes MK5 6LB; "PURCHASER'S ACCOUNTANTS" means KPMG of Norfolk House, 499 Silbury Boulevard, Central Milton Keynes NK9 2HA; "PURCHASER'S SOLICITORS" means Dibb Lupton Alsop of 125 London Wall, London EC2Y 5AE; "SOFTWARE LICENCE AND TECHNICAL SUPPORT AGREEMENT" means the agreement in the agreed form to be made between GmbH and the Purchaser relating, amongst other things, to the use of the pay TV operating system; "STOCKS" means the stock of finished goods and spare parts of the Business as at the date of this Agreement; "STOCK LIST" means the list of Stocks referred to in Clause 2 of this Agreement; "SUPPLY AGREEMENT" means the agreement in the agreed form to be made between GmbH and the Purchaser relating, amongst other things, to their business relationship after Completion; "TANGIBLE ASSETS" means the Tangible Immovable Assets and the Tangible Moveable Assets; "TANGIBLE IMMOVEABLE ASSETS" means such fixed plant and machinery owned by Prodac in connection with the Business at the date of this Agreement; "TANGIBLE MOVEABLE ASSETS" means such equipment, tools, and furnishings and other like articles other than the Stocks owned by Prodac in connection with the Business at the date of this Agreement excluding (1) the equipment which is the subject of the Operating & Finance Leases and (2) the demonstration equipment which is the property of GmbH; "TAXES ACT" means Income and Corporation Taxes Act 1988; "TERRITORY" means the United Kingdom and the Republic of Ireland; "TRADE CREDITS" means the amounts due from the Prodac in connection with the Business at the date of Completion in respect of trade creditors arising through normal business transactions; "TRADE DEBTS" means the amounts due to Prodac in connection with the Business at the date of this Agreement in respect of trade debtor accounts arising through normal business transactions (whether or not yet due and payable); "TRANSFER REGULATIONS" means the Transfer of Undertakings (Protection of Employment) Regulations 1981 (as amended); -5- "VATA" means Value Added Tax Act 1994; "VENDOR" means, as the case may be, GmbH and Prodac; "VENDOR'S GROUP" means the Vendor and any subsidiary or holding company from time to time of the Vendor and any subsidiary from time to time of any holding company of the Vendor and any reference to "member of the Vendor's Group" shall be construed accordingly; "VENDOR'S SOLICITORS" means Jay Benning & Peltz of One Great Cumberland Place, London W1H 7AL; "WARRANTIES" means the representations and warranties contained in Schedule 3. 1.2 In this Agreement, a reference to: 1.2.1 a "SUBSIDIARY" or "HOLDING COMPANY" shall be construed in accordance with section 736 of the Companies Act 1985 and a reference to "SUBSIDIARY UNDERTAKING" shall be construed in accordance with section 258 of the Companies Act 1985; 1.2.2 a document in the "AGREED FORM" is a reference to a document in a form approved and for the purpose of identification signed by or on behalf of the parties; 1.2.3 a statutory provision incudes a reference to: (a) the statutory provision as modified or re-enacted or both from time to time (whether before or after the date of this Agreement); and (b) any subordinate legislation made under the statutory provision (whether before or after the date of this Agreement); 1.2.4 persons includes a reference to any body corporate, unincorporated association or partnership; 1.2.5 a person includes a reference to that person's legal personal representatives and successors; 1.2.6 a Clause or Schedule, unless the context otherwise requires, is a reference to a clause of and schedules to this Agreement; 1.2.7 an agreement or other document is a reference to that agreement or document as from time to time supplemented or amended. 1.3 The headings in this Agreement shall not affect the interpretation of this Agreement. -6- 1.4 Reference in Clause 6 and Schedule 3 to the knowledge, information, belief or awareness of any person shall be deemed to include any knowledge, information, belief or awareness which the person would have if the person had made all usual and reasonable enquiries. 1.5 The Vendor shall have joint and several liability under this Agreement. 2. ASSETS TO BE SOLD 2.1 In accordance with and subject to the provisions of this Agreement, Prodac shall and GmbH shall procure that Prodac shall as beneficial owner and with full title guarantee sell and the Purchaser shall purchase, with effect from the close of business on the date of Completion, the Business as a going concern and the Assets as at the date of Completion free from all Encumbrances comprising: 2.1.1 the benefit (together with the burden) of each Contract; 2.1.2 the Goodwill; 2.1.3 such Intellectual Property Rights as are owned by Prodac: 2.1.4 the Tangible Immovable Assets; 2.1.5 the Tangible Movable Assets; 2.1.6 such Know How as is owned by Prodac; 2.1.7 the Hotel Billing System; 2.1.8 the Business Records; 2.1.9 the benefit of any sum to which Prodac is entitled either from third parties or insurers in respect of damage or injury to any of the Assets other than any sum expended before Completion in making good the damage or injury; and 2.1.10 all other property and assets (if any) of Prodac used in connection with the Business, other than the Excluded Assets and the Stocks (save as provided in clauses 2.2 and 2.3). 2.2 Prodac shall procure that on or before 4 October 1996 there is delivered to the Purchaser a list of Stocks (prepared by Marlene Devonshire). On or before 7 October 1996 the Purchaser shall give notice to Prodac in writing ("THE STOCKS LIST") identifying which of the Stock on the list of Stocks it wishes to acquire. Prodac shall and GmbH shall procure that Prodac shall sell to the Purchaser and the Purchaser will purchase the Stocks in good condition and working order set out in the Stocks List at the invoice price of such Stocks to Prodac ("THE STOCKS PRICE"). The Stock List shall, subject to availability, correspond with the original list of Stocks prepared by the -7- Purchaser. On or before 17 October 1996 the Purchaser shall pay the Vendor the Stocks Price on the basis that the relevant Stocks shall have been delivered to the Purchaser. 2.3 The Vendor will retain all other items of Stocks for six months from Completion at 25 Shenley Pavilions under the control of Nicholas Reynell during which time the Purchaser may from time to time require Prodac to sell or GmbH to procure that Prodac shall sell such other items of Stocks as the Purchaser in its absolute discretion from time to time requires for an amount equal to the invoice price of such Stocks to Prodac on payment for such items within 30 days after delivery. Granada shall not be responsible in any way whatsoever for such other items of Stocks until such time (if any) as they purchase the same (or any of the same) from Prodac. 2.4 At the expiration of such period of six months Prodac shall be free to deal with any balance of Stocks in such manner as it in its absolute discretion thinks fit (at no cost to the Purchaser). 3 CONSIDERATION 3.1 The consideration payable by the Purchaser to the Vendor for the Business and Assets at Completion shall be the sum of (Pounds)187,500 apportioned between the Assets concerned as set out in Schedule 4. 3.2 Within three Business Days after agreement or determination of the Completion Statement in accordance with Clause 5: 3.2.1 an appropriate payment shall be made by the Vendor or the Purchaser, as the case may be, to discharge any outstanding liability between the parties in relation to the apportionments to give effect to Clause 9.4; and 3.2.2 the Vendor shall pay the Purchaser the amount of the net profit or the Purchaser shall pay the Vendor the amount of the net loss as the case may be from ordinary activities before taxation in respect of the period from the Effective Date to close of business on the date of Completion calculated as set out in the pro forma set out in Schedule 6. 3.3 If a party fails to pay any sum due and payable by it under this Agreement on the due date of payment in accordance with the terms of this Agreement, the party shall pay interest on the sum from the due date until the date upon which the obligation of the party to pay the sum is discharged at the rate of 2 per cent over the base rate from time to time of Barclays Bank PLC (whether before or after judgment). 3.4 Any payment to be made under this Clause 3 shall be made by banker's draft on the branch of a London clearing bank or by telegraphic transfer to an account notified by the solicitors to the party due to receive the payment to the other party's solicitors not later than four Business Days before the date of the payment. 4. COMPLETION 4.1 Completion shall take place at the offices of the Vendor's Solicitors on 1 October 1996. -8- 4.2 At Completion Prodac and GmbH shall: 4.2.1 give possession to the Purchaser at 25 Shenley Pavilions aforesaid of those Assets which are transferable by delivery; and 4.2.2 deliver to the Purchaser the Business Records. 4.3 At Completion the Purchase shall pay the amounts specified in Clause 3.1. 4.4 At Completion: 4.4.1 GmbH and the Purchaser shall each enter into and deliver to the other the Escrow Agreement, the Software Licence and Technical Support Agreement and the Supply Agreement; 4.4.2 Prodac and the Purchaser shall and the Vendor shall procure that Mr. Reynell shall each enter into and deliver to the other a novation agreement in the agreed form of the consultancy agreement between Prodac and Mr. Reynell; and 4.4.3 Prodac and the Purchaser shall and the Vendor shall procure that Harley-Robinson Associates shall each enter into and deliver to the other a novation agreement in the agreed form of the consultancy agreement between Prodac and Harley-Robinson Associates in relation to the services of Dr. Robinson. 4.5 The Purchaser shall not be obliged to complete this Agreement unless: 4.5.1 the Vendor complies fully with all its obligations under Clauses 4.2 and 4.4; and 4.5.2 the purchase of all of the Assets is completed simultaneously. 4.6 The Vendor shall not be obliged to complete this Agreement unless: 4.6.1 the Purchaser has complied with the provisions of Clause 4.3; and 4.6.2 the Purchaser has complied fully with all its obligations under Clause 5. COMPLETION STATEMENT 5.1 As soon as possible after Completion and in any event within 15 Business Days after Completion the Vendor shall prepare and submit to the Purchaser a statement showing: 5.1.1 any apportionments required to be made pursuant to Clause 9.4; and 5.1.2 the calculation of the net profit or net loss as referred to in Clause 3.2.2. -9- The purchaser agrees that for the purposes of the preparation and submission to the Purchaser of the statement Mr. Reynell may act as representative of the Vendor. 5.2 The Purchaser shall within five Business Days or receipt of the statement certify whether or not it agrees with the statement. 5.3 If the Purchaser certifies its agreement with the statement, it shall constitute the Completion Statement. If the Purchaser certifies that it disagrees with the statement, then the provisions of Clause 5.4 shall apply and the decision of the independent firm of chartered accountants produced in accordance with Clause 5.4 shall constitute the Completion Statement. If the Purchaser does not give the Vendor the certificate required by this Clause 5.3 within the prescribed time limit (in respect of which time shall be of the essence), the statement shall constitute the Completion Statement. 5.4 If any dispute arises between the parties as to the amount of consideration payable under Clause 3 or as to any matter to be included in the Completion Statement either party may give notice that a dispute exists (a "DISPUTE NOTICE") to the other party and if the parties have not resolved the dispute within 10 Business Days of the date of the receipt of the Dispute Notice by the other party, the following provisions shall apply. Either party may refer the dispute to an independent firm of chartered accountants agreed by the parties or in default of agreement within 20 business days of the date of the Dispute Notice, an independent firm of chartered accountants nominated by the President for the time being of the Institute of Chartered Accountants in England and Wales (the "EXPERT"), with a request that the Expert make a decision on the dispute within 20 Business Days of receiving the reference. In any reference, the Expert shall act as an expert and not as an arbitrator. The decision of the Expert shall, in the absence of fraud or manifest error, be final and binding on both parties. The costs of the Expert shall be borne equally by the parties. 6. WARRANTIES 6.1 The Vendor represents, warrants and undertakes to the Purchaser that each of the Warranties is true and accurate in all respects, and not misleading, at the date of this Agreement. 6.2 The Vendor acknowledges that the Purchaser is entering into this Agreement in reliance upon each of the Warranties with the intention of inducing the Purchaser to enter into this Agreement. 6.3 The Warranties shall be qualified by reference to those matters fairly disclosed in the Disclosure Letter but no other information relating to the Business or the Assets of which the Purchaser has knowledge, (whether actual, constructive or imputed) shall preclude or affect any claim made by the Purchaser for breach of any of the Warranties or reduce any amount recoverable and the Vendor shall not invoke any knowledge (whether actual, constructive or imputed) of the Purchaser of any facts which might render any of the Warranties as being untrue or misleading as a defence to or otherwise to affect any claim for breach of any of the Warranties. 6.4 The provisions of Schedule 5 shall have effect. -10- 6.5 The Vendor agrees with the Purchaser that it shall waive and not enforce any right which it may have in respect of any misrepresentation, inaccuracy or omission in or from any information or advice supplied or given by any officer, employee, consultant or adviser of or to the Vendor for the purpose of assisting the Vendor to give any of the Warranties or to prepare the Disclosure Letter or otherwise in connection with this Agreement. 6.6 Each of the Warranties shall be construed separately and independently and (save where expressly provided to the contrary) shall not be limited or restricted by reference to or inference from any other provision of this Agreement or any of the other Warranties. 7. THE PURCHASER'S REMEDIES Subject to, in the case of the Warranties, the provisions of clauses 6.3, 8 and Schedule 5 the Vendor shall indemnify and hold the Purchaser harmless against: 7.1 all losses, liabilities and reasonable costs which the Purchaser may properly incur arising out of, or as a consequence of, any breach of any of the Warranties by the Vendor or in connection with the Dispute; and 7.2 all reasonable costs which the Purchaser may properly incur (whether before or after the commencement of any action) in connection with: 7.2.1 the settlement of any claim against the Vendor arising out of, or as a consequence of, any breach of any of the Warranties or the Dispute or the enforcement of any settlement; and 7.2.2 any legal proceedings against the Vendor arising out of, or as a consequence of, any breach of any of the Warranties in which judgment is given for the Purchaser or in connection with the Dispute or the enforcement of any judgment. 8. LIMITATIONS ON THE VENDOR'S LIABILITY 8.1 The Vendor shall have no liability whatsoever in respect of any Relevant Claim unless and until the amount that would otherwise be recoverable from the Vendor in respect of that Relevant Claim, when aggregated with any other amounts so recoverable in respect of other Relevant Claims, exceeds (Pounds)12,500 ("THE THRESHOLD") provided that the Vendor shall have no liability for any amount less than the Threshold even if the Threshold is exceeded. 8.2 The Vendor shall have no liability for any Relevant Claim unless notice in writing of the Relevant Claim (stating in reasonable detail the nature of the Relevant Claim and, so far as practicable, the amount claimed) has been given to the Vendor on or before the expiration of two years from Completion and proceedings shall have been commenced within 30 months from completion. 8.3 For the purposes of Clause 8, "RELEVANT CLAIM" means any claim (whether in contract, tort or otherwise) by the Purchaser in respect of breach of any of the Warranties. 9. LIABILITIES AND APPORTIONMENTS -11- 9.1 Subject to Clauses 9.3, 9.4 and 10, Prodac and/or GmbH, as the case may be, shall: 9.1.1 continue to be responsible for, and shall duly and promptly pay and discharge, all debts payable by it and claims by third parties outstanding against it as at the date of Completion or arising by reason of any act or omission by it on or before the date of Completion; and 9.1.2 indemnify the Purchaser against all losses, liabilities and reasonable costs which the Purchaser may properly incur arising out of, or as a consequence of, the ownership or operation of the Business or any of the Assets before the date of Completion (including, without limitation, all losses, liabilities and reasonable costs properly incurred as a result of defending or settling any claim (a "SPECIFIED CLAIM") alleging any such liability). 9.2 Subject to Clauses 9.3, 9.4 and 10 the Purchaser shall: 9.2.1 be responsible for all debts payable by it after the date of Completion in respect of the Business and the Assets; and 9.2.2 indemnify the Vendor against all losses, liabilities and reasonable costs which the Vendor may properly incur arising out of, or as a consequence of, the ownership or operation of the Business or any of the Assets after the date of Completion (including, without limitation, all losses, liabilities and reasonable costs properly incurred as a result of defending or settling any claim (a "SPECIFIED CLAIM") alleging any such liability). 9.3 If either party (the "INDEMNIFIED PARTY") becomes aware of any matter which might give rise to a Specified Claim, the following provisions shall apply: 9.3.1 the Indemnified Party shall immediately give written notice to the other party (the "INDEMNIFYING PARTY") of the matter (stating in reasonable detail the nature of the matter and, so far as practicable, the amount claimed) and shall consult with the Indemnifying Party with respect to the matter. If the matter has become the subject of any proceedings the Indemnified Party shall give the notice within sufficient time to enable the Indemnifying Party time to contest the proceedings in the Indemnified Party's name before any final judgment; 9.3.2 the Indemnified Party shall: (a) take such action and institute such proceedings, and give such information and assistance, as the Indemnifying Party or its insurers may reasonably request to: (i) dispute, resist, appeal, compromise, defend, remedy or mitigate the matter; or -12- (ii) enforce against any person (other than the Indemnifying Party) the rights of the Indemnified Party or its insurers in relation to the matter; and (b) in connection with any proceedings related to the matter (other than against the Indemnifying Party) use professional advisers nominated by the Indemnifying Party or its insurers and, if the Indemnifying Party so requests, allow the Indemnifying Party or its insurers the exclusive conduct of the proceedings, in each case on the basis that the Indemnifying Party shall fully indemnify the Indemnified Party for all reasonable costs properly incurred as a result of any request or nomination by the Indemnifying Party or its insurers; 9.3.3 if the Purchaser is the Indemnified Party, Clause 9.3.2 shall not apply if the request or nomination by the Vendor or its insurers would in the Purchaser's reasonable opinion prejudice its relationship with any customer or supplier of the Business; 9.3.4 the Indemnified Party shall not admit liability in respect of or settle the matter without the prior written consent of the Indemnifying Party, such consent not to be unreasonably withheld or delayed. 9.4 There shall be apportioned between Prodac and/or GmbH, as the case may be, and the Purchaser as at the date of Completion: 9.4.1 all outgoings and expenses (including, without limitation, wages, accrued holiday pay, and other outgoings in respect of the Employees and rentals payable under the Operating and Finance Leases in respect of the Business or the Assets; and 9.4.2 all royalties and periodical payments receivable in respect of the Business or the Assets including payments receivable under the Customer Agreements. 9.5 All the necessary apportionments to give effect to Clause 9.4 shall be included in the Completion Statement and the appropriate payment shall be made by Prodac and/or GmbH, as the case may be, or the Purchaser (as the case may be) to discharge any outstanding liability between the parties in accordance with Clauses 3 and 5. 10. CONTRACTS 10.1 Subject to Clause 10.3.3, after Completion the Purchaser shall perform all the Vendor's obligations in respect of the period after Competition under the Contracts including the Customer Agreements (the latter in a proper and workmanlike manner) and shall indemnify the Vendor against all losses, liabilities and reasonable costs which the Vendor may properly incur arising out of, or as a consequence of, the performance of the Purchaser's obligations under each Contract to the extent that the loss, liability or reasonable cost properly incurred is attributable to any act, default or omission of the Purchaser after the date of Completion (including, without limitation, all losses, liabilities and reasonable costs on any indemnity basis properly incurred as a result of defending or settling any claim alleging any such liability). -13- 10.2 The Vendor shall indemnify the Purchaser against all losses, liabilities and reasonable costs which the Purchaser may properly incur arising out of, or as a consequence of the performance of the Vendor's obligations under each Contract to the extent that the loss, liability or reasonable cost properly incurred is attributable to any act, default or omission of the Vendor (including, without limitation, all losses, liabilities and reasonable costs on an indemnity basis properly incurred as a result of defending or settling any claim alleging any such liability). 10.3 If any of the Contracts cannot be transferred to the Purchaser except by an assignment made with the consent of another party (the "THIRD PARTY") or by an agreement of novation, then the following provisions shall apply: 10.3.1 this Agreement shall not constitute an assignment or an attempted assignment of the Contract if the assignment or attempted assignment would constitute a breach of the Contract; 10.3.2 both before and after Completion the parties shall use their respective reasonable endeavours to obtain the consent of the Third Party to the assignment, or to procure the novation, of the Contract; 10.3.3 until the consent or novation is obtained, the Vendor shall at the sole cost of the Purchaser do all such acts and things as the Purchaser may reasonably require to enable due performance of the Contract and the Purchaser shall (if such sub-contracting is permissible and lawful under the Contract in question) as the Vendor's sub-contractor perform all the obligations of the Vendor under such Contract and the Vendor shall provide for the Purchaser all the benefits of the Contract (including enforcement at the cost and for the account of the Purchaser of any right of the Vendor against the other party to the Contract arising out of its termination by the Third Party or otherwise); and 10.3.4 if the arrangements in Clauses 10.3.2 and 10.3.3 cannot be made in respect of the Contract unless the parties otherwise agree the parties shall use their respective reasonable endeavours to procure that the Contract is terminated without liability to either of them and neither the Vendor nor the Purchaser shall have any further obligation to the other relating to the Contract. 10.4 On Completion the Granada Maintenance Contract shall be deemed to have terminated and save in respect of any accrued rights or obligations neither party shall have any rights or obligations in relation to the Granada Maintenance Contract to the other. 11. EMPLOYEES 11.1 The parties acknowledge and agree that the sale and purchase pursuant to this Agreement will constitute a relevant transfer for the purposes of the Transfer Regulations and that it will not operate so as to terminate any of the contracts of employment of the Employees and such contracts shall be transferred to the Purchaser pursuant to the Transfer Regulations with effect from the date of Completion. -14- 11.2 The Vendor undertakes to the Purchaser to fully indemnify and keep indemnified the Purchaser against all losses, damages, reasonable costs, actions, awards, penalties, fines, proceedings, claims, demand, liabilities (including without limitation any liability to taxation), and reasonable expenses (including, without limitation, legal and other professional fees and expenses) which the Purchaser may suffer, sustain, incur, pay or be put to by reason or on account of or arising from: 11.2.1 any claim or other legal recourse by all or any of the Employees in respect of any fact or matter concerning or arising from employment with the Vendor prior to the date of Completion; 11.2.2 any claim or other legal recourse by any trade union or staff association recognised by the Vendor or employee representatives in respect of all or any of the Employees arising from or connected with the failure by the Vendor to comply with its legal obligations to such trade union or staff association or employee representatives; 11.2.3 the employment or termination of employment prior to completion of any agent or contractor or employee of the Vendor (other than the Employees) whose employment is transferred to the Purchaser by the Transfer Regulations; and 11.2.4 any act or omission done or omitted to be done by the Vendor prior to completion in relation to the Employees or any other employee of the Vendor which by virtue of the Transfer Regulations is deemed to be an act or omission of the Purchaser. 11.3 If any contract of employment not disclosed to the Purchaser in the Disclosure Letter or in this Agreement shall have effect as if originally made between the Purchaser and any employee in relation to the Business as a result of the provisions of the Transfer Regulations: 11.3.1 the Purchaser may, upon becoming aware of the application of the Transfer Regulations to any such contract of employment terminate such contract or agreement forthwith; and 11.3.2 the Vendor shall indemnify and shall keep indemnified the Purchaser against all losses, damages, reasonable costs, actions, proceedings, claims, demands, liabilities (including, without limitations, any liability to taxation), and reasonable expenses (including, without limitation, legal and other professional fees and expenses) which the Purchaser may suffer, incur, sustain, pay or be put to by reason or on account of or arising out of such termination or arising from such contracts of employment before and after Completion if such is not terminated by the Purchaser. 11.4 The Purchaser undertakes to the Vendor to fully indemnify and keep indemnified the Vendor against all losses, damages, reasonable costs, actions, awards, penalties, fines, proceedings, claims, demand, liabilities (including without limitation any liability to taxation), and reasonable expenses (including, without limitation, legal and other professional fees and expenses) which the Vendor may suffer, sustain, incur, pay or be put to by reason or on account of or arising from any claim or other legal recourse by all or any of the Employees in respect of any fact or matter -15- concerning or arising from anything done or omitted to be done by the Purchaser after the date of Completion. 11.5 Without prejudice to the other provisions of this Clause, the Vendor shall, at its own expense, give the Purchaser such assistance as the Purchaser may reasonably require to contest any claim by any person employed in the Business at or prior to Completion resulting from or in connection with this Agreement. 12. VALUE ADDED TAX 12.1 The parties shall use their respective reasonable endeavours to secure that the transfer of the Assets under this Agreement is treated under the Value Added Tax (Special Provisions) Order 1992 as neither a supply of goods nor a supply of services. 12.2 Notwithstanding Clause 12.1 if value added tax is chargeable on the transfer of any of the Assets under this Agreement, the Purchaser shall (against delivery of tax invoices in respect of the Assets) pay the amount of the value added tax in addition to the consideration payable under Clause 3. 12.3 At Completion the Vendor shall deliver to the Purchaser all records referred to in section 49 of the VATA. After Completion the Vendor shall not make any request to H.M. Customs and Excise for the records to be taken out of the custody of the Purchaser. During the period for which the records are required to be preserved under paragraph 6 of Schedule 11 to the VATA (duty to keep records), the Purchaser shall give the Vendor reasonable access to the records for the purpose of inspecting the records and making copies of them. 13 POST-COMPLETION OBLIGATIONS 13.1 As from Completion until title in the Assets has effectively been vested in the Purchaser Prodac shall hold the Assets in trust for the Purchaser. 13.2 For a period of six years from Completion: 13.2.1 the Vendor shall procure that at all reasonable times during usual business hours the Financial Records held by it shall be open to the inspection of the Purchaser, its employees and agents and such other persons as may be authorised by the Vendor who may take such copies of those Financial Records as the Purchaser may reasonably require; 13.2.2 the Purchaser shall procure that at all reasonable times during usual business hours the Business Records held by it shall be open to the inspection of the Vendor its employees and agents and such other persons as may be authorised by the Purchaser who may take, such copies of those Business Records as the Vendor may require. 13.3 Each party shall forthwith pass to the other any payment, notice, correspondence, information or enquiry in relation to the Business or the Assets which it receives after Completion and which properly belongs to the other. -16- 13.4 Any monies due to any party which are received by any other party shall be paid forthwith to the party to which the monies are due. Pending payment the other party shall be deemed to hold the monies on trust for the party to which the monies are due. 14. CONFIDENTIAL INFORMATION 14.1 The Vendor shall: 14.1.1 not, and shall procure that no member of the Vendor's Group will, at any time after the date of this Agreement use or disclose to any person any Prodac Confidential Information or Prodac Know-How which may be within or may come to its knowledge; and 14.1.2 use its, and shall procure that each member of the Vendor's Group will use its, reasonable endeavours to prevent the disclosure of any Prodac Confidential Information or Prodac Know-How. 14.2 Clause 14.1 shall not apply to: 14.2.1 disclosure of any Prodac Confidential Information or Prodac Know- How to officers or employees of the Purchaser or the Vendor whose province it is to know about the Prodac Confidential Information or Prodac Know-How; 14.2.2 disclosure of any Prodac Confidential Information or Prodac Know- How required by law or any stock exchange; 14.2.3 disclosure of any Prodac Confidential Information or Prodac Know- How to any professional adviser; 14.2.4 any Prodac Confidential Information or Prodac Know-How which comes into the public domain otherwise than by breach of this Clause 14 by the Vendor; or 14.2.5 the continued use of any Prodac Confidential Information used by GmbH at the date of this Agreement for the purposes of its business. 14.3 The Purchaser shall not and shall procure that no member of the Purchaser's Group shall disclose to any person any GmbH Confidential Information of GmbH Know-How which may be written or may have come to its knowledge. 14.4 Clause 14.3 shall not apply to: 14.4.1 disclosure of any GmbH Confidential Information or GmbH Know-How to officers or employees of the Vendor or the Purchaser whose province it is to know about the GmbH Confidential Information or GmbH Know- How; -17- 14.4.2 disclosure of any GmbH Confidential Information or GmbH Know-How required by law or any stock exchange; 14.2.3 disclosure of any GmbH Confidential Information or GmbH Know-How to any professional adviser; 14.4.4 any GmbH Confidential Information or GmbH Know-How which comes into the public domain otherwise than by breach of this Clause 14 by the Purchaser; or 14.4.5 any GmbH Confidential Information or GmbH Know-How used by Prodac at the date of this Agreement for the purposes of the Business. 15. USE OF INTELLECTUAL PROPERTY RIGHTS 15.1 Save as otherwise provided in this Agreement the Vendor shall not in the Territory, and shall procure that no member of the Vendor's Group will, either alone or jointly with, through or as manager, adviser, consultant or agent for any person, directly or indirectly use in connection with any business which competes, directly or indirectly, with the Business as carried on at the date of this Agreement, any of the Intellectual Property Rights (in particular, any name including the word "Prodac") or use in that connection anything which is intended or is likely to be confused with, any of the Intellectual Property Rights provided that this Clause 15 shall not prevent GmbH from using the word "Prodac" or any of the Intellectual Property Rights which do not belong to Prodac in the Territory in connection with the supply of any Prodac Systems, goods, components, parts software or literature produced or sourced by GmbH where (subject to Clause 16.6) it is not directly or indirectly in competition with the Business. 15.2 To the extent that any Intellectual Property Rights are used or required to be used by Prodac in, or in connection with, the Business at the date of this Agreement and GmbH owns or has the right to use such Intellectual Property Rights then to the extent that GmbH has the right to grant the same GmbH grants to the Purchaser a non-exclusive, royalty free right to use the Intellectual Property Rights for the duration of any of the Customer Agreements (as amended, extended, novated or superseded from time to time). 16. FURTHER VENDOR'S UNDERTAKINGS 16.1 The Vendor shall not, and shall procure that no member of the Vendor's Group will nor any successor to its or their business other than the Business will for a period of three years after the date of this Agreement either alone or jointly with, through or as manager, adviser, consultant or agent for any person, directly or indirectly: 16.1.1 carry on, or be engaged, concerned or interested in, or assist, any business which competes, directly or indirectly, with the Business as carried on at the date of this Agreement in the Territory; 16.1.2 within the Territory in competition with the Business as carried on at the date of this Agreement either seek to procure orders from, or do business with, or procure directly -18- or indirectly any other person to procure orders from or do business with, any person who has been a customer of the Business at any time during the period of 12 months before the date of this Agreement; 16.3.1 in connection with any business competing with the Business carried on at the date of this Agreement engage, employ, solicit, or contact with a view to the engagement or employment by any person, any employee, officer or manager of the Business or any person who has been an employee, officer or manager of Business in the 12 months before the date of this Agreement in either case where the employee officer or manager either was as a part of his duties privy to Prodac Confidential Information or Prodac Know-How or would be in a position to exploit the trade connections of the Business provided that this Clause 16.1.3 shall not prevent the Vendor from employing Mr. Nicholas Reynell outside the hours of his Consultancy Agreement for the purpose of Prodac's business in the United Kingdom; 16.3.4 do or say anything which is harmful to the reputation of the Business or which may lead any person to cease to deal with the Business on substantially equivalent terms to those previously offered or at all. 16.2 The Vendor shall not, and shall procure that no member of the Vendor's Group will nor any successor to its or their business (other than the Business) will for the unexpired period of the relevant Customer Agreement either alone or jointly with, through or as manager, adviser, consultant or agent for any person, directly or indirectly in competition with the Business as carried on at the date of this Agreement in the Territory either seek to procure orders from, or do business with, or procure directly or indirectly any other person to procure orders from or do business with any party to the relevant Customer Agreement. 16.3 The intent of the parties is that each of Clause 16.1 and 16.2 and each sub-clause in Clause 16.1 shall constitute an entirely separate and independent restriction on the Vendor. 16.4 Within three months after Completion Prodac shall procure that its name is changed so as not to include the word "Prodac" or to suggest any connection with the Business. Prodac acknowledges the reputation and goodwill is attached to the name "Prodac" and that the Purchaser is acquiring all rights in that name pursuant to this Agreement in respect of its use in connection with the Business subject to the provision in Clause 15.1 and otherwise as set out in this Agreement. The Vendor shall not and shall procure that no member of the Vendor's Group will at any time after Completion, directly or indirectly, use, or authorise, encourage, allow or assist any person to use, any name or names identical or confusingly similar to "Prodac" in connection with any activity whatsoever which competes directly or indirectly with the Business in the Territory. 16.5 This Clause 16 shall not prevent GmbH from using the word "Prodac" in the Territory in connection with the supply of any goods, components, parts software or literature produced or sourced by GmbH where it is not directly or indirectly in competition with the Business. -19- 16.6 Without prejudice to any other provision of this Agreement, save for Clause 16.1.2 which shall apply in any event, nothing shall prevent GmbH from competing with the Purchaser and any successors in title of the Purchaser under the name "Prodac" (including a company with the name "Prodac") from such point in time (if any) after the expiration of 12 months from the date hereof at which the Purchaser shall have failed to acquire not less than 10 Prodac Systems from time to time in the immediately preceding period of 12 months. 17. ANNOUNCEMENTS 17.1 Subject to Clause 17.2, no public announcement, communication or circular concerning the transactions referred to in this Agreement shall be made or despatched at any time (whether before or after Completion) by either party without the prior written consent of the other (such consent not to be unreasonably withheld or delayed). 17.2 Where the announcement, communication or circular is required by law or any regulation or rule of any stock exchange it shall so far as is practicable be made by a party after consultation with the other party and taking into account the reasonable requirements (as to timing, contents and manner of making or despatch of the announcement, communication or circular) of the other party. 18. COMPETITION Notwithstanding any other provision of this Agreement, no provision of this Agreement, or of any agreement or arrangement of which it forms part, by virtue of which this Agreement, or any agreement or arrangement of which it forms part, is subject to registration under the Restrictive Trade Practices Acts 1976 and 1977 shall take effect until the day after the date on which particulars thereof have been furnished to the Director General of Fair Trading in accordance with the requirements of those Acts. 19. COSTS Except as otherwise expressly provided in this Agreement, each party shall pay its own costs of and incidental to the negotiation, preparation, execution and implementation by it of this Agreement and of all other documents referred to in it. 20. FURTHER ASSURANCE At any time (after Completion) the Vendor shall (at its cost) do and execute, or procure to be done and executed, all necessary acts, deeds, documents and things as may be reasonably requested of it by the Purchaser to give effect to this Agreement. 21. GENERAL 21.1 No variation of this Agreement or of any of the documents in the agreed form shall be valid unless it is in writing and signed by or on behalf of each of the parties. 21.2 The failure to exercise or delay in exercising a right or remedy under this Agreement shall not constitute a waiver of the right or remedy or a waiver of any other rights or remedies and no -20- single or partial exercise of any right or remedy under this Agreement shall prevent any further exercise of the right or remedy or the exercise of any other right or remedy. 21.3 The rights and remedies of the parties provided in this Agreement are cumulative and not exclusive of any rights and remedies provided by law. 21.4 The invalidity, illegality or unenforceability of any provision of this Agreement shall not affect or impair the continuation in force of the remainder of this Agreement. 21.5 Except to the extent that they have been performed and except as expressly provided in this Agreement the Warranties, indemnities, undertakings, and obligations contained in this Agreement shall remain in full force and effect notwithstanding Completion. 21.6 Nothing in this Agreement shall restrict or limit the general obligations at law of a party to mitigate any loss or damage which it may incur in consequence of a matter giving rise to a claim involving or relating to a breach of this Agreement. 22. ASSIGNMENT Neither party shall assign or transfer or purport to assign or transfer any of its rights or obligations under this Agreement except that the benefit of the Warranties may be assigned in whole or in part and without restriction by the person for the time being entitled to the benefit of the Warranties. 23. PROPERTY 23.1 Prodac hereby agrees that the Purchaser may occupy Prodac's premises at 25 Shenley Pavilions ("THE PREMISES") as licensee for a period of three months from 30 September 1996 ("THE LICENCE PERIOD"). 23.1 During the Licence Period: 23.2.1 Prodac shall be responsible for the rent and other sums payable pursuant to Prodac's lease of the Premises including for the avoidance of doubt the service charge and insurance premiums; 23.2.2 the Purchaser shall not knowingly do anything which may be in breach of the said lease (save for its occupation of the Premises as licensee). 23.3 At the end of the Licence Period: 23.3.1 the Purchaser shall vacate the Premises; and 23.3.2 if the Purchaser does not vacate the Premises at the end of the Licence Period then it shall refund to Prodac the rent and other sums payable pursuant to Prodac's lease of the Premises including for the avoidance of doubt the service charge and insurance premiums -21- from the end of the Licence Period up until the date that the Purchaser vacates the Premises. 23.4 For the avoidance of doubt the Purchaser may vacate the Premises at any time during the Licence Period whereupon the licence granted by this clause 23 shall forthwith cease and determine. 24. NOTICES 24.1 Any notice or other communication under or in connection with this Agreement shall be in writing and shall be delivered personally or sent by first class post pre-paid recorded delivery (and air mail if overseas) or by telefax, to the party due to receive the notice or communication as follows or such other address as either party may specify by notice in writing to the other: 24.1.1 GmbH and Prodac Address: Max-Planck-Strasse 38 D-50858 Koln Marsdorf Germany Fax No.: 00 49 22 34 21 5111 Addressed for the personal attention of: Reiner Kasbach; and Heinrich Wirt 24.1.2 Purchaser Address: Granada House Ampthill Road Bedford MK42 9QQ England Fax No: 01234 226600 Addressed for the personal attention of: The Company Secretary 24.2 In the absence of evidence of earlier receipt, any notice or other communication shall be deemed to have been duly given: 24.2.1 if delivered personally, when left at the address referred to in Clause 24.1; 24.2.2 if sent by first class mail other than air mail, three days after posting it; -22- 24.2.3 if sent by air mail, six days after posting it; and 24.2.4 if sent by telefax, on completion of its transmission during normal business hours on a Business Day if not sent on a Business Day at 10:00 a.m. on the next Business Day. 25. GOVERNING LAW AND JURISDICTION 25.1 This Agreement is governed by, and shall be construed in accordance with, English law. 25.2 Each party irrevocably agrees for the benefit of the Purchaser that the courts of England shall have exclusive jurisdiction to hear and determine any suit, action or proceedings, and to settle any disputes, which may arise out of or in connection with this Agreement (respectively, "PROCEEDINGS" and "DISPUTES") and, for such purposes, irrevocably submits to the jurisdiction of the courts of England. 25.3 Each party irrevocably waives any objection which it might at any time have to the courts of England being nominated as the forum to hear and determine any Proceedings and to settle any Disputes and agrees not to claim that the courts of England are not a convenient or appropriate forum. 25.4 Each party agrees that the process by which any Proceedings are begun in England or elsewhere may be served on the Vendor by being delivered in accordance with Clause 24. Nothing contained in this Clause 25.4 shall affect the right to serve process in any other manner permitted by law. 25.5 The submission to the jurisdiction of the courts of England shall not (and shall not be construed so as to) limit the right of the Purchaser to take Proceedings against the Vendor in any other court of competent jurisdiction, nor shall the taking of Proceedings by the Purchaser in any one or more jurisdictions preclude the Purchaser taking Proceedings in any other jurisdiction (whether concurrently or not) if and to the extent permitted by applicable law. 26. COUNTERPARTS This Agreement may be executed in any number of counterparts, each of which when executed and delivered shall be an original, but all the counterparts together shall constitute one and the same instrument. EXECUTED by the parties the day and year first above written. -23- SCHEDULE 1 EXCLUDED ASSETS 1. The Trade Debts and all cheques, bills, notes and securities for the Trade Debts. 2. Any cash in hand and at bank. 3. The Property. 4. The Trade Credits. 5. The Financial Records. 6. The Jaguar motor car in the possession of Mr. Scully. -24- SCHEDULE 2 EMPLOYEES
Name Position - ---- -------- Marlene Devonshire Administration Manager Jane Henstock Administrator John Clarke Service Engineer
-25- SCHEDULE 3 WARRANTIES 1. CAPACITY AND AUTHORITY 1.1 INCORPORATION AND EXISTENCE Prodac is a company duly incorporated and validly existing under English law. GmbH is a company duly incorporated and validly existing under German law. 1.2 POWER AND AUTHORITY 1.2.1 The Vendor has the legal right and full power and authority to execute and deliver, and to exercise its rights and perform its obligations under, this Agreement and all the documents which are to be executed at Completion. 1.2.2 Prodac has the legal right and full power and authority to carry on the Business. 1.3 CORPORATE ACTION All corporate action required by the Vendor validly and duly to authorise the execution and delivery of, and to exercise its rights and perform its obligations under, this Agreement and all other documents which are to be executed at Completion has been duly taken. 1.4 BINDING AGREEMENTS This Agreement constitutes, and the documents which are to be executed at Completion when executed will constitute, valid and binding agreements of the Vendor enforceable in accordance with their respective terms. 2. INFORMATION 2.1 GENERAL All information which has been given by the Vendor or its advisors to the Purchaser or its advisors in writing before and during the negotiations leading to this Agreement is true, complete and accurate in all respect and not misleading in any respect. 2.2 THE AGREEMENT AND THE DISCLOSURE LETTER The information set out in this Agreement and the Disclosure Letter (including any annexures to the Disclosure Letter) is true and accurate in all respect and not misleading in any respect. 3. ACCOUNTS 3.1 GENERAL 3.1.1 The Accounts have been prepared in accordance with the law and on a proper and consistent basis in accordance with generally accepted accounting standards, principles and practices in the United Kingdom. 3.1.2 No change in accounting policies has been made in preparing the accounts of the Vendor for each of the financial periods of Prodac ended on the Last Accounting Date, except as stated in the audited balance sheets and profit and loss accounts for these periods. -26- 3.1.3 The relevant Accounts show a true and fair view of the assets, liabilities, and the state of affairs of Prodac as at the Last Accounting Date and of the profits and losses or Prodac for the period ended on the Last Accounting Date. 3.2 PROVISION FOR DEBTS AND LIABILITIES Full disclosure of and adequate provisions for bad and doubtful debts and all liabilities (whether actual, contingent or otherwise) and all financial commitments in existence at the Last Accounting Date have been made in the relevant Accounts. 3.3 EXTRAORDINARY AND EXCEPTIONAL ITEMS The results shown by the audited profit and loss accounts of Prodac for each of the financial periods of Prodac ended on the Last Accounting Date have not (save as disclosed in those accounts) been affected by any extraordinary, exceptional or non-recurring item or by any other circumstance rendering the profits or losses for all or any of the periods covered by those accounts unusually high or low. 3.4 VALUATION OF STOCK AND LONG TERM CONTRACT BALANCES In the Accounts Stocks were valued in the same manner adopted in the preceding accounting periods and on the basis of the lower of cost or net realisable value. 3.5 DEPRECIATION The bases and rates of depreciation and amortisation adopted in the Accounts were the same as those adopted in the audited accounts of Prodac for the previous accounting periods. 3.6 MANAGEMENT ACCOUNTS The Management Accounts are substantially accurate insofar as they state the income arising in the Business during the period to which they relate and all expenses in that period directly relating to the Business and are not materially misleading in any respect. 3.7 RECORDS All the Records are in Prodac's possession or under its control, are fully and accurately completed in accordance with all applicable legal requirements and are up-to-date. 4. CHANGES SINCE THE LAST ACCOUNTING DATE 4.1 GENERAL Since the Last Accounting Date: 4.1.1 the Business has been carried on in the ordinary and usual course without interruption, in the same manner (including, without limitation, nature and scope) as in the year ended on the Last Accounting Date and so as to maintain the Business as a going concern; and 4.1.2 save as disclosed by the Management Accounts there has been no adverse change in the financial or trading position or prospects of the Business. -2- 4.2 SPECIFIC Since the Last Accounting Date: 4.2.1 Prodac has not, other than in the ordinary and usual course of the Business: (a) acquired or disposed of, or agreed to acquire or dispose of, any asset; (b) assumed or incurred, or agreed to assume or incur, any liability, expenditure or obligation; 4.2.2 Prodac has not factored, sold or agreed to sell, any of the Trade Debts; 4.2.3 the Business has not been materially and adversely affected by the termination, or any change in the terms, of any important agreement or by the loss of any customer or source of supply. 5. TAXATION 5.1 DISPUTES The Vendor is not involved in any dispute with the Inland Revenue or H.M. Customs and Excise or other appropriate fiscal authority concerning any matter likely to affect the Business or any of the Assets in any way. 5.2 STAMP DUTY All documents (other than those which have ceased to have any legal effect) to which the Vendor is a party and which relate to the Business have been duly stamped. 6. ASSETS 6.1 TITLE AND CONDITION 6.1.1 All the Assets are: (a) legally and beneficially owned by Prodac free from any Encumbrance; (b) where capable of possession, in the possession or under the control of Prodac; and (c) situated in the United Kingdom. 6.1.2 The Assets together with those items held on the Operation and Finance Leases comprise all the assets necessary or desirable for the Purchaser to carry on, fully and effectively, the Business as at present. 6.1.3 All the Tangible Assets are in good repair, condition and working order and none is dangerous, fails to provide the functions for which it was made, out-of-date, unsuitable or in need of renewal or replacement or surplus to the requirements of the Business. -29- 6.2 HIRE PURCHASE AND LEASED ASSETS Save as set out in the Disclosure Letter the Vendor is not a party to, or has any liability under, any lease or hire, hire purchase, credit sale or conditional sale agreement. 6.3 STOCKS 6.3.1 The Stocks are of merchantable quality. 6.3.2 None of the Stocks is or will be, defective when acquired by the Purchaser. 6.4 INTELLECTUAL PROPERTY 6.4.1 The Intellectual Property Rights are: (a) in full force and effect; (b) solely and beneficially owned by, or validly granted to, Prodac or GmbH, as the case may be, free from any licenses or Encumbrances, in either case, preventing the use in connection with the Business; and (c) not, and will not, be the subject of any claims or opposition from any employees or Prodac or GmbH as the case may be. 6.4.2 There are no registered Intellectual Property Rights used or required to be used in the Business. 6.4.3 There are and have been no proceedings, actions or claims, and no proceedings, actions or claims are pending or threatened or will arise, impugning the title, validity or enforceability of any of the Intellectual Property Rights or claiming any right or interest in any of the Intellectual Property Rights. 6.4.4 Prodac has not granted and is not obliged to grant any license, sub-license, assignment or any other rights in respect of any of the Intellectual Property rights. 6.4.5 There is, and has been, no infringement of any of the Intellectual Property rights. 6.4.6 The activities, processes, methods, products or services now or at any time employed, used, dealt in, or supplied, by Prodac in the Business; (a) are not now nor were they at the time employed, used, dealt in or supplied, subject to the licence, consent or permission of, or payment to, any third party; (b) do not now nor did they at the time employed, used, dealt in or supplied, infringe any Intellectual Property (including without limitation, moral rights) of any third party; and -29- (c) will not give rise to any claim. 6.4.7 To the best of the Vendor's knowledge, information and belief no party to any agreement relating to the use by the Vendor of any Intellectual Property Rights owned by a third party is, or has at any time been, in breach of the agreement. 6.4.8 Prodac is not a party to any confidentiality or other agreement which restricts or would restrict the free use or disclosure of any information relating to the Business by the Purchaser. 6.4.9 Prodac does not use, or otherwise carry on the Business under, any name other than Prodac. 6.5 EFFECT OF SALE The execution or performance of this Agreement and all other documents which are to be executed at Completion will not: 6.5.1 result in the Purchaser losing the benefit of any asset, license, right or privilege which Prodac presently enjoys or relieve any person from any obligation to Prodac; or 6.5.2 conflict with, or result in a breach of, any agreement or arrangement to which Prodac is a party. 7. CONTRACTS 7.1 TYPES OF CONTRACTS None of the Contracts: 7.1.1 was entered into otherwise than in the ordinary and usual course of the Business or (save for any agreement between Prodac and GmbH details of which are set out in the Disclosure Letter) by way of a bargain at arm's length; 7.1.2 is a sale or purchase option or similar agreement, arrangement or obligation affecting any of the Assets; 7.1.3 is an agreement, arrangement or obligation which cannot readily be fulfilled or performed by Prodac on time or without undue or unusual expenditure or money or effort; 7.1.4 is an agreement or arrangement whereby Prodac is a member of a joint venture, consortium, partnership or incorporated or incorporated association (other than bona fide trade associations); 7.1.5 is a distributorship, agency, franchise or management agreement or arrangement; 7.1.6 is an agreement or arrangement in respect of which: -3- (a) particulars have been furnished to the Director General of Fair Trading under the Restrictive Trade Practices Acts 1976 and 1977; (b) has been notified to the Commission of the European Communities for an exemption under Article 85(3) of the Treaty of Rome; or (c) an application has been made to the Commission of the European Communities for a negative clearance under Article 85 or 86 of the Treaty of Rome. 7.2 CONDITIONS AND WARRANTIES IN RESPECT OF GOODS OR SERVICES Save for any condition or warranty implied by law or contained in its standard terms of business or otherwise given in the ordinary and usual course of business, Prodac has not given any condition or warranty, or made any representation, in respect of good or services supplied or agreed to be supplied by it or accepted any obligation that could give rise to any liability after the goods or services have been supplied by it. 7.3 ASSIGNMENT AND NOVATION Details of any permission or consent required for the assignment or novation of the Contracts to the Purchaser are set out in the Disclosure Letter. 7.4 DETAILS OF CONTRACTS True, complete and accurate details of each Contract has been supplied to the Purchaser. 7.5 DISPUTES None of the parties to any Contract is in breach of the Contract and no Contract is subject to any dispute or claim nor are there any circumstances existing known to Prodac which might give rise to any dispute or claim. 7.6 AMENDMENT, TERMINATION AND INVALIDITY 7.6.1 Prodac has not received notice of any actual or intended amendment to the prices or other terms of any Contract. 7.6.2 None of the parties to any Contract has given any notice of its intention to terminate, or has otherwise sought to repudiate or disclaim, the Contract. 7.6.3 Prodac has no knowledge of the invalidity or unenforceability of, or grounds for rescission, avoidance or repudiation of, any Contract. 7.7 SET OFF AND COUNTERCLAIM None of the parties to any Contract is entitled to exercise any set off or counterclaim or delay or withhold payment of any monies falling due under the Contract or to effect payment to any party other than the party specified in the Contract or otherwise to perform its obligations in a manner at variance to that provided in the Contract. -31- 8. TERMS OF TRADE AND BUSINESS 8.1 CREDITORS Prodac has paid its creditors within the times agreed with the creditors and there are no debts owing by it which have been due for more than four weeks. 8.2 SUPPLIERS AND CUSTOMERS 8.2.1 During the 12 months ending on the date of this Agreement not substantial customer or supplier of the Business has: (a) ceased, or indicated an intention to cease, trading with or supplying the Business; (b) reduced, or indicated an intention to reduce, substantially its trading with or supplies to the Business; or (c) changed, or indicated an intention to change, substantially the terms on which it is prepared to trade with or supply the Business (other than normal price and quota changes). 8.2.2 To the best of Prodac's knowledge information and belief without making enquiries no substantial customer or supplier of the Business is likely to: (a) cease trading with or supplying the Business; (b) reduce substantially its trading with or supplies to be Business; or (c) change the terms on which it is prepared to trade with or supply the Business (other than normal price and quota changes). 8.2.3 Prodac has not entered into any agreement or arrangement with any customer or supplier of the Business on terms materially different to any of its standard terms of business, copies of which are contained in the Disclosure Bundle. 8.3 LICENSES, AUTHORISATIONS AND CONSENTS 8.3.1 Prodac has obtained all licenses, authorisations and consents required for the proper carrying on of the Business and any such licenses, authorisations and consents are valid and subsisting and are freely transferable to the Purchaser. 8.3.2 Prodac is not in breach of any licenses, authorisations or consents and there are no circumstances which indicate that any of them may be revoked or not renewed, in whole or in part. 8.4 COMPUTER RECORDS None of the records, systems, data or information of the Business are recorded, stored, maintained, operated or otherwise wholly or partly dependent on or held or accessible by any -32- means (including without limitation, any electronic, mechanical or photographic process whether computerised or not) which are not included amongst the Assets. 9. EMPLOYEES 9.1 GENERAL 9.1.1 There is not in existence any service agreement with any of the Employees which cannot be terminated by three months' notice or less without giving rise to any claim for damages or compensation (other than a statutory redundancy payment or statutory compensation for unfair dismissal) and Prodac has not received notice of resignation from any of the Employees. 9.1.2 Full particulars are contained in the Disclosure Letter of: (a) the name, date of commencement of employment, period of continuous employment, salary and other benefits, grade, and age, of each of the Employees and where any of the Employees is continuously absent from work for a period in excess of one month, the reason for the absence; (b) the terms of each service agreement of each of the Employees; and (c) the terms of all consultancy agreements with Prodac relating to the Business. 9.1.3 The basis of the remuneration payable to the Employees is the same as that in force at the Last Accounting Date and Prodac is not obliged to increase nor has it made any provision to increase the aggregate annual remuneration payable to the Employees by more than five per cent, or to increase the rates of remuneration of any of the Employees save as disclosed in the Disclosure Letter. 9.1.4 There are no amounts owing to any of the Employees or former employee of the Business other than remuneration accrued due or for reimbursement of business expenses. 9.1.5 There is no agreement or arrangement between Prodac and any of the Employees or former employees of the Business with respect to his employment, his ceasing to be employed or his retirement which is not included in the written terms of his employment or previous employment (as the case may be). 9.1.6 Prodac has maintained current, adequate and suitable records regarding the service of each of the Employees (including where appropriate, without limitation, details of terms of employment, payments of statutory sick pay, statutory maternity pay, disciplinary and health and safety matters, income tax and social security contributions). -33- 9.2 PAYMENTS ON TERMINATION Except as disclosed in the Accounts: 9.2.1 no liability has been incurred by Prodac for breach or termination of any service agreement with any of the Employees including, without limitation, redundancy payments, protective awards, compensation for wrongful dismissal, or unfair dismissal or failure to comply with any order for the reinstatement or re-engagement of any of the Employees; and 9.2.2 Prodac has not made or agreed to make any payment or provided or agreed to provide any benefit to any of the Employees or former employees of the Business or any dependent of any of the Employees or former employees in connection with the actual or proposed termination or suspension of employment or variation of any service agreement of any of the Employees or former employees. 9.4 COMPLIANCE WITH RELEVANT LEGISLATION To the best of the Vendor's knowledge information and belief Prodac has not failed to comply with: 9.3.1 any obligations imposed on it by, and all orders and awards made under, all statutes, regulations, codes of conduct and practice, collective agreements, customs and practices relevant to the relations between it and the Employees or any trade union or the terms of employment of the Employees; and 9.3.2 any recommendations made by the Advisory Conciliation and Arbitration Service and with all awards and declarations made by the Central Arbitration Committee. 9.4 REDUNDANCIES AND TRANSFER OF BUSINESS Within the period of one year ending on the date of this Agreement Prodac has not: 9.4.1 given notice of any redundancies to the relevant Secretary of State 9.4.2 been a party to any relevant transfer as defined in the Transfer of Undertakings (Protection of Employment) Regulations 1981 nor has Prodac failed to comply with any duty to inform and consult any trade union under those Regulations. 9.5 TRADE UNIONS 9.5.1 Prodac has no agreement or arrangement with any trade union or other body representing any of the Employees and Prodac does not recognise any trade union or other body representing any of the Employees for negotiating purposes. 9.5.2 Prodac is not involved in, and there are no circumstances likely to give rise to, any industrial or trade dispute or negotiation regarding a claim of material importance with any trade union or other body representing any of the Employees. -34- 9.6 INCENTIVE SCHEMES Prodac does not have in existence nor is it proposing to introduce any share incentive, share option, profit sharing, bonus or other incentive scheme for any of the Employees. 9.7 TRAINING There is no training scheme, arrangement or proposal in existence at the date of this Agreement in relation to the Business nor has there been any training scheme, arrangement or proposal in the past in respect of which a levy may in the future become payable by Prodac under the Industrial Training Act 1982. 10. INSOLVENCY 10.1 No order has been made or petition presented or resolution passed for the winding up of Prodac or for the appointment of a provisional liquidator to Prodac or for an administration order in respect of Prodac. 10.2 No receiver or receiver and manager has been appointed by any person of the whole or any part of the business or assets of Prodac. 10.3 No voluntary arrangement has been proposed under section 1 of the Insolvency Act 1986 in respect of Prodac and no compromise or arrangement has been proposed, agreed to or sanctioned under section 425 of the Companies Act 1985 in respect of Prodac. 10.4 Prodac has not stopped paying its debts as they fall due. 10.5 No distress, execution or other process has been levied on any of the Assets. 10.6 There is no unfulfilled or unsatisfied judgment or Court order outstanding against Prodac. 11. PENSIONS AND OTHER BENEFITS Prodac is not and has not been party to and does not contribute nor has it contributed to any retirement benefit scheme as defined in Section 611 of the Income and Corporation Taxes Act 1988 or to any personal pension scheme as defined in Section 630 of the Income and Corporation Taxes Act 1988 or to any other scheme, arrangement or agreement (whether legally enforceable or not) for the provision of any relevant benefits as defined in Section 612(1) of that Act or any like benefits. 12. LITIGATION AND COMPLIANCE WITH LAW 12.1 LITIGATION 12.1.1 Save for the Dispute neither Prodac nor any person for whose acts or defaults Prodac may be vicariously liable is involved, or has during the two years ending on the date of this Agreement been involved, in any civil, criminal, arbitration or other proceedings in relation to the Business or any of the Assets and no civil, criminal, arbitration or other proceedings are pending, or threatened, by or against Prodac or any person for whose acts or defaults Prodac may be vicariously liable. -35- 12.1.2 To the best of the knowledge, information and belief of Prodac without making any enquiries no fact or circumstance exists which is likely to give rise to any civil, criminal, arbitration or other proceedings involving Prodac or any person for whose acts or defaults Prodac may be vicariously liable. 12.1.3 There is no outstanding judgment, order, decree, arbitral award or decision of any court, tribunal, arbitrator or governmental agency against Prodac or any person for whose acts or defaults Prodac may be vicariously liable. 12.2 COMPLIANCE WITH LAW Prodac has conducted the Business in all material respects in accordance with all applicable legal and other requirements. 12.3 INVESTIGATIONS There have been and are no governmental or other investigations or enquiries or disciplinary proceedings concerning the Business; none are pending or threatened; and to the best of the knowledge, information and belief of Prodac no fact or circumstance exists which is likely to give rise to any such investigation, enquiry or proceedings. 12.4 UNLAWFUL PAYMENTS Neither Prodac nor any person for whose acts or defaults Prodac without making any enquiry may be vicariously liable has: 12.4.1 induced any person to enter into any agreement or arrangement with Prodac by means of any unlawful or immoral payment, contribution, gift, or other inducement; 12.4.2 offered or made any unlawful or immoral payment, contribution, gift or other inducement to any government official or employee; or 12.4.3 directly or indirectly made any unlawful contribution to any political activity. -36- SCHEDULE 4 CONSIDERATION
ASSET AMOUNT PAYABLE ON COMPLETION The Contracts other than the (Pounds)1 Operating and Finance Leases The Operating Leases (Pounds)1 The Finance Leases (Pounds)125,531 The Customer Agreements (Pounds)19,463 The Goodwill (Pounds)9,900 The Intellectual Property Rights (Pounds)1 The Tangible Immoveable Assets (Pounds)100 The Tangible Moveable Assets (Pounds)22,900 (including those at Linton Lodge) The Know How (Pounds)100 The Hotel Billing System (Pounds)9,500 The Records (Pounds)1 Sums from third parties or insurers (Pounds)1 (Clause 2.1.9) All other property or assets (Clause (Pounds)1 2.1.10) TOTAL (Pounds)187,500
-37- SCHEDULE LIMITATIONS ON WARRANTIES 1. DEFINITIONS AND INTERPRETATIONS 1.1 In this Schedule the following words and expressions shall have the following meanings namely: "Claim" a claim by the Purchaser in respect of the Warranties "Liability" the liability of the Vendor for a Claim 1.2 The headings used in this Schedule shall not affect its interpretation 2. GENERAL The provisions of this Schedule shall operate to limit the Liability and Clause 6 and Schedule 3 of this Agreement which shall be subject to and as qualified by the terms of this Schedule. 3. MAXIMUM CLAIMS The aggregate Liability and for all legal and other costs in respect of Claims shall be the sum of (Pounds)187,500. 4. PROVISION IN PRINCIPAL ACCOUNTS No Liability shall in any event arise to the extent that the particular subject matter of the relevant Claim is provided for in the Accounts and/or the Notes thereto and/or the Directors' Report and/or the auditors' report. 5. INSURANCE In respect of any matter covered in whole or in part by any insurance policy the Purchaser shall procure that a Claim is notified to the relevant insurer and to the extent that the Purchaser recovers any loss suffered by it under such insurance shall give credit to the Vendor for the amount so recovered less all reasonable costs and expenses properly incurred by the Purchaser in making such recovery. 6. RECOVERIES Any Liability shall be reduced by the amount of any recoveries which have been or subsequently are actually received or obtained by the Purchaser from any third party responsible or partly responsible for the act matter or circumstances giving rise to the relevant breach of Warranties or Claim and which are directly referable to the relevant Claim less all reasonable costs and expenses properly incurred by it or on behalf of the Purchaser in making such recovery. If any recovery is made after the Vendor has made payment to the Purchaser in respect of any such Liability the Purchaser shall forthwith refund or procure that there is forthwith refunded to the Vendor, the amount of such recovery less all reasonable costs and expenses properly incurred by it in making such recovery. -38- 7. LIMITATION OF REMEDY The remedy of the Purchaser for a Claim shall be in damages only and following Completion nothing herein contained or elsewhere shall entitle the Purchaser to rescind this Agreement. 8. REMEDIABLE BREACHES A breach of the Warranties which is remediable shall not entitle the Purchaser to make any Claim unless the Vendor is given written notice thereof and the same is not remedied to the reasonable satisfaction of the Purchaser by the Vendor without cost to or obligation upon the Purchaser within 45 days after the date of receipt of such notice. Provided always that this paragraph 8 shall not operate to avoid a Claim in respect of which a notice has been given in accordance with this paragraph before the relevant Claim Date. 9. MISCELLANEOUS If there shall be any conflict or ambiguity as between the provision of this Schedule and remainder of this Agreement then the relevant provisions of this Schedule shall prevail. -39- SCHEDULE 6 PRO FORMA
(Pounds) (Pounds) Rental Income (Note 2) x LESS: REBATES (x) ---- TURNOVER (Note 1) x --------- Leasing x Depreciation x Commission x Royalties x Cassettes x Film Programmers x Entertainment Guides x Service x Freight x Repair Stock x Insurance x Cost of Sales (Note 1) x - Gross Margin (Note 1) x Overheads (Note 3) x - net profit or net loss +/- x - Notes (1) Headings and content will be as per Management Accounts reference FCONSOL.XLS. (2) Where Rental Income billed on a Monthly Basis apportionment to be made on a days expired basis. (3) Management Fees x Less: Costs re: Disposal (x) x Technical Costs x Salaries x Office Expenses x Less Rent x Rates (x) 40 Service Charge (x) x Travel and Subsistence x
-40-
Insurance x Overheads x ---------
-41- Signed by ) for and on behalf of ) /s/ Authorized signature PRODAC PROZESSDATENTECHNIK GmbH: ) /s/ Authorized signature Signature - ------------------------------------------- Signed by ) for and on behalf of ) /s/ Authorized signature PRODAC HOTELVIDEO ) /s/ Authorized signature COMMUNICATIONSYSTEMS LIMITED: Signature /s/ Authorized signature - ------------------------------------------- Signed by for and on behalf of UK CONSUMER ELECTRONICS LIMITED: Signature /s/ Authorized signature - ------------------------------------------- -42- EX-10.43 19 SUPPLY AGREEMENT WITH UK LIMITED EXHIBIT 10.43 DATED 1996 - -------------------------------------------------------------------------------- (1) PRODAC POZESSDATENTECHNIK GmbH AND (2) UK CONSUMER ELECTRONICS LIMITED ---------------------------- SUPPLY AGREEMENT ---------------------------- - -------------------------------------------------------------------------------- Dibb Lupton Alsop 125 London Wall London EC2Y 5AE Tel: 0345 26 27 28 Fax: 0171 600 1727 1 -------------------------------------------------------------------- [***] Confidential treatment requested pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission.
CONTENTS 1. INTERPRETATION........................................................ 1 2. SALE OF THE PRODUCTS.................................................. 2 3. TERMS OF BUSINESS..................................................... 2 4. SPECIFICATION OF THE PRODUCTS......................................... 3 5. PROGRESS AND INSPECTION............................................... 4 6. DESPATCH.............................................................. 4 7. DESPATCH DELAY, SHORTAGES AND SURPLUSES............................... 5 8. PASSING OF PROPERTY AND RISK TO THE CUSTOMER.......................... 5 9. PACKAGING AND MARKING................................................. 5 10. WARRANTY.............................................................. 6 11. TRAINING AND COMMERCIAL AND TECHNICAL ASSISTANCE...................... 6 12. ENHANCEMENTS AND DEVELOPMENTS......................................... 7 13. CUSTOMER SUPPLIER MATERIALS........................................... 7 14. AVAILABILITY OF SPARE PARTS........................................... 7 15. SERVICE MANUALS....................................................... 7 16. PATENT RIGHTS......................................................... 8 17. COMPLIANCE............................................................ 8 18. CONFIDENTIALITY....................................................... 8 19. DURATION AND TERMINATION.............................................. 8 20. FORCE MAJEURE......................................................... 9 21. ENTIRE AGREEMENT...................................................... 10 22. WAIVER OF RIGHTS BASED ON MISREPRESENTATION........................... 10 23. ASSIGNMENT............................................................ 10 24. NO PARTNERSHIP........................................................ 11 25. COSTS AND EXPENSES.................................................... 11 26. INVALIDITY............................................................ 11 27. EXECUTION............................................................. 11 28. AMENDMENT AND WAIVER.................................................. 11 29. LAW AND JURISDICTION.................................................. 11 30. NOTICES............................................................... 12 31. SURVIVORSHIP.......................................................... 12 32. RESTRICTIVE TRADE PRACTICES ACT....................................... 12 33. CONSEQUENTIAL LOSS.................................................... 12 SCHEDULE 1--The Products and the Price List................................ 14 SCHEDULE 2--The Specification.............................................. 15 SCHEDULE 3--Warranties..................................................... 17
-i- THIS AGREEMENT is made on _____________________,1996 BETWEEN: (1) PRODAC PROZESSDATENTECHNIK GMBH, a company incorporated in Germany of Max- Planck-Strasse 38 D-50858 Koln Germany ("the Supplier"); and (2) UK CONSUMER ELECTRONICS LIMITED, a company incorporated in England and Wales (registered no. 532857), whose registered office is at Granada House, Ampthill Road, Bedford MK32 9QQ, England ("the Customer"). RECITALS (A) The Supplier carries on the business of, inter alia, manufacturing and selling the Products. (B) The Supplier and the Customer wish to ensure continuity of supply and orders for the Products and have agreed to enter into this Agreement on the terms set out below. (C) The Supplier has agreed to supply the Products to the Customer, inter alia, to be incorporated into the finished Products by Manufacturers, as appointed by the Customer, to be used for or in respect of the Customer's business from time to time. The Supplier undertakes to liaise and/or co- operate with all the relevant parties as necessary to achieve this. 1. INTERPRETATION 1.1 In this Agreement, unless the context requires otherwise: "COMMISSIONING" means the acceptance by a customer of the Customer after installation of a Prodac System; "CONSEQUENTIAL LOSS" means liability in respect of loss of profits, goodwill or any type of special indirect or consequential loss (including loss or damage suffered as a result of action brought by a third party) other than any liability for death or injury arising from negligence; "FINISHED PRODUCTS" means the television sets into which the Prodac Boards are, from time to time, incorporated which constitute part of the Prodac System; "PRODAC BOARDS" means a device which when fitted to a television set enables the Prodac System to provide in-house pay for view films and hotel information services; "PRODAC SYSTEM" means the pay for view systems and hotel information systems supplied by the Supplier from time to time; "PRODUCTS" means the products set out in Schedule 1 and all enhancements, modifications, developments and improvements to them together with equipment, parts or services not readily obtainable from a source other than the Supplier; and "SPECIFICATION" means the specification of the Products set out in Schedule 2 or any other specification agreed in writing between the parties. 1.2 Reference to a clause, sub-clause, paragraph or schedule is to a clause, sub-clause, paragraph or schedule of or to this Agreement, unless the context requires otherwise. 1.3 Reference to any gender includes the other genders and words denoting the singular include the plural and vice versa unless the context requires otherwise. Reference to a "person" includes any individual, firm, unincorporated association or body corporate. 1.4 Reference to a statutory provision includes a reference to that statutory provision as from time to time amended, extended or re- enacted and any regulations made under it. 1.5 The headings in this Agreement are for ease of reference only and shall not affect its construction or interpretation. 2. SALE OF THE PRODUCTS During the continuance of this Agreement the Supplier shall sell and the Customer shall purchase such quantities of the Products as may be ordered by the Customer from time to time in accordance with the terms of this Agreement. 3. TERMS OF BUSINESS 3.1 All purchases of the Products by the Customer, including the purchases of 46 Prodac Systems for installation in various Moat House hotels plus 2 spare Prodac Systems for such hotels, shall be in accordance with this Agreement. Any terms and conditions of sale and/or purchase of the Supplier and/or the Customer shall not apply. 3.2 The Products shall be sold by the Supplier to the Customer at the agreed prices set out in Schedule 1. The prices of the Products as listed in Schedule 1 will be reviewed by both parties annually in accordance with the latest available German Retail Price Index ("RPI") figures but the Supplier shall have the right to increase the prices of the Products from time to time by more than the prices as so reviewed to the extent that the increase in the cost to the Supplier of supplying the relevant Product exceeds the increase provided by increasing the price in accordance with the latest RPI. 3.3 Spare parts shall be sold by the Supplier to the Customer on the basis of the Supplier's price list for the time being. -2- 3.4 All prices for the Products exclude postage, carriage, freight, insurance, handling charges, import duties, value added tax or other applicable sales tax but include packaging unless agreed, at the time of ordering, with the Customer. 3.5 Orders for the Products shall be given by the Customer to the Supplier in writing. 3.6 The Customer shall pay the Supplier for all Products sold and despatched to the Customer at the end of the month following the month in which the relevant invoice is received. The Supplier is entitled to interest at an annual rate of 2 per cent above the bank rate of the Deutsche Bundesbank valid at the time from the due date of payment (accruing on a daily basis) in relation to Products despatched to the Customer and in relation to which there is no dispute (save where the dispute is resolved in favor of the Supplier in which case interest shall be payable). 3.7 The Supplier shall allow the customer such discount for prompt payment or otherwise as the Supplier may from time to time notify to the Customer provided that the Customer is not then in breach of any of the terms of this Agreement. 4. SPECIFICATION OF THE PRODUCTS 4.1 All Products sold by the Supplier to the Customer pursuant to this Agreement shall conform in all respects to the Specification (including, without limitation, as to quality and description) and the Customer shall be entitled to reject any of the Products which are not in accordance with the Specification. Immaterial faults which do not affect the functionality of the Products despatched do not entitle the Customer to refuse acceptance. The Supplier shall make good free of charge to the Customer any loss or damage to or defect in the Products (save in the extent that the Customer has a valid insurance claim in respect of the loss) where notice is given by the Customer within 30 days from despatch to the Customer. 4.2 The Supplier shall consult with the Customer from time to time during the continuance of this Agreement with a view to updating the Specification so as to ensure that it continues to be viable. 4.3 If a significant number of the Products fail to meet the Specification or differ from samples previously approved or present a fire hazard or risk of harmful radiation or electrical shock or other injury or damage (a "Relevant Problem") the Customer may instruct the Supplier in writing to suspend despatch. Despatch may not be recommenced without the prior permission of the Customer which shall not be unreasonably withheld or delayed where the Relevant Problem has been rectified. 4.4 The Supplier shall as soon as reasonably practicable notify the Customer in writing of any proposed changes, improvement, enhancements or modifications to the Products of which it has knowledge. The Supplier shall not, save in respect of any component -3- which performs an identical function, make any such change, improvement, enhancement or modification where the Customer shall have objected in writing to the Supplier within 30 days after receipt of the notification from the Supplier. 4.5 When requested in writing the Supplier shall supply samples of any proposed new Products, changes, improvements, enhancements or modifications to the Customer for its approval (such approval not to be unreasonably withheld or delayed) prior to production of the full quantity ordered. 5. PROGRESS AND INSPECTION 5.1 The Customer shall have the right to inspect all the Products at the Supplier's works at all reasonable times and reject any of the Products that do not comply with the terms of this Agreement. 5.2 Any such inspection, checking, approval or acceptance made or given by or on behalf of the Customer shall not relieve the Supplier or his sub-contractors from any obligation under this Agreement. 6. DESPATCH 6.1 The Customer shall consult from time to time with the Supplier concerning the Customer's likely demand for the Products and expected requirement for times of despatch. The Customer shall notify the Supplier of any prospective order for Products as soon as is reasonably practicable. The parties shall use all reasonable endeavors to agree a mutually satisfactory date for despatch of the Products which enables the Customer to satisfy any prospective orders and, in the absence of any such agreement, the date of despatch shall be as soon as reasonably practicable having due regard, in the normal course of events, to the capacity of and the lead time for the Supplier to manufacture or source the Products. Any alteration to the date of despatch must be agreed to by each of the parties. 6.2 The Supplier shall furnish such programmes of manufacture and despatch as the Customer may reasonably require and the Supplier shall give notice to the Customer as soon as practicable if such programmes are or are likely to be delayed. 6.3 The Products must be despatched to the delivery point(s) within the Territory specified in the Customer's order unless a different delivery point(s) is subsequently agreed. 6.4 Where the Customer's order states that the time and delivery point should be obtained from the Customer prior to despatch, the Supplier must so inform any carrier accordingly. -4- 6.5 As well as any documentation required by law or for the carriage of the Products across international borders, all the Products must be accompanied by a despatch note clearly showing the Customer's order number and batch numbers of the products and a full description of the Products supplied including both the Supplier's part number(s) and the Customer's part number(s) (if any). 6.6 The Supplier is entitled to despatch a consignment in several batches and to invoice these separately. 7. DESPATCH DELAY, SHORTAGES AND SURPLUSES 7.1 Time of despatch shall be of the essence. 7.2 Subject to the provisions of Clause 20, without prejudice to the Customer's other rights the Customer reserves the right to cancel either the whole or the unexecuted part of the order if unexecuted within the time determined in accordance with the provisions of Clause 6.1 unless agreed otherwise. 7.3 Should the Supplier's failure to despatch by the due date necessitate deliveries by special transport, all additional carriage charges shall be for the Supplier's account unless agreed otherwise. 7.4 The Customer reserves the right to return to the Supplier at the Supplier's expense, any of the Products despatched in excess of the quantities specified in the Customer's order, or in excess of despatch schedules previously agreed. 7.5 The Supplier shall give notice to the Customer in writing as soon as practicable in the event that the time of despatch is or is likely to be delayed. 8. PASSING OF PROPERTY AND RISK TO THE CUSTOMER 8.1 The property and risk in the Products shall remain with the Supplier until they leave the Supplier's premises. 8.2 The Supplier shall be obliged to arrange the insurance of the Products at the expense of the Customer for the period from when the Products leave the Supplier's premises up to and including when they are delivered to the delivery point. 9. PACKAGING AND MARKING 9.1 The Products must be clearly labeled and suitably packaged to avoid damage in transit and afford reasonable protection for safe storage by or on behalf of the Customer. -5- 9.2 All information, held by or reasonably available to the Supplier, regarding any hazards or potential hazards known or believed to exist in the transport, handling or use of the Products supplied shall be communicated to the Customer by the Supplier in writing prior to despatch. 10. WARRANTY 10.1 The Supplier shall warrant all the Products, whether in relation to workmanship, software or materials, to be free of defects for a period of: (i) six months from the date of Commissioning in the case of Products other than spare parts; and (ii) eight months from despatch in the case of spare parts. In the event of such defects being notified to the Supplier within the relevant period, the Supplier will at the Supplier's option replace or repair (within a reasonable time) the Products that are defective at no charge to the Customer provided that the Customer shall have first returned any defective Product to the Supplier at the sole cost of the Supplier subject to the means of return being appropriate in all the circumstances. 10.2 In the event of any epidemic failure within 40 months of Commissioning the Supplier shall meet the Customer's full costs (material and labor) in adjusting, repairing, modifying or replacing components in all the Products which have so failed or which in the Customer's reasonable opinion are likely to fail provided that the Supplier shall have been given a reasonable opportunity of adjusting, repairing, modifying or replacing such components. For the purpose of this clause, epidemic failure shall be defined as a recurrence of the same fault or component failure within a three month period at a rate of 5% per annum or more of the total quantity of the Products or goods of the same type, purchased by the Customer from the Supplier (fair wear and tear excepted). 10.3 The Customer shall notify the Supplier of Commissioning on or before seven days after Commissioning. 11. TRAINING AND COMMERCIAL AND TECHNICAL ASSISTANCE 11.1 The Supplier shall from time to time during the term of this Agreement, at the request of the Customer render to the Customer free of charge (save as specified below) adequate training and commercial and technical assistance in connection with the Products. 11.2 Any training course which takes place otherwise than (i) at the premises of the supplier; or (ii) at any other place in Koln shall be at the cost of the Customer to be agreed in advance by the Supplier and the Customer. -6- 12. ENHANCEMENTS AND DEVELOPMENTS 12.1 The Supplier shall endeavor to maintain the Products' competitive edge in the market. The Customer shall notify the Supplier of any suggestions to reduce costs or increase productivity. 12.2 It is acknowledged by both parties that enhancements to the technology of the Prodac System may be necessary in the future. The Customer shall notify the Supplier when such need arises in order to provide the Supplier with the first opportunity to respond to it. Nothing in this Agreement shall prevent the customer from time to time developing or using any other pay for view system or hotel information systems. 13. CUSTOMER SUPPLIER MATERIALS 13.1 The Supplier shall be responsible for any property which the Customer may provide to the Supplier in connection with the Customer's order and shall indemnify the Customer against loss or damage to such property. This shall also apply to any tooling wholly or partially paid for by the Customer. The Supplier shall clearly mark all such property as the property of the Customer and shall submit stock returns thereof as and when requested by the Customer. 13.2 The Supplier must advise the full name and address of the contact to whom items are to be sent and the despatch date by which they are required. 14. AVAILABILITY OF SPARE PARTS 14.1 The supplier shall undertake to make available spare parts replacements and upgrades of the Products as reasonably required by the Customer for at least seven years from the date of the last Commissioning provided that the supplier shall make available to the Customer such spare parts replacements and upgrades as the Customer may order within the three month period immediately before the end of such seven year period. 14.2 Spare parts ordered by the Customer for despatch to any nominated United Kingdom address must be despatched within a six week period from receipt of order by the Supplier. 15. SERVICE MANUALS Where applicable and agreed, the Supplier shall supply as agreed quantities of service manuals and broadsheets free of charge and ensure that these are available prior to first despatch of the Products. Any service manuals and broadsheets shall be in English. -7- 16. PATENT RIGHTS The Supplier shall indemnify the Customer against any cost, damage, expense or claim in respect of letters patent, registered design, trade mark or copyright caused by or arising out of the use or sale of the Products or any article or material supplied by the Supplier to the Customer. 17. COMPLIANCE The Supplier and the Customer mutually undertake to comply with all legislation, directives and regulations relating to the provision and use of electrical appliances, software, goods and services applicable in the European Community and the United Kingdom. 18. CONFIDENTIALITY 18.1 Each of the parties to this agreement undertakes to the other to keep confidential all information (written or oral) concerning the business and affairs of the other which it has obtained or received as a result of discussions leading up to the entering into of this agreement or which it has obtained during the course of this agreement except any information which is: 18.1.1 trivial or obvious; 18.1.2 already in its possession other than as a result of a breach of this clause 18; or 18.1.3 in the public domain other than as a result of a breach of this clause 18. 18.2 Each of the parties undertakes to the other to take all such steps as shall from time to time be necessary to ensure compliance with the provisions of this clause 18 by its employees, agents and subcontractors. 19. DURATION AND TERMINATION 19.1 This agreement shall commence on 1 October 1996 and, subject to the provisions of this clause 19 and Clause 14, shall continue for a period of three years from the date of this Agreement and thereafter, unless or until terminated by either party giving to the other not less than three calendar months' notice in writing. 19.2 Without prejudice to the foregoing, either party may terminate this Agreement immediately by notice in writing to the other party if any of the following events occurs: -8- 19.2.1 that the other party has committed a material breach of this Agreement which, in the case of a material breach capable of remedy, has not been remedied within 30 days of the receipt by such other of a notice specifying the material breach and requiring its remedy; 19.2.2 an order is made or a resolution is passed for the winding up of the other party except in the case of a voluntary winding up for the purposes of a scheme of reconstruction or amalgamation, the terms of which shall previously have been approved in writing by the other party; 19.2.3 an administrative order is made or a petition for such an order is presented in respect of the other party; 19.2.4 a receiver (which expression shall include an administrative receiver) is appointed in respect of the other party or any of the other party's assets; 19.2.5 the other party is unable to pay its debts within the meaning of section 123 of the Insolvency Act 1986; 19.2.6 any voluntary arrangement is proposed under section 1 of the Insolvency Act 1986 in respect of the other party; 19.2.7 the other party ceases, or threatens to cease, to carry on business; 19.2.8 any event analogous to those described in sub-clauses 19.2.3 to 19.2.7 occurs in relation to the other party in any jurisdiction in which that other party is incorporated or resident or carries on business. 19.3 On termination of this agreement for any reason, and subject as otherwise provided in this agreement to any rights or obligations which have accrued before termination, neither party shall have any further obligation to the other under this agreement. 20. FORCE MAJEURE 20.1 Neither party shall be liable to the other or be deemed to be in breach of this Agreement and the Supplier may suspend despatch of the Products by reason of any delay in performing, or failure to perform, any of its obligations under this Agreement if the delay or failure was due to circumstances beyond that party's reasonable control (including, without limitation, any strike, lock-out or other industrial action, Act of God, war or threat of war, accidental or malicious damage, fire, or prohibition or restriction by governments or other legal authority or any unforeseen failure of any supplier of the Supplier). -9- 20.2 A party claiming to be unable to perform its obligations under this agreement (either on time or at all) in any of the circumstances set out in clause 20.1 must immediately notify the other party of the nature and extent of the circumstances in question. 20.3 This clause 20 shall cease to apply when the relevant circumstances have ceased to have effect on the performance of this Agreement but where the circumstances so require the time for performance shall be extended for an appropriate period of time. 20.4 If any circumstance relied on by either party for the purposes of this clause 20 continues for more than six months, the other party shall be entitled to terminate this Agreement immediately by notice in writing. 21. ENTIRE AGREEMENT 21.1 This Agreement constitutes the entire agreement between the parties in connection with its subject matter. 21.2 No party has relied on any representation or promise except as expressly set out in this Agreement. 22. WAIVER OF RIGHTS BASED ON MISREPRESENTATION 22.1 Each party unconditionally waives any rights it may have to claim damages against the other on the basis of any statement made by the other (whether made carelessly or not) not set out or referred to in this Agreement (or for breach of any warranty given by the other not so set out or referred to) unless such statement or warranty was made or given fraudulently. 22.2 Each party unconditionally waives any rights it may have to seek to rescind this Agreement on the basis of any statement made by the other (whether made carelessly or not) whether or not such statement is set out or referred to in this Agreement unless such statement was made fraudulently. 23. ASSIGNMENT Neither party shall without the prior written consent of the other party assign, transfer, charge or deal in any other similar manner with this Agreement or its rights or any part of them under this Agreement, or purport to do any of the same, nor subcontract any or all of its obligations under this agreement provided that nothing in this Clause shall restrict the Supplier from obtaining its supplies from third parties. -10- 24. NO PARTNERSHIP Nothing in this Agreement shall create, or be deemed to create, a partnership between the parties. 25. COSTS AND EXPENSES Except as otherwise stated in this Agreement, each party shall pay its own costs and expenses in relation to the negotiation, preparation, execution and implementation of this Agreement. 26. INVALIDITY The invalidity, illegality or unenforceability of any provision of these conditions should not affect the other conditions. 27. EXECUTION This Agreement may be executed in any number of counterparts, and by the parties on separate counterparts, each of which when so executed shall be an original, but all counterparts shall together constitute one and the same instrument. 28. AMENDMENT AND WAIVER 28.1 No variation of this Agreement shall be effective unless it is made in writing, refers specifically to this Agreement and is signed by the parties. 28.2 No waiver of any term, provision or condition of this Agreement shall be effective except to the extent made in writing and signed by the waiving party. 28.3 No omission or delay on the part of any party in exercising any right, power or privilege under this Agreement shall operate as a waiver by it or of any right to exercise it in future or of any other of its rights under this Agreement. 29. LAW AND JURISDICTION 29.1 This Agreement shall be governed by and construed in all respects in accordance with English law. 29.2 The parties submit to the exclusive jurisdiction of the English courts and agree that (subject to clause 29.3), in respect of proceedings in England or in any other jurisdiction, process may be served on either of them in the manner specified for notices in clause 30. -11- 29.3 The Supplier irrevocably appoints and authorises Jay Benning & Peltz of One Great Cumberland Place, London W1H 7AL (or such other person being a firm of solicitors resident in England as the Supplier may by notice substitute) to accept service on behalf of the Supplier of all legal process and service on Jay Benning & Peltz (or each substitute) shall be deemed to be service on the Supplier. 29.4 The rights set out in this clause 29 are in addition to any other manner of service permitted by law. 30. NOTICES 30.1 Any notice or other communication to be given under this agreement must be in writing and may be delivered or sent by pre-paid air mail letter post or facsimile transmission to the party to be served at that party's last known address. 30.2 Any notice or document shall be deemed served, if delivered, at the time of delivery, if posted, 6 working days after posting and if sent by facsimile transmission, at the time of transmission. 31. SURVIVORSHIP This agreement shall, as to any of its provisions remaining to be performed in whole or in part or capable of having effect following termination, remain in full force and effect despite termination. 32. RESTRICTIVE TRADE PRACTICES ACT 32.1 Despite any other terms of this agreement, no provisions by virtue of which this agreement (or any agreement or arrangement of which it forms part) is subject to registration under the Restrictive Trade Practices Acts 1976 and 1977 shall take effect until the day after the required particulars of it have been furnished to the Director General of Fair Trading in accordance with the requirements of those Acts. 32.2 The parties undertake to submit the required particulars within 30 days from the date of this agreement. 33. CONSEQUENTIAL LOSS The Supplier shall not be liable for Consequential loss in relation to any matter if: 33.1 the Customer shall have failed to give the supplier written notice of the relevant matter (stating in reasonable detail its nature and, so far as is practicable, the amount claimed) and to have consulted with the Supplier with respect to the matter; or -12- 33.2 the Customer shall have settled any claim or taken (or failed to have taken) any significant step in proceedings in relation to the matter without the prior written consent of the Supplier such consent not to be unreasonably withheld or delayed. The Customer shall limit liability under any new contracts with any customers to (Pounds)5,000 per hotel. IN WITNESS of which this Agreement has been duly executed by the parties. EXECUTED for and on behalf of ) PRODAC PROZESSDATENTECHNIK GmbH ) /s/ Authorized Signature in the presence of: ) EXECUTED for and on behalf of ) CONSUMER ELECTRONICS LIMITED in ) /s/ Authorized Signature the presence of: ) -13- SCHEDULE 1 THE PRODUCTS AND THE PRICE LIST
DESCRIPTION PRICE IN DM Prodac HSI Board for Philips TV HT3352 [***] Video Steel Cabinet [***] Pentium Computer [***] VGA Colour Monitor [***] Video Text Inserter (Full Channel) [***] Interface for Data Transmission Card [***] Serial Interface Card [***] Keyboard 19" [***] Printer [***] Software Video Version 6.0 [***] Data Receiver V3.0 [***] Blocking Filter for Low Frequencies [***] Radio Tuner Technics [***] Power Supply TRN270 [***] TGR202 Transmission Unit [***] TGR203 Transmission Unit [***] TRM253 VHF Modulator [***] TRM254 UHF Modulator [***] CPU400 [***] AVM400 IF Convertor [***] Data Transmitter TXS 400 [***] Carbon Copy Licence [***] Printer Platform [***] Data Cable per metre [***] Project Leader per hour [***] Installaton Leader per hour [***] Technician per hour [***] Training - rate to be agreed prior to each training session
-14- -------------------------------------------------------------------- [***] Confidential treatment requested pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission. SCHEDULE 2 THE SPECIFICATION OVERVIEW - -------- The Prodac system is a Pay-TV system with interactive guest services for the hospitality industry. Typically 4 pay channels would be provided, along with a number of off air satellite, TV and radio channels. The system operates over a conventional VHF/UHF tree and branch cable system. The communications between the rooms and the head end PC is achieved by using FSK data modulated onto carriers. Interfaces to a number of hotel Property Management Systems (PMS) are provided. These are software selectable. This allows guest and transaction information to be passed to and from the PMS and the Prodac PC controller. The Interactive guest service can include some or all of the following: Welcome message Bill Review Express checkout Messaging Room service Information channel (teletext based) Room status (for hotel staff) The system currently has interfaces for Phillips and Nokia hotel TV's. -15- CONFORMITY - ---------- It is acknowledged that unless actual installation meets with at least CE Standards there may be interference with reception. Subject to clause 4 of the Agreement, all equipment supplied must conform to samples evaluated and signed off by Granada Technical Engineering Department prior to any order being placed. High quality components must be used in order to minimize maintenance costs and down time. The design must comply with all the relevant European Standards - CE. The equipment supplied to the Moat House contract should be used as a bench mark. -16- SCHEDULE 3 WARRANTIES 1. CAPACITY AND AUTHORITY 1.1 INCORPORATION AND EXISTENCE Prodac is a company duly incorporated and validly existing under English law. GmbH is a company duly incorporated and validly existing under German law. 1.2 POWER AND AUTHORITY 1.2.1 The Vendor has the legal right and full power and authority to execute and deliver, and to exercise its rights and perform its obligations under, this Agreement and all the documents which are to be executed at Completion. 1.2.2 Prodac has the legal right and full power and authority to carry on the Business. 1.3 CORPORATE ACTION 1.4 -17- EX-10.44 20 SOFTWARE LICENSE & TECHNICAL SUPPORT AGREEMENT EXHIBIT 10.44 DATED __________, 1996 PROZESSDATENTECHNIK GmbH - AND - UK CONSUMER ELECTRONICS LIMITED - -------------------------------------------------------------------------------- SOFTWARE LICENCE AND TECHNICAL SUPPORT AGREEMENT - -------------------------------------------------------------------------------- Jay Benning & Peltz One Great Cumberland Place London W1H 7AL Tel: 0171-636 9043 Fax: 0171-631 4207 Ref: BJ -------------------------------------------------------------------- [***] Confidential treatment requested pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission. SOFTWARE LICENCE AND TECHNICAL SUPPORT AGREEMENT PAGE ---- Index to Clauses 1 Definitions...................................................... 1 2 Grant of Licence and Provision of Services....................... 2 3 Licence Fee...................................................... 3 4 Technical Support................................................ 3 5 Property and Confidentiality in the Licensed Program Materials... 5 6 Use on Non-Designated Equipment and Relocation of the Designated Equipment........................................... 5 7 Warranty......................................................... 6 8 Limitation of Liability.......................................... 6 9 Intellectual Property Rights Indemnity........................... 6 10 Risk in the licensed program materials........................... 7 11 Confidentiality.................................................. 7 12 Licensee's Representatives....................................... 7 13 Force Majeure.................................................... 7 14 Waiver........................................................... 8 15 Notices.......................................................... 8 16 Invalidity and severability...................................... 8 17 Entire Agreement................................................. 8 18 Successors....................................................... 9 19 Assignment and Sub-Licensing..................................... 9 -i- TABLE OF CONTENTS (CONTINUED) PAGE ---- 20 VAT.............................................................. 9 21 Headings......................................................... 9 22 Law.............................................................. 9 Schedule -ii- SOFTWARE LICENCE AND TECHNICAL SUPPORT AGREEMENT Date: 1996 Parties: 1 "The Company": PRODAC PROZESSDATENTECHNIK GmbH a Company incorporated in Germany and whose registered office is at Max-Planck-Strasse 38D - 50858 Koln Marsdorf Germany 2 "The Licensee": UK CONSUMER ELECTRONICS LIMITED registered number 532857) whose registered office is at Granada House Ampthill Road, Bedford MK42 9QR RECITAL The Company has agreed to grant the Licensee perpetual non-exclusive, royalty-free licenses to use the computer software programs and associated documentation listed in the Schedule and to provide certain services to the Licensee in respect of technical support upon the terms and conditions of this Agreement. Operative Provisions: 1 DEFINITIONS 1.1 In this Agreement unless the context otherwise requires: "ACTUAL DELIVERY DATE" means the actual date that the Prodac System in which the licensed program is to reside is delivered. "ADDITIONAL CHARGES" means the charges at the Company's rates from time to time for work undertaken on a time and materials basis. "CDPA" means the Copyright Design & Patents Act 1988. "COMMISSIONING" as defined in the Supply Agreement. "CONSEQUENTIAL LOSS" means a liability in respect of loss of profits goodwill or any type of special indirect or consequential loss (including loss or damage suffered as a result of action brought by a third party) other than any liability for death or injury arising from negligence. "DELIVERY DATE" means the estimated date for the delivery of the Licensed Program Materials set out in the Schedule. "LICENCED PROGRAMS" means the software programs used in the Prodac System save for the Microsoft and Microcom Software including any New Release of the same made or issued pursuant to clause 4 below. "LICENCED PROGRAM MATERIALS" means the Licensed Programs and the Program Documentation. "NEW RELEASE" means any improved enhanced modified or corrected version of any of the Licensed Programs or Program Documentation from time to time issued by the Company. "PRODAC SYSTEM" has the same meaning as that in the supply agreement between the parties of even date. "PROGRAM DOCUMENTATION" means the instruction manuals for the software and any other information to be made available from time to time during this Agreement by the Company at its discretion in either printed or machine readable form to the Licensee. "SERVICES" means the provision of Technical Support in accordance with respectively clause 4 below. "SITE" means the address for delivery of the Licensed Program Materials to be advised in the relevant order. "THE SUPPLY AGREEMENT" as referred to above in the definition of Prodac System. "TECHNICAL SUPPORT" means the provision of such categories of technical support in accordance with clause 4 below. "USE" includes, without limitation, the running, copying or transmission of the Licensed Programs into or on the Prodac System and the operation of the Prodac System and Licensed Programs with other equipment or software together with the use of the Program Documentation. 2 GRANT OF LICENCE AND PROVISION OF SERVICES 2.1 The parties agree that the first time Licensed Programs are supplied by the Company to the Licensee on the supply of any Prodac System whether before or after the date of this Agreement including the completion of the Sale & Purchase Agreement relating inter alia to the Customer Agreements referred to in Clause 3.1 the provisions of this Agreement shall apply to the Licensed Programs so supplied; -2- 2.2 The Company in consideration of the payment by the Licensee of the Licence Fee in accordance with clause 3 below hereby: 2.2.1 grants to the Licensee a perpetual, non-exclusive royalty-free licence to Use: (i) the Licensed Programs upon the Prodac System and (ii) the Program Documentation; and 2.2.2 undertakes to the Licensee to provide the Services upon the terms and conditions of this Agreement. 3 LICENCE FEE 3.1 The Licensee shall pay a one off licence fee of Dm [***] plus VAT to the Company ("the Fee") for each Licensed Program ordered but not already paid for and those to be ordered in the future but not for those relating to the Customer Agreements as referred to in the Sale and Purchase Agreement of even date made inter alia between the parties at the time and in the manner that the Licensee is to pay for the Prodac System into which the Licensed Programs are to be installed. 3.2 The Company reserves the right to charge the Licensee interest in respect of the late payment of any sum due under this Agreement (as well after as before judgment) at the rate of three per cent per annum above the base rate from time to time of Barclays Bank plc from the due date therefor until payment. 4 TECHNICAL SUPPORT 4.1 With effect from the Actual Delivery Date and for seven years from the date of Commissioning of the last Prodac System sold by the Company to the Licensee in each case the Company shall provide in respect of each of the Licensed Programs such category of Technical Support as referred to in Clause 4.2. 4.2 Technical Support shall comprise all or any of the following categories and as otherwise stated. 4.2.1 advice by telephone on the Use of the Licensed Programs (category "A") free of charge until the expiration of one month from Commissioning; 4.2.2 free of charge information and advice by telephone or within a reasonable time by post on forthcoming New Releases of the Licensed Programs (category "B"); 4.2.3 upon request by the Licensee the diagnosis of faults in the Licensed Programs and the rectification of such faults (remotely or by attendance on Site as determined by the Company) within a reasonable time where appropriate by the issue of fixes in respect of the Licensed Programs -3- -------------------------------------------------------------------- [***] Confidential treatment requested pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission. and the making of all necessary consequential amendments (if any) to the Program Documentation (category "C"); 4.2.4 the despatch within a reasonable time to the Licensee whenever available of fixes in respect of the Licensed Programs (category "D"). 4.2.5 for the price of [***] DM plus VAT the despatch within a reasonable time to the Licensee whenever available of one copy of any New Release of the Licensed Programs or Program Documentation if required by the Customer at its expense and the Licensee shall be entitled to make multiple copies at no additional charge for each Prodac System (category "E"). 4.3 The Licensee shall supply in writing to the Company a detailed description of any fault requiring Technical Support within category C above and the circumstances in which it arose forthwith upon becoming aware of the same. 4.4 The Response Time for category C Technical Support shall be between the hours of 9:00 a.m. and 5:30 p.m. Monday through Friday (excluding bank and other public holidays). The Company shall use its reasonable endeavors to respond within 24 hours of receipt of a request. 4.5 Technical Support shall include the diagnosis and rectification of any fault but the Response Times shall not apply in any such case and response shall take place within a reasonable time having regard to all the circumstances resulting from: 4.5.1 the improper use operation or neglect of either the Licensed Program Materials or the Prodac System; or 4.5.2 the modification by the Licensee of the Licensed Programs or the merger (in whole or in part) with any other software; 4.5.3 the use of the Licensed Programs on equipment other than the Prodac System; 4.5.4 the failure by the Licensee to implement recommendations in respect of or solutions to faults previously advised by the Company; 4.5.5 any repair adjustment alteration or modification of the Licensed Programs by any person other than the Company without the Company's prior consent; 4.5.6 the use of the Licensed Programs for a purpose for which they were not designed. 4.6 The Company shall upon request by the Licensee provide Technical Support notwithstanding that the fault results from any of the circumstances described in clause 4.5 above. The Company shall in any case be entitled to levy reasonable charges in the manner set out in Clause 4.7 below. -4- -------------------------------------------------------------------- [***] Confidential treatment requested pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission. 4.7 Subject to the provisions of Clause 4.2.1 and 4.2.2. save in a case in which a software malfunction takes place as a result of anything done or omitted to be done by the Company, the Company shall be entitled to levy reasonable charges on the basis of time spent including where applicable traveling time, subsistence and the price of materials and of spare parts. 4.8 Charges shall be invoiced by the Company monthly in arrears and shall be payable by the Licensee (together with value added tax thereon) within 30 days of despatch of an invoice therefor. 4.9 The Company shall not be liable under this Agreement for the consequences of any of the circumstances set out in clause 4.5 above. 5 PROPERTY AND CONFIDENTIALITY IN THE LICENSED PROGRAM MATERIALS 5.1 The Licensed Program Materials contain confidential information of the Company and all copyright trade marks and other intellectual property rights in the Licensed Program Materials are the exclusive property of the Company. 5.2 The Licensee shall not: 5.2.1 reverse compile, copy or adapt the whole or any part of the Licensed Program Materials except for the purposes expressly permitted by and in accordance with CDPA 1988 as amended. 5.2.2 remove or alter any copyright or other proprietary notice on any of the Licensed Program Materials. 5.3 The Licensee shall: 5.3.1 keep confidential the Licensed Program Materials; 5.3.2 reproduce on any copy (whether in machine readable or human readable form) of the Licensed Program Materials the Company's copyright and trade mark notices; 5.3.3 notify the Company immediately if the Licensee becomes aware of any unauthorized use of the whole or any part of the Licensed Program Materials by any third party. 6 USE ON NON-DESIGNATED EQUIPMENT 6.1 If the Prodac System is for any reason inoperable the Licensee shall be entitled without extra charge to use the Licensed Programs upon such alternative machine under the control of the Licensee as the Company shall approve (such approval not to be unreasonably withheld or delayed) until such time as the Prodac System once more becomes operable which fact shall be promptly notified to the Company. -5- 6.2 Subject to Clause 6.1 if the Licensee shall replace the Prodac System or permanently transfer the Licensed Program Materials from the Prodac System the Company shall be under no obligation to provide any further Technical Support. 7 WARRANTY 7.1 Subject to the exceptions set out in clauses 7.2 and 7.3 below and the limitations upon its liability in clause 8 below the Company warrants that its title to and property in the Licensed Program Materials is free and unencumbered and that it has the right power and authority to license the same upon the terms and conditions of this Agreement. 7.2 The Company will perform the Services with reasonable care and skill. 7.3 The Company warrants that the Licensed Programs (including where in machine-readable form the Program Documentation) will on despatch be in good working condition and fit for Use. 7.4 The Company shall remedy and breach of the warranties set out above by the provision where appropriate of Technical Support. 7.5 Subject to the foregoing all conditions, warranties, terms and undertakings express or implied, statutory or otherwise in respect of the Licensed Program Materials and the provisions of the Services are hereby excluded. 8 CONSEQUENTIAL LOSS (A) The Company shall not be liable for Consequential Loss in relation to any matter if: (a) the Licensee shall have failed to give the Company written notice of the relevant matter (stating in reasonable details its nature and, so far as is practicable, the amount claimed) and to consult with the Licensee with respect to the matter; or (b) the Licensee shall have settled any claim or taken (or failed to have taken) any significant step in proceedings in relation to the matter without the prior written consent of the Company such consent not to be unreasonably withheld or delayed. (B) The Licensee will limit liability under any new contracts with any customers to (Pounds)5,000 per hotel. 9 INTELLECTUAL PROPERTY RIGHTS 9.1 Subject to the rights granted to the Licensee by this Licence, and to others the Licensee acknowledges that all and any proprietary rights in the Software, shall be and remain the sole property of the Company. -6- 9.2 The Company shall indemnify and hold harmless the Licensee against any damages (including costs) that may be awarded by a court of competent jurisdiction or agreed to be paid to any third party with the prior consent of the Company in respect of any claim or action that the normal operation possession or use of the Licensed Program Materials by the Licensee infringes the patent, copyright, registered design or trade mark of the said third party. 10 RISK IN THE LICENSED PROGRAM MATERIALS Risk in the Licensed Program Materials will pass to the Licensee upon the delivery to the Licensee. If subsequently the Licensed Program Materials are (in whole or in part) destroyed damaged or lost the Company will upon request replace the same subject to the Licensee paying its then prevailing charges for the relevant media. 11 CONFIDENTIALITY 11.1 Each of the parties hereto undertakes to the other to keep confidential all information (written or oral) concerning the business and affairs of the other that it shall have obtained or received as a result of the discussions leading up to or the entering into of this Agreement save that which is: 11.1.1 trivial or obvious; 11.1.2 already in its possession other than as a result of a breach of this clause; or 11.1.3 in the public domain other than as a result of a breach of this clause. 11.2 Each of the parties undertakes to the other to take all such steps as shall from time to time be necessary to ensure compliance with the provisions of clause 11.1 above by its employees, agents and sub-contractors. 12 LICENSEE'S REPRESENTATIVES The Licensee shall communicate to the Company upon the date hereof the identify of the person(s) or the department within its undertaking who shall act as the sole contact point and channel of communication for the provision by the Company of the Services during the currency of this Agreement. The Licensee shall forthwith inform the Company of any change in the identity of any such person(s) or department. 13 FORCE MAJEURE 13.1 Neither party hereto shall be liable for any breach of its obligations hereunder resulting from causes beyond its reasonable control including but not limited to fires, strikes (of its own or others' employees), insurrection or riots, embargoes, wrecks, or delays in transportation, inability to obtain supplies and raw materials, requirements or regulations of any civil or military authority (an "Event of Force Majeure"). -7- 13.2 Each of the parties hereto agrees to give notice forthwith to the other upon becoming aware of an Event of Force Majeure such notice to contain details of the circumstances giving rise to the Event of Force Majeure. 14 WAIVER The waiver by either party of a breach or default of any of the provisions of this agreement by the other party shall not be construed as a waiver of any succeeding breach of the same or other provisions not shall any delay or omission on the part of either party to exercise or avail itself of any right power or privilege that it has or may have hereunder operate as a waiver of any breach or default by the other party. 15 NOTICES Any notice request instruction or other document to be given hereunder shall be delivered or sent by first class post or by facsimile transmission (such facsimile transmission notice to be confirmed by letter posted within 12 hours) to the address or to the facsimile number of the other party set out in this Agreement (or such other address or numbers as may have been notified) and any such notice or other document shall be deemed to have been served (if delivered) at the time of delivery (if sent by post) upon the expiration of 6 days after posting and (if sent by facsimile transmission) upon the expiration of 12 hours after dispatch. Notices to the Company : Mr. R. Kasbach & Mr. H. Wirt Facsimile Number : 00-49-22-34-215195 Notices to the Licensee : The Company Secretary Facsimile Number : 01234 226600 16 INVALIDITY AND SEVERABILITY If any provision of this Agreement shall be found by any court or administrative body of competent jurisdiction to be invalid or unenforceable, the invalidity or unenforceability of such provision shall not affect the other provisions of this Agreement and all provisions not affected by such invalidity or unenforceability shall remain in full force and effect. The parties hereby agree to attempt to substitute for any invalid or unenforceable provision a valid or enforceable provision which achieves to the greatest extent possible the economic legal and commercial objectives of the invalid or unenforceable provision. 17 ENTIRE AGREEMENT 17.1 The Company shall not be liable to the Licensee for loss arising from or in connection with any representations agreements statements or undertakings made prior to the date of execution of this Agreement other than those representations agreements statements or undertakings confirmed by a duly authorized representative of the Company in writing or expressly incorporated or referred to in this Agreement. -8- 17.2 The Licensee accepts that the Licensed Program Materials were not designed and produced to its individual requirements and that it was responsible for their selection. 18 SUCCESSORS This Agreement shall be binding upon and enure for the benefit of the successors in title of the parties hereto. 19 ASSIGNMENT AND SUB-LICENSING 19.1 The Licensee shall be entitled to assign or otherwise transfer this Agreement and to sub-license the use (in whole or in part) of the Licensed Program Materials in any such case only together with the Prodac System in which the same are installed. 19.2 In the event that the Licensee shall assign or otherwise transfer this Agreement or the Licensed Program Materials or sub-license the use (in whole or in part) of the Licensed Program Materials it shall first procure that the sub- licensee enters into a License agreement with the Company substantially in the terms of this Agreement. 20 VAT Save insofar as otherwise expressly provided all amounts stated in this Agreement are expressed exclusive of value added tax and any value added tax arising in respect of any supply made hereunder shall on the issue of a valid tax invoice in respect of the same be paid to the party making such supply by the party to whom it is made in addition to any other consideration payable therefor. 21 HEADINGS Headings to clauses in this Agreement are for the purpose of information and identification only and shall not be construed as forming part of this Agreement. 22 LAW This Agreement shall be governed by and construed in accordance with English law and the parties hereto agree to submit to the non-exclusive jurisdiction of the English courts. The Company irrevocably appoints and authorizes Jay Benning & Peltz of One Great Cumberland Place, London W1H 7AL (or such other person being a firm of solicitors resident in England as the Company may by notice substitute) to accept service on behalf of the Company of all legal process and service on Jay Benning & Peltz (or each substitute) shall be deemed to be service on the Company. -9- Executed by the parties the day and year first above written. Signed on behalf of PRODAC PROZESSDATENTECHNIK GmbH By: /s/ Authorized Signature Director (duly authorised) Signed on behalf of UK CONSUMER ELECTRONICS LIMITED BY: /s/ Director (duly authorised) -10- EX-10.45 21 SOURCE CODE AGREEMENT WITH UK LIMITED EXHIBIT 10.45 Dated ________________ 1996 (1) DIBB LUPTON ALSOP (2) PRODAC PROZESSDATENTECHNIK (3) UK CONSUMER ELECTRONICS LIMITED SOURCE CODE AGREEMENT Jay Benning & Peltz One Great Cumberland Place London W1H 7AL SOURCE CODE DEPOSIT AGREEMENT - SINGLE LICENSEE ----------------------------------------------- INDEX TO CLAUSES 1. Definitions 2. Deposit of source code 3. Custody of source code 4. Release of source code 5. Property and confidential information in the source code 6. Licensee's covenants 7. Company's covenants 8. Licensor's Warranty 9. Liability of the Company 10. Termination 11. Waiver 12. Notices 13. Entire Agreement 14. Headings 15. Disputes 16. VAT 17. Assignment 18. Law Schedule Confidentiality Undertaking -1- Date: 1996 Parties: 1. 'The Company': DIBB LUPTON ALSOP of 125 London Wall EC2Y 5AE 2. 'The Licensor': PRODAC PROZESSDATENTECHNIK GmbH whose registered office is at Max-Planck-Strasse 38 50858 Koln Marsdorf Germany 3. 'The Licensee': UK CONSUMER ELECTRONICS LIMITED (registered number 532857) whose registered office is at Granada House Ampthill Road, Bedford MK42 9QQ Recitals: (A) The Licensor has licensed the Licensee to use in object code form only certain computer software programs and has agreed to provide technical support in respect of the same upon the terms and conditions of a software licence and technical support agreement of even date herewith (B) The Licensor has agreed to deposit the source code version of the computer software programs referred to in (A) above with the Company and has authorised the Company to release the same to the Licensee in the circumstances and subject to the terms and conditions of this Agreement -2- Operative provisions: 1 DEFINITIONS 1.1 In this Agreement unless the context otherwise requires: "THE COMPANY" means Dibb Lupton & Alsop or their successors in practice "LICENSED PROGRAMS" means the software programs identified in the Software License and Technical Support Agreement "SOURCE CODE" means the source code version of the Licensed Programs in eye readable form including any modification enhancement revision or update thereto that may be made from time to time by the Licensor "SOFTWARE LICENCE AND TECHNICAL SUPPORT AGREEMENT" means the software licence and technical support agreement between the Licensor and Licensee of even date herewith 2 DEPOSIT OF SOURCE CODE 2.1 Within 28 days of the date of execution of this Agreement the Licensor will deposit with the Company at its above address or such other address as it shall from time to time in writing indicate to the Licensor one copy of the Source Code. It shall be marked for the attention of Dr N Dunmore. 2.2 Within 28 days of the date of any modification enhancement revision or update to the Licensed Programs the Licensor will deposit with the Company a revised copy of the whole (or the relevant part) of the Source Code incorporating such modification enhancement revision or update (as the case may be). 2.3 The Company shall bear no obligation or responsibility to any person or entity whatsoever to determine the existence, relevance, completeness, accuracy or other aspect of the Licensed Program and Source Code. The Company shall have no responsibility to determine that whatever is deposited or accepted by it for deposit is or is not modifications, enhancements, revisions or updates. 2.4 The Licensee shall be entitled to require a third party with appropriate skill and experience (the "Expert") to carry out such test as would reasonably establish that the Licensed Programs and the Source Code are true and accurate versions. Any -3- reasonable changes and expenses incurred by the Expert shall be paid by the Licensee, provided that if the Licensed Program and Source Code are substantially defective in content, any such reasonable charges will be paid by the Licensor. 3 CUSTODY OF SOURCE CODE Forthwith upon receipt of the Source Code the Company as custodian shall send written confirmation of receipt to the Licensor and Licensee. 4 RELEASE OF SOURCE CODE 4.1 A 'Relevant Event' shall have occurred for the purpose of this Agreement if: 4.1.1 A resolution is passed or an order is made for the winding up of the Licensor (otherwise than for the purpose of an amalgamation or reconstruction) or any analogous event in any applicable jurisdiction; 4.1.2 the Licensor shall be in breach of its obligation to deposit revised copies of the Source Code pursuant to clause 2.2 above and the Licensor has failed to deposit such revised copies within 28 days of receiving such notice from the Licensee requiring it to do so; 4.1.3 the Licensor shall be in material and persistent breach of its obligations to provide technical support pursuant to the terms of the Software License and Technical Support Agreement and has failed to remedy such breach within 30 days after receiving written notice requiring the remedying of such breach; 4.1.4 the Licensor assigns the copyright in the Licensed Programs and the assignee fails within 60 days of such assignment or within 30 days of a request made by the Licensee to be made within 30 days after the Licensee has actual knowledge of such assignment to offer the Licensee substantially similar protection to that provided by this Agreement. 4.2 In order to obtain the release of the Source Code the Licensee shall forthwith upon becoming aware of a Relevant Event prepare and submit to the Company a statutory declaration which shall: 4.2.1 be sworn by a duly authorised officer of the Licensee; 4.2.2 set out the facts and circumstances of the Relevant Event; and -4- 4.2.3 have attached thereto all relevant supporting documentation in the Licensee's possession. 4.3 In the case of a Relevant Event the Company shall submit a copy of the Licensee's Statutory Declaration to the Licensor forthwith upon receiving the same. If the Licensor does not either: 4.3.1 remedy the breach giving rise to the Relevant Event; or 4.3.2 by written notice (setting out all relevant facts and circumstances and having attached thereto all relevant documentation in the Licensor's possession) deny its occurrence within 30 days or receipt of the Licensee's copy statutory declaration then the Company is hereby authorised upon the expiry of said 30 days (and subject to the said statutory declaration complying with the provisions of clause 4.2 above and on receipt of a signed confidentiality undertaking in the form set out in the Schedule) to release the Source Code to the Licensee. 4.4 If the Licensor denies the occurrence of a Relevant Event by written notice pursuant to clause 4.3.2 above: 4.4.1 the Company shall not release the Source Code; 4.4.2 the Company shall forthwith submit a copy of the Licensor's written notice to the Licensee; 4.4.3 each of the Licensor and the Licensee hereby agrees to use its best endeavours to reach agreement upon whether or not a Relevant Event within the terms of clause 4.1 above has taken place with 28 days of the date of receipt by the Licensee of the Licensor's notice referred to in clause 4.4.2 above in default of which the matter shall be settled in accordance with the disputes procedure set out in clause 15 below; and 4.4.4 if it is agreed by the parties pursuant to clause 4.4.3 above or decided pursuant to the disputes procedure in clause 15 below that a Relevant Event has occurred within the terms of clause 4.1.3 above then the Licensor shall have 30 days from the date of said agreement or decision (as the case may be) to -5- remedy the breach giving rise to the Relevant Event failing which the Company is hereby authorised to release the Source Code to the Licensee upon receipt by the Company of a statutory declaration (in the form specified in clause 4.2 above) from the Licensee that the said breach remains unremedied. 5 PROPERTY AND CONFIDENTIAL INFORMATION IN THE SOURCE CODE Notwithstanding the deposit and release of the Source Code in accordance with the terms of this Agreement all confidential information and intellectual property rights therein shall remain vested in the Licensor. 6 LICENSEE'S COVENANTS 6.1 Upon receipt of the Source Code the Licensee shall: 6.1.1 use the Source Code solely for the purposes of maintaining and/or enhancing the Licensed Programs; 6.1.2 keep confidential the Source Code and limit access to the Source Code to those of its employees agents contractor or sub- contractors who either have a need to know or who are directly engaged in the maintenance and/or enhancement of the Licensed Programs; 6.1.3 not assign transfer sell lease rent charge or otherwise deal in or encumber the Source Code nor use the same on behalf of or for the benefit of any other party; 6.1.4 not alter or remove any proprietary notices affixed to or contained in the Source Code and will ensure the inclusion of such proprietary notices on any back-up copies of the Source Code held by or under the control of the Licensee; and 6.1.5 without prejudice to the generality of the foregoing shall take all such other steps as shall from time to time be necessary to protect the confidential information and intellectual property rights of the Licensor in the Source Code and to ensure the compliance with the provisions of this clause 6 by its employees agents contractors and sub-contractors. -6- 6.2 Upon the proper termination of the Software Licence and Technical Support Agreement the Licensee shall at the option of the Licensor (or any person to whom the title to the software programs the subject of the Software Licence and Technical Support Agreement has been assigned or transferred) either return all copies of the Source Code in its care or under its control or certify in writing that the same have been destroyed. 6.3 The Licensee shall pay any charges of the Company or any other depositee. 7 COMPANY'S COVENANTS 7.1 The Company hereby covenants and undertakes to the Licensor: 7.1.1 not to assign transfer sell lease rent charge or otherwise deal in or encumber the Source Code; and 7.1.2 not to use the Source Code for its own purposes or on behalf of any other party not to disclose test or release the same except in accordance with the provisions of this Agreement. 8 LICENSOR'S WARRANTY 8.1 The Licensor represents and warrants to the Licensee that: 8.1.1 subject to the time limit for depositing revisions to the Source Code set out in Clause 2.2 above the Source Code deposited with the Company shall at all times be a complete accurate and up-to-date copy of the source code version of the current release of the Licensed Programs; and 8.1.2 the Source Code shall contain all information in human readable form necessary to enable a reasonably skilled programmer or analyst to maintain and/or enhance the Licensed Programs without the help of any other person or reference to any other material and that without prejudice to the generality of the foregoing the Source Code shall contain all listings of code programmers' comments. 9 LIABILITY OF THE COMPANY 9.1 The Company shall not be liable for any loss caused to the Licensee or the Licensor arising from the loss of or damage to the Licensed programs and Source Code except -7- to the extent that such loss or damage is caused by the negligence of the Company, its employees, agents or sub-contractors in carrying out its sole responsibilities hereunder, namely provision of safe custody and confidentiality in respect of the Source Code and in such event the Company's total liability in respect of all claims arising under or by virtue of this Agreement shall not (except in the case of claims for personal injury or death) exceed the sum of (Pounds)25,000. The Company shall in no circumstances be liable to either the Licensee or the Licensor for indirect or consequential loss of any nature whatsoever whether for loss or profit, loss of business, loss of anticipated savings, or otherwise. 9.2 Subject to ensuring compliance with the provisions of clauses 4.2.1, 4.2.2 and 4.2.3 above the Company shall not be under any obligation to examine enquire into or check the accuracy completeness or authenticity of any statutory declaration submitted by the Licensee pursuant to either clause 4.2 or 4.5 above. 10 TERMINATION 10.1 This Agreement may be terminated: 10.1.1 by the Company upon giving not less than 56 days notice to each of the Licensor and Licensee; 10.1.2 by the Licensor forthwith if the Software Licence and Technical Support Agreement is properly terminated for breach by the Licensee; 10.1.3 jointly (but not otherwise) by the Licensor and License upon giving not less than 56 days notice to the Company. 10.2 Forthwith upon receipt of notice of termination pursuant to clause 10.1.1 above the Licensor and Licensee agree to use their respective best endeavours to appoint a mutually acceptable replacement depositee of the Source Code on terms and conditions as near as possible identical to those set out in this Agreement. 10.3 In the event of the termination of this Agreement pursuant to this clause 10 the Company shall return the Source Code to the Licensor at its registered office or such other address as it shall in writing notify to the Company. -8- 10.4 Without prejudice to the provisions of clause 6 and 10.1 above and the Confidentiality Undertaking this Agreement shall terminate upon the release of the Source Code to the Licensee pursuant to clause 4 above. 11 WAIVER The waiver by either party of a breach or default of any of the provisions of this Agreement by the other party shall not be construed as a waiver of any succeeding breach of the same or other provisions nor shall any delay or omission on the part of either party to exercise or avail itself of any right power or privilege that it has or may have hereunder operate as a waiver of any breach or default by the other party. 12 NOTICES Any notice request instruction or other document to be given hereunder shall be delivered or sent by first class post or by telex or facsimile transmission (such telex or facsimile transmission notice to be confirmed by letter posted within 12 hours) to the address or to the facsimile number of the other party set out in this Agreement (or such other address or numbers as may have been notified) and any such notice or other document shall be deemed to have been served (if delivered) at the time of delivery (if sent by post) upon the expiration of 6 days after posting and (if sent by telex or facsimile transmission) upon the expiration of 12 hours after dispatch. Notices to the Company: ---------------------- Address: 125 London Wall London BC2Y 5AE Facsimile Number - 0171 600 1650 Addressed for the personal attention of Dr N Dunmore Notices to the Licensor: ----------------------- Address: Max-Planck-Strasse 38D -- 50858 Koln Marsdorf Germany Facsimile Number: 004922 3421 5111 Addressed for the personal attention of Reiner Kasbach and Heinrich Wirt Notices to the Licensee ----------------------- Address: Granada House Ampthill Road Bedford MK42 9QQ England Facsimile Number: 01234 220 600 Addressed for the personal attention of the Company Secretary -9- 13 ENTIRE AGREEMENT This Agreement supersedes all prior arrangements undertakings and agreements (whether oral or written) between the parties hereto in respect of the subject matter here. 14 HEADINGS Headings to clauses in this Agreement are for the purpose of information and identification only and shall not be construed as forming part of this Agreement. 15 DISPUTES 15.1 All disputes or differences which shall at any time hereafter arise between the parties hereto in respect of the construction or effect of this Agreement or the rights duties and liabilities of the parties hereunder or any matter or event connected with or arising out of this agreement (a "Dispute") shall be referred to such independent third party (the "Third Party") as the parties shall jointly nominate. 15.2 If the parties hereto shall fail to nominate a Third Party within 21 days of the date of occurrence of the Dispute then the Third Party shall be nominated at the request of any of the parties hereto by the President for the time being of the Law Society. 15.3 The Third Party (whether appointed under clause 15.1 or 15.2 above) shall act as an expert and not as an arbitrator whose decision (including as to costs) shall except in the case of manifest error be final and binding upon the parties hereto. The fees for the appointment of the Third Party will be borne equally by both the Licensor and the Licensee. 16 VAT Save insofar as otherwise expressly provided all amounts stated in this Agreement are expressed exclusive of value added tax and any value added tax arising in respect of any supply made hereunder shall on the issue of a valid tax invoice in respect of the same be paid to the party making such supply by the party to whom it is made in addition to any other consideration payable therefor. 17 ASSIGNMENT This Agreement is personal to the Licensee and may not be assigned. 18 LAW 18.1 This Agreement shall be governed by and construed in accordance with English Law. -10- 18.2 Each party irrevocably agrees for the benefit of the Licensee that the courts of England shall have exclusive jurisdiction to hear and determine any suit, action or proceedings, and to settle any disputes which may arise out of or in connection with this Agreement (respectively "Proceedings" and "Disputes") and for such purposes irrevocably submits to the jurisdiction of the courts of England. 18.3 Each party irrevocably waives any objection which it might at any time have to the courts of England being nominated as the forum to hear and determine any Proceedings and to settle any Disputes and agrees not to claim that the courts of England are not a convenient or appropriate forum. 18.4 Each party agrees that the process by which any Proceedings are begun in England or elsewhere may be served on the Licensor by being delivered in accordance with Clause 12. Nothing contained in this Clause 18.4 shall affect the right to serve process in any other manner permitted by law. 18.5 The submission to the jurisdiction of the courts of England shall not (and shall not be construed so as to) limit the right of the Licensee to take Proceedings against the Licensor in any other court of competent jurisdiction, nor shall the taking of Proceedings by the Licensee in any one or more jurisdictions preclude the Licensee taking Proceedings in any other jurisdiction (whether concurrently or not) if and to the extent permitted by applicable law. EXECUTED by the parties the day and year first before written. THE SCHEDULE ------------ CONFIDENTIALITY UNDERTAKING --------------------------- This undertaking is given on release of the Source Code pursuant to Source Code Deposit Agreement dated the day of and made between (1) Dibb Lupton Broomhead ("the Company") (2) Prodac Prozessdatentechnik GmbH ("the Licensor") and (3) UK Consumer Electronics Limited ("the Licensee"). 1 Definitions contained in the Source Code Deposit Agreement will apply to this undertaking. 2 In consideration of the Company delivering to the Licensee a copy of the Source Code the Licensee hereby undertakes with the Company and with the Licensor: -11- 2.1 to use the Source Code solely for the purposes of maintaining, and/or enhancing the Licensed Programs; 2.2 not to use the Source Code for any other purpose nor disclose it to any person save to such of its employees, agents, contractors or subcontractors who need access to the same in order to maintain, and/or enhance the Licensed Programs on behalf of the Licensee; 2.3 to hold all media containing the Source Code in a safe place when not in use; 2.4 forthwith to destroy the Source Code should the Licensee cease to be entitled to use the Licensed Programs; 2.5 not to alter or remove any proprietary notices affixed to or contained in the Source Code and to ensure the inclusion of such proprietary notices on any back-up copies of the Source Code held by or under the control of the Licensee; 2.6 not to assign, transfer, sell, lease, rent, charge, or otherwise deal in or encumber the Source Code nor use the same on behalf of or for the benefit of any other party and; 2.7 to ensure the compliance with the provisions of this clause by its employees agents contractors and sub-contractors. -12- SIGNED on behalf of ) DIBB LUPTON ALSOP by: ) /s/ Authorized Signature SIGNED on behalf of ) UK CONSUMER ELECTRONICS by: ) /s/ Authorized Signature by ) Duly Authorised SIGNED on behalf of ) PRODAC PROZESSDATENTECHNIK GmbH by: ) /s/ Authorized Signature Director (duly authorised) -13- EX-11.1 22 CALCULATION OF EARNINGS PER SHARE EXHIBIT 11.1 MAGINET CORPORATION STATEMENT OF COMPUTATION OF NET LOSS PER SHARE
NINE MONTHS ENDED YEARS ENDED DECEMBER 31, SEPTEMBER 30, -------------------------------------- ------------------------- 1993 1994 1995 1995 1996 ----------- ----------- ------------ ----------- ------------ Historical primary net loss per share: Shares used in calculation of net loss per share: Weighted average common shares outstanding.......... 263,569 271,084 291,163 285,900 306,951 Shares related to SAB Nos. 55, 64, and 83: Common Stock........ 188,911 188,911 188,911 188,911 188,911 Warrants............ 184,615 184,615 184,615 184,615 184,615 Stock Options....... 818,065 818,065 818,065 818,065 818,065 Preferred Stock, if converted.......... 3,142,858 3,142,858 3,142,858 3,142,858 3,142,858 ----------- ----------- ------------ ----------- ------------ 4,334,449 4,334,449 4,334,449 4,334,449 4,334,449 ----------- ----------- ------------ ----------- ------------ Total............. 4,598,018 4,605,533 4,625,612 4,620,349 4,641,400 =========== =========== ============ =========== ============ Net loss................ $(3,379,000) $(7,926,000) $(12,796,000) $(8,791,000) $(11,534,000) Net loss per share...... $ (0.73) $ (1.72) $ (2.77) $ (1.90) $ (2.49) Pro Forma: Shares used in calculation of pro forma net loss per share: Weighted average common shares outstanding... 291,163 306,951 Preferred stock, if converted............ 7,766,020 7,766,020 Shares related to SAB Nos. 55, 64 and 83: Common Stock........ 188,911 188,911 Warrants............ 184,615 184,615 Stock Options....... 818,065 818,065 Preferred Stock, if converted....... 3,142,858 3,142,858 ------------ ------------ 4,334,449 4,334,449 ------------ ------------ Total............. 12,391,632 12,407,420 ============ ============ Net loss................ $(12,796,000) $(11,534,000) Pro forma net loss per share.................. $ (1.03) $ (0.93)
EX-21.1 23 LIST OF SUBSIDIARIES OF THE REGISTRANT Exhibit 21.1 MAGINET CORPORATION SUBSIDIARY LIST Australia - MagiNet Australia Pty Limited - --------- Germany - MagiNet GmbH - ------- Hong Kong - MagiNet (H.K.) Ltd. - --------- Israel - MagiNet Israel, Inc. (a California Corporation) - ------ Japan - MagiNet, KK Ltd - ----- Korea - MagiNet (Korea), Ltd. - ----- New Zealand - MagiNet New Zealand Limited - ----------- Singapore - Maginet (Singapore) PTE. LTD. - --------- South Africa - Maginet South Africa, Inc. - ------------ Taiwan - MagiNet Taiwan, Inc. - ------ Thailand - Pacific Pay Video (Thailand) Co. Ltd. - -------- MagiNet International Corporation (a California Corporation) Pacific Pay Video Limited (a California Corporation) EX-23.1 24 CONSENT OF ERNST & YOUNG LLP EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and "Selected Consolidated Financial and Other Data" and to the use of our report dated February 16, 1996 in Amendment No. 2 to the Registration Statement (Form S-1) and related Prospectus of MagiNet Corporation for the registration of 6,325,000 shares of its common stock. ERNST & YOUNG LLP Palo Alto, California November 22, 1996 EX-23.2 25 CONSENT OF ERNST & YOUNG GMBH EXHIBIT 23.2 CONSENT OF ERNST & YOUNG GMBH, INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and to the use of our report dated August 30, 1996 in Amendment No. 2 to the Registration Statement (Form S-1) and related Prospectus of MagiNet Corporation for the registration of 6,325,000 shares of its common stock. ERNST & YOUNG GMBH Dusseldorf, Germany November 22, 1996 EX-27 26 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE SEPTEMBER 30, 1996 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR 9-MOS DEC-31-1995 DEC-31-1996 JAN-01-1995 JAN-01-1996 DEC-31-1995 SEP-30-1996 18,672 7,251 151 0 1,191 2,081 0 0 0 0 20,638 11,011 2,035 2,906 659 1,161 46,540 49,484 6,096 6,154 24,900 25,829 0 0 40,231 53,241 124 387 (25,744) (37,659) 46,540 49,484 8,689 12,048 8,689 12,048 0 0 0 0 11,768 14,092 0 0 1,297 2,710 (12,490) (11,068) 554 681 (12,796) (11,534) 0 0 0 0 0 0 (12,796) (11,534) (2.77) (0.93) (2.77) (0.93)
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