-----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, SIgOAflbVmqBUlwRyEJ7/QRkIpOpiEG0rJg/5H7/LIP+yJZ3tZcvxj4VdhDsD0z9 whbN2DNFVx5xbjgToK+mtQ== 0000950109-96-008373.txt : 19961217 0000950109-96-008373.hdr.sgml : 19961217 ACCESSION NUMBER: 0000950109-96-008373 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 12 FILED AS OF DATE: 19961216 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: 942990567 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: 96680899 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 4 TO FORM S-1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 16, 1996 REGISTRATION NO. 333-12185 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- AMENDMENT NO. 4 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ---------------- MAGINET CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ---------------- 4841 77-0407677 DELAWARE (PRIMARY STANDARD (I.R.S. EMPLOYER (STATE OR OTHER INDUSTRIAL IDENTIFICATION NUMBER) JURISDICTION OF CLASSIFICATION CODE INCORPORATION OR NUMBER) ORGANIZATION) 405 TASMAN DRIVE SUNNYVALE, CALIFORNIA 94089 (408) 752-1000 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ---------------- KENNETH B. HAMLET PRESIDENT AND CHIEF EXECUTIVE OFFICER MAGINET CORPORATION 405 TASMAN DRIVE SUNNYVALE, CALIFORNIA 94089 (408) 752-1000 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ---------------- COPIES TO: THOMAS C. DEFILIPPS, ESQ. EDWARD M. LEONARD, ESQ. WILSON SONSINI GOODRICH & ROSATI BROBECK, PHLEGER & HARRISON LLP PROFESSIONAL CORPORATION TWO EMBARCADERO PLACE 650 PAGE MILL ROAD 2200 GENG ROAD PALO ALTO, CA 94304 (415) 493-9300 PALO ALTO, CA 94303 (415) 424-0160 ---------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. ---------------- If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [_] If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] ---------------- CALCULATION OF REGISTRATION FEE - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
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 $9.00 $56,925,000 $19,629.31(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) 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 December 16, 1996 PROSPECTUS 5,500,000 SHARES [LOGO OF MAGINET APPEARS HERE] COMMON STOCK ------------ Of the 5,500,000 shares of Common Stock, $.001 par value ("Common Stock"), of MagiNet Corporation ("MagiNet" or the "Company") being offered hereby, 4,400,000 shares are being offered initially in the United States and Canada by the U.S. Underwriters (the "U.S. Offering") and 1,100,000 shares are being offered initially outside the United States and Canada by the International Managers (the "International Offering"). Such offerings are referred to collectively as the "Offerings." Prior to the Offerings, there has been no public market for the Common Stock of the Company. It is currently estimated that the initial public offering price per share will be between $8.00 and $9.00 per share. See "Underwriting" for a discussion of factors to be considered in determining the initial public offering price. The Common Stock has been approved for listing on the Nasdaq National Market under the symbol "MGNT." ------------ THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 7. ------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
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] [LOGO FOR MAGINET APPEARS HERE] [ARTWORK APPEARS HERE] ---------------- IN CONNECTION WITH THE OFFERINGS, THE U.S. UNDERWRITERS AND THE INTERNATIONAL MANAGERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. 2 [GATEFOLD--FIRST PAGE] MagiNet is the largest provider of in-room on-demand video entertainment and information systems outside North America. [Graphic: Underneath the above caption on both the first and second page of the gatefold is a map of the continents outside of North and South America America with the countries where there are MagiNet and Prodac installations indicated] [Graphic: Two images of a television screen showing the Company's welcome channel.] Currently being tested in Australia, MagiNet's new Welcome Channel introduces feature Hollywood movie trailers, advertising commercials, promotions and instructions in five languages--all with the quality of network television broadcasting. With the acquisition of Prodac, installed rooms will total 103,000 (63% on- demand, 37% scheduled). MagiNet's full service offices provide local support. [Graphic: One image of a television screen showing casino-style gaming, and two images of a television screen showing Bloomberg Information TV.] In an exclusive agreement with InterGame, MagiNet will be able to provide in-room, interactive casino-style gaming in hotel rooms worldwide where jurisdictions allow. MagiNet also expects to distribute Bloomberg Information Television, a 24-hour financial news program to hotels, starting with a test in Israel in late 1996. [GATEFOLD-SECOND PAGE] [Graphic: Three images of a television screen: one showing a welcome screen; one showing a movie menu; and one showing text describing a movie.] MagiNet's mainstay is on-demand entertainment, such as Hollywood blockbusters and adult theme movies. Plus, hotel information and guest services such as in-room check out and folio review. Providing guests as many choices as possible is MagiNet's formula for winning the world's leading hotels. MagiNet users are business and leisure guests at the world's leading hotels. MagiNet has 238% annualized growth in rooms since 1993 [Graphic: Three images of a television screen showing an information directory known as iLook.] iLook is an interactive information and resource directory for travelers that can provide hotel guests immediate and easy access to thousands of businesses, services, restaurants, shops and cultural information. iLook is expected to be launched in Thailand in early 1997, and is one of several products being developed as additional revenue sources. The world's best hotels have selected MagiNet for their interactive entertainment and information systems. Sheraton On The Park, australia Yokohama Grand Inter-Continental Hotel, japan Inter-Continental Sydney, australia Regent Auckland, new zealand Guam Hilton, guam The Orchard Hotel, singapore Mandarin Oriental, hong kong Sandton Sun & Towers, south africa JW Marriott, hong kong Durban Crowne Plaza, south africa Island Shangri-La, hong kong Hotel Lotte, south korea Regent Hong Kong, hong kong Hotel Shilla, south korea Hilton Tel Aviv, israel Grand Formosa Regent, taiwan Sheraton Tel Aviv, israel Grand Hyatt Taipei, taiwan Hotel Inter-Continental Tokyo Bay, Shangri-La Hotel, thailand Japan Hotel Okura Tokyo, japan Regent Bangkok, thailand Grand Hyatt Fukuoka, japan 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 reincorporated into Delaware in December 1996. Unless the text otherwise requires, references in this Prospectus to "MagiNet" and the "Company" refer to MagiNet Corporation, a Delaware corporation, and its subsidiaries. The Company's principal executive offices are located at 405 Tasman Drive, Sunnyvale, California 94089, and its telephone number at that address is (408) 752-1000. ACQUISITION OF PRODAC On November 6, 1996, the Company entered into a definitive Share Purchase and Transfer Agreement (the "Acquisition Agreement") to acquire all the outstanding shares of Prodac (the "Prodac Shares"), which is headquartered in Cologne, Germany. Prodac is one of the leading providers of video entertainment and information systems in Europe and develops, manufactures and installs its own proprietary scheduled broadcast and on-demand interactive video entertainment systems. The Company believes that the acquisition of Prodac will provide important competitive and strategic advantages to the Company. Europe represents the world's largest hotel market with approximately 5.5 million rooms, of which approximately 1.1 million represent rooms in the Company's target market of hotels with greater than 100 rooms. MagiNet's acquisition of Prodac will substantially expand the geographic scope of the Company's operations and establish the Company as an industry leader in Europe. In addition, the Company expects the acquisition to enhance its ability to pursue contracts with leading hotels and hotel chains in Europe. As of September 30, 1996, Prodac served 242 hotels with 43,657 installed rooms, the majority of which were located in Germany, and had 10,316 rooms in backlog. Scheduled broadcast equipment represented approximately 87% of Prodac's installations and 70% of its backlog, and the balance of installations and backlog represented installations and backlog of Prodac's Videoquest on-demand system. Pursuant to the Acquisition Agreement, following the closings of the Offerings, the Company will pay the shareholders of Prodac an aggregate consideration of approximately $16.4 million, consisting of approximately $13.1 million in cash (plus interest at the rate of 6% per annum from November 6, 1996 through the date of the payment of the acquisition consideration) and shares of MagiNet Common Stock with an aggregate value of approximately $3.3 million (based on a 10% discount to the initial public offering price). The shareholders of Prodac are also entitled to a distribution of approximately $393,000 to be paid from Prodac's retained earnings, calculated in accordance with German generally accepted accounting principles ("German GAAP"). If the closing of the Offerings occurs after December 31, 1996, such shareholders shall be entitled to any additional retained earnings, calculated in accordance with German GAAP, in excess of such $393,000. In addition, the Company will pay up to an aggregate of approximately $9.8 million in cash and MagiNet Common Stock contingent upon Prodac achieving certain financial targets in fiscal 1997, 1998 and 1999. The cash portion of the acquisition consideration will be paid in Deutsche Marks out of the net proceeds of the Offerings based on the applicable exchange rate on the Frankfurt am Main exchange on the closing date of the Offerings. Any increase in the value of the Deutsche Mark relative to the U.S. Dollar will increase the portion of the net proceeds of the Offerings used in connection with the Prodac acquisition and will result in the Company's issuing a greater number of shares of MagiNet Common Stock to the shareholders of Prodac. See "Use of Proceeds," "Dilution," "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" and "Acquisition of Prodac." 4 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 18,531,041 shares(1) after the Offerings............... Use of proceeds.................... System installations, the cash portion of the purchase price for the acquisition of Prodac, working capital and general corporate purposes. See "Use of Proceeds." Nasdaq National Market symbol...... MGNT
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 13,806 7,808 8,455 10,729 Research and development........... 1,320 856 1,247 1,525 890 1,599 1,809 ------- ------- -------- -------- -------- -------- -------- Operating loss......... (3,351) (7,797) (11,499) (15,916) (8,193) (8,985) (9,755) Interest expense and other, net............ (28) (253) (991) (2,688) (379) (2,083) (4,019) ------- ------- -------- -------- -------- -------- -------- Loss before income taxes and minority interest in net losses of consolidated subsidiaries.......... (3,379) (8,050) (12,490) (18,604) (8,572) (11,068) (13,774) Provision for income taxes ................ -- -- (554) (680) (423) (681) (1,123) Minority interest in net losses of consolidated subsidiaries.......... -- 124 248 248 204 215 215 ------- ------- -------- -------- -------- -------- -------- Net loss............... $(3,379) $(7,926) $(12,796) $(19,036) $ (8,791) $(11,534) $(14,682) ======= ======= ======== ======== ======== ======== ======== Pro forma net loss per share(4).............. $ (1.03) $ (1.48) $ (0.93) $ (1.14) ======== ======== ======== ======== Shares used in computation of pro forma net loss per share(4).............. 12,392 12,847 12,407 12,862 CONSOLIDATED STATEMENT OF CASH FLOWS DATA(5): Net cash used in operating activities.. $(1,753) $(6,137) $ (7,619) $ (6,680) $ (9,510) Net cash used in investing activities.. (3,091) (9,361) (14,897) (10,967) (16,451) Net cash provided by financing activities.. 5,082 25,715 30,656 23,034 14,540 OTHER DATA: EBITDA (In thousands)(6)......... $(3,180) $(6,840) $ (7,817) $ (5,980) $ (5,629) $ (4,238) $ (389) EBITDA margin.......... (805)% (292)% (90)% (31)% (100)% (35)% (2)% New rooms installed.... 2,087 10,929 26,106 37,702 18,075 20,407 33,054 Total rooms served(7).. 2,087 13,016 39,122 70,132 31,091 59,529 103,186 Rooms in backlog(8).... -- 10,941 12,194 15,156 16,783 27,099 Average monthly gross video revenue per room(5)............... -- $ 32.39 $ 29.18 $ 28.74 $ 28.84
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 $40,798 Working capital (deficit)............. 4,857 (15,879) 23,641 Total assets.......................... 49,484 74,424 113,944 Long-term debt........................ 25,829 40,142 40,142 Accumulated deficit................... (37,008) (49,208) (49,208) Total stockholders' equity............ 15,969 7,069 46,589
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 455,373 shares of Common Stock to be issued in connection with the Company's acquisition of Prodac within 10 business days after the closing of the Offerings. See "Management--Stock Plans," "Acquisition of Prodac" and Note 5 of Notes to Consolidated Financial Statements. Also excludes 40,000 shares of Common Stock issuable upon exercise of an outstanding warrant issued in connection with the Company's obtaining a commitment letter for up to $10 million of unsecured subordinated debt. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." (2) Pro forma to give effect to the Company's acquisition of Prodac following the closing of the Offerings as if such acquisition had taken place as of January 1, 1995. See "Acquisition of Prodac," the Unaudited Pro Forma Combined Condensed Financial Statements and Note 8 of Notes to Consolidated Financial Statements. (3) Pro forma to give effect to the Company's acquisition of Prodac following the closing of the Offerings as if such acquisition had taken place as of January 1, 1996. See "Acquisition of Prodac," the Unaudited Pro Forma Combined Condensed Financial Statements and Note 8 of Notes to Consolidated Financial Statements. (4) See Note 1 of Notes to Consolidated Financial Statements for a discussion of the computation of net loss per share. (5) Data not available on a pro forma basis. (6) Indicates earnings (loss) before interest expense, income taxes, depreciation and amortization, and minority interest in net losses of consolidated subsidiaries and is not intended to represent an alternative to net income (as determined in accordance with generally accepted accounting principles) as a measure of performance. Management of the Company believes that EBITDA provides an additional perspective on the Company's operating results and its ability to service its long-term debt and fund its operations. The primary differences between EBITDA and net cash used in operating activities are that net cash used in operating activities includes interest expense, income tax expense and changes in operating assets and liabilities, which items are excluded from EBITDA. See "Consolidated Statements of Cash Flows." (7) Includes all rooms installed with Company-owned systems, except for pro forma total rooms served, which also includes Prodac systems. A charge relating to the acquisition of in-process technology of approximately $12.2 million is included in the pro forma balance sheet as a charge to retained earnings. The Company expects to record this charge in its financial results during the three month period ended December 31, 1996. (8) Data not available on a pro forma basis as of December 31, 1995. (9) Pro forma to give effect to the Company's acquisition of Prodac following the closing of the Offerings as if such acquisition had taken place as of September 30, 1996. (10) Adjusted to reflect the net proceeds of the sale of Common Stock offered by the Company hereby at an assumed initial public offering price of $8.00 per share and the application thereof. See "Use of Proceeds." ---------------- Except as set forth in the Consolidated Financial Statements or otherwise indicated herein, all information in this Prospectus (i) reflects the reincorporation of the Company into Delaware effected in December 1996, (ii) reflects the conversion of all the Company's outstanding shares of Preferred Stock into 10,908,878 shares of Common Stock, which will occur automatically upon the closing of the Offerings, (iii) reflects the filing, upon the closing of the Offerings, of the Company's Restated Certificate of Incorporation authorizing 5,000,000 shares of undesignated Preferred Stock, (iv) assumes the net exercise of warrants to acquire up to an aggregate maximum of 3,704,840 shares of Common Stock and Preferred Stock for 1,158,918 shares of Common Stock in connection with the Offerings at an assumed fair market value of $8.00 per share, (v) assumes the approval by the Company's Board of Directors of the acquisition of Prodac and the issuance of 455,373 shares of Common Stock in connection with such acquisition and (vi) assumes that the U.S. Underwriters' and International Managers' over-allotment options are not exercised. See "Description of Capital Stock," "Underwriting," "Acquisition of Prodac" and Note 5 of Notes to Consolidated Financial Statements. For purposes of calculating the U.S. Dollar cash consideration and number of shares issuable pursuant to the Acquisition Agreement in connection with the Prodac acquisition, an assumed exchange rate of DM 1.525 per U.S. Dollar, representing the closing price in New York trading on September 30, 1996, and an assumed initial public offering price of $8.00 per share less a ten percent discount have been used throughout this Prospectus. The exchange rate determined on the Frankfurt am Main Exchange on the date of the closing of the Offerings will be used to determine the actual number of shares initially issued in connection with the Prodac acquisition. See "Dilution" and "Acquisition of Prodac." ---------------- MagiNet and iLook are trademarks of the Company. Prodac and Videoquest are registered in Germany as trademarks of Prodac. This Prospectus also contains trademarks and tradenames of other companies. 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 of employment and which has certain rights of co- determination with respect to management policy, in particular with regard to personnel measures. In addition, certain of Prodac's employees are members of trade unions. Any future failure to reach agreements with its employees or their representatives could result in a work stoppage at Prodac, which could have a material adverse effect on the Company's business, financial condition and results of operations. Under applicable German law, in order to 7 effect certain operational changes, including significant reductions in employment, employers are required to adopt "equalization of interest" and social plans designed to compensate dislocated employees. Although the Company has no present plans to implement such changes, if the Company were required to do so, including in connection with the integration of Prodac into the Company, it could be required to make substantial payments to such employees, which could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, there can be no assurance that, even if Prodac is successfully integrated into the Company, the Company could successfully compete against Prodac's competitors, including EMI Group plc ("EMI"), Video Management Services, Inc. ("VMS") and Granada Group Plc ("Granada") in the European or other markets. In October 1996, Prodac sold its United Kingdom operations to U.K. Consumer Electronics Limited ("UKCEL"), a division of Granada, and agreed to a non-competition provision for three years in the United Kingdom and Ireland that may be enforceable against both MagiNet and Prodac. This provision could prevent the Company from expanding installations into the United Kingdom and Ireland. The Company may be obligated under a contract with Hyatt International (Europe, Africa and Middle East) Ltd. to install rooms in the United Kingdom using the Company's licensed Guestserve technology, which could conflict with the non-competition provision of the UKCEL agreement. Any resulting breach of either the Company's agreement with Hyatt or the non-competition provision of the UKCEL agreement could have a material adverse effect on the Company's business, financial condition and results of operations. The Company is obligated to pay within 10 days after the closing of the Offerings DM 20 million for the cash portion of the consideration for the acquisition of Prodac (plus interest at the rate of 6% per annum from November 6, 1996 through the date of payment of the acquisition consideration) and to issue shares of MagiNet Common Stock with an aggregate value of DM 5 million based on a 10% discount to the initial public offering price. The Acquisition Agreement also provides that the shareholders of Prodac will be entitled to a cash distribution of DM 600,000 (approximately $393,000) from the retained earnings of Prodac, calculated based on German GAAP. In addition, in the event the Offerings have not closed on or prior to December 31, 1996, Prodac's shareholders will be entitled to receive an additional cash payment equal to all retained earnings in excess of DM 600,000, calculated under German GAAP, as of December 31, 1996. As of September 30, 1996, Prodac's retained earnings, calculated on a German GAAP basis, totalled approximately DM 2 million (approximately $1.3 million), which will be adjusted for the quarter ending December 31, 1996. The cash consideration payable in connection with the acquisition of Prodac, including the potential distributions from retained earnings, is payable in Deutsche Marks, and any increase in the value of the Deutsche Mark relative to the U.S. Dollar would increase the portion of the net proceeds of the Offerings used in connection with the acquisition of Prodac as well as the number of shares of MagiNet Common Stock to be issued to Prodac's shareholders. See "Acquisition of Prodac." HISTORY OF LOSSES; FUTURE CAPITAL NEEDS; ANTICIPATED FUTURE LOSSES MagiNet has recorded cumulative net losses of approximately $37,008,000 since its inception, including a loss of approximately $11,534,000 for the nine months ended September 30, 1996. Prodac has recorded cumulative net losses, calculated based on generally accepted accounting principles in the United States, of approximately $5,113,000 since its inception, including a loss of approximately $1,219,000 for the nine months ended September 30, 1996. The Company's business requires substantial investment on a continuing basis for the installation of the Company's systems in additional hotel rooms and the upgrading of existing installations. Capital expenditures expected to be incurred by the Company will likely exceed cash flows from its operating activities for the foreseeable future. The Company intends to use the net proceeds of the Offerings and may use other secured and/or unsecured borrowings to pay the cash portion of the consideration for the acquisition of Prodac and to expand its installed base of rooms and support its projected growth. If the Company cannot obtain sufficient funds to support installations of rooms, the Company may have to reduce the rate of room installations, which could have a material adverse effect on the Company's business, financial condition and results of operations. Whether or when the Company can achieve cash flow levels from operations sufficient to support its projected growth cannot be accurately predicted, and unless and until such cash flow levels are achieved, the Company may require additional borrowings or the sale of additional equity securities, or some combination thereof. There can be no assurance that the Company will be able to borrow additional amounts or sell additional equity on terms acceptable to the Company, or at all. See "Selected Consolidated Financial and Other Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." 8 RELIANCE ON NEW HOTEL CONTRACTS AND INSTALLATIONS The Company's future growth will depend principally on its ability to obtain contracts with new hotels and to install systems in such hotels in a timely manner. The timing of obtaining new contracts is dependent upon the level of competition in a particular market, the length of the negotiating process with each individual hotel and the amount of the Company's local personnel resources allocated to obtaining contracts as opposed to servicing existing hotel customers. To the extent new contracts are not obtained in future periods at the rate anticipated by the Company, there could be a significant shortfall in the Company's anticipated growth in installed rooms. The timing of system installations has historically been reasonably predictable after a contract has been executed, although, for certain prior installations, technical and other issues have delayed installations in specific hotels. Under MagiNet's master hotel contracts, MagiNet must install the interactive video entertainment and information system specified in the contract with the hotel chain. Pursuant to its hotel contracts, Prodac is required to install its scheduled broadcast or on-demand video systems. The inability to provide the particular system specified, including the inability of Prodac to manufacture sufficient quantities of its systems, could delay installations of such systems in the individual hotels within such chain, which could have a material adverse effect on the Company's business, financial condition and results of operations. The inability of the Company to obtain new contracts, to manufacture sufficient quantities of its systems or to install systems at the rate it currently anticipates for these or other reasons could have a material adverse effect on the Company's results of operations. MagiNet historically has obtained contracts and installed systems in large city-center hotel properties, primarily in Asia. With the acquisition of Prodac, the Company will be seeking to consistently obtain contracts and install systems in Europe. Many hotel properties in Europe are installed with either free-to-guest or scheduled broadcast systems, and European hotels tend to be smaller and older than the business and resort hotels in Asia in which the Company has historically installed its systems. Obtaining contracts and installing systems in Europe may require significant additional capital and personnel resources, which could have a material adverse effect on the Company's results of operations. The inability of the Company to obtain new contracts and install systems in Europe at the rate they currently anticipate for these or other reasons could have a material adverse effect on the Company's results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business--Installed Base and Backlog" and "Acquisition of Prodac." FLUCTUATIONS IN OPERATING RESULTS The Company's operating results have historically been, and will continue to be, subject to quarterly and annual fluctuations due to a variety of factors, including the time required to obtain new contracts and install systems; timely introduction, enhancement and market acceptance of new services; changes in the pricing policies by the Company or its competitors; increased competition; the gain or loss of contracts with hotels or hotel chains; the introduction of new products, product enhancements or new services by competitors; currency fluctuations and other uncertainties related to operating in multiple jurisdictions; hotel occupancy; buy rates; availability of programming and the ability to anticipate changing hotel or guest preferences. A large portion of MagiNet's installations are in tropical climates where occupancies are generally higher in the first and fourth quarters of the year, and buy rates are typically lower in the third quarter of each year. As a consequence, revenue per room is generally lowest in the third quarter. There can be no assurance that new contracts can be obtained in a timely manner, or at all, or that systems can be installed in a timely manner after contracts are obtained. The Company's operating results will also be affected by seasonality in the markets in which Prodac is operating, the timing of orders from UKCEL and shipments to UKCEL of Prodac systems, the ability of Prodac to manufacture its systems, general economic and other conditions affecting the timing of contracts and installations, capital spending, and order cancellations or rescheduling. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." SUBSTANTIAL FIXED COMMITMENTS Funds generated by MagiNet's and Prodac's existing operations are not sufficient to enable the Company to meet its debt service obligations on the Senior Secured Notes due 2000 (the "Notes") and Prodac's obligations 9 under lease financing arrangements for Prodac systems, together with other fixed charges. Net proceeds from the Offerings will be used by the Company primarily to pay the cash portion of the consideration for the acquisition of Prodac and to install new systems. If sufficient revenue is not generated from these installations, the Company's ability to make necessary payments with respect to the Notes would be impaired, and the Company's ability to service the Notes would then depend upon the Company's ability to secure additional funds from other sources. There can be no assurance that the Company will be able to obtain such additional funds on favorable terms, if at all. Further, the instruments governing the Company's debt obligations contain financial and other covenants, and no assurance can be given that the Company will comply with such covenants. During 1996, the Company failed to comply with certain financial covenants and obtained from the holders of the Notes amendments of the covenants in exchange for the Company issuing additional warrants to the holders of the Notes. Failure of the Company to comply with the covenants, or in the event of non-compliance, to obtain an amendment of the covenants, could result in acceleration of the maturity of the Company's borrowings, which would have a material adverse effect on the Company's business, financial condition and results of operations. The Company's debt obligations will be subject to acceleration in the event that the Company does not meet its principal and interest payments or comply with its covenants. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." IMPORTANCE OF POTENTIAL NEW SOURCES OF REVENUE; COMPATIBILITY MagiNet's strategy includes developing new applications and markets for its interactive entertainment and information systems. This strategy presents the risks inherent in assessing the value of development opportunities and committing capital to unproven markets. The Company expects that its future performance will be dependent on usage of additional services such as in-room casino-style gaming and advertising provided over the Company's systems to hotel guests. New services may require the Company to devote resources to software or other development to enable the new services to be provided over the Company's systems. There can be no assurance that the Company's new products or any products being developed by Prodac or MagiNet will generate additional revenue or earnings for the Company or that the Company will successfully penetrate these additional markets. In addition, any new services provided by the Company could induce guests to change their viewing patterns away from an existing service of the Company and toward a new service resulting in either no additional revenue or decreased actual revenue from the installed base of rooms, depending upon the pricing of the new services and the change in guest viewing patterns that may result. MagiNet will devote resources to developing such services through licensing agreements and other arrangements and marketing such services to hotels and to hotel guests. The Company's ability to provide in-room casino-style gaming is dependent upon obtaining the necessary licenses, approvals, findings of suitability and product approvals in all jurisdictions in which it intends to provide this service. The licensing and approval processes can involve significant expenditures of time and resources by the Company. There can be no assurance such approvals will be obtained. In addition, to the extent that new services introduced by MagiNet are not attractive to hotels and hotel guests, that hotel guests do not utilize such services to the extent necessary to generate a sufficient return on the Company's development and marketing expenditures or that governmental regulation prohibits the provision of these services, the Company's business, financial condition and results of operations would be adversely affected. The Company holds an exclusive license to provide an on-demand interactive video system developed by On Command Video Corporation ("OCV") to certain countries outside North America and a license to provide an on-demand interactive video system developed by Guestserve Development Group ("Guestserve") to all countries outside North America. The Company's OCV and Guestserve-based systems are not compatible with Prodac's scheduled broadcast or on-demand systems. Accordingly, additional development resources will be required to provide either the Company's existing or new products over Prodac's systems. EXPANSION OF BUSINESS THROUGH ACQUISITIONS Part of MagiNet's business strategy is to pursue additional acquisitions that will complement its existing business. The Company has had preliminary discussions with, or has evaluated the potential acquisition of, several companies in addition to Prodac. Although no transaction other than Prodac is being considered at this 10 time, the Company is unable to predict whether or when any prospective acquisition candidates will become available or the likelihood of a material transaction being completed should any negotiations commence. There can be no assurance that any additional acquisitions will occur, that the Company can be successful in integrating the operations and personnel of any acquired entity into the Company's business, incorporating any acquired product lines into the Company's business, establishing and maintaining uniform standards, controls, procedures and policies, avoiding the impairment of relationships with employees and management as a result of changes in management, or overcoming other problems that may be encountered in connection with the integration of acquired businesses. To the extent MagiNet proceeds with an additional transaction, and if such transaction is relatively large and consideration is in the form of cash, a substantial portion of the Company's available cash, including the net proceeds of the Offerings, could be used to consummate any such acquisition. The Company may also seek to finance any such acquisition through issuances of equity or debt financings, which could be dilutive to, or have an adverse impact on, the Company's earnings. There can be no assurance that any such financings will be available on acceptable terms or at all. SYSTEM RELIABILITY MagiNet has experienced and continues to experience problems with certain equipment, including converters and remote control units. MagiNet has replaced equipment at some hotels to correct problems that affected the delivery of the Company's services to the hotel guests. It is possible that the Company's systems, including Prodac's systems, may be found to be unreliable after installation at a hotel or hotels. Such occurrences could result in the Company devoting substantial resources to maintenance services for the systems, and could result in a substantial number of installed rooms not having the Company's services available for an extended period of time. Because a substantial majority of the Company's revenue is derived from video equipment installations, system unreliability could result in reduced revenue for the Company and dissatisfaction among hotels because of reduced commission revenue to the hotel and disruption of certain hotel operations, any of which could have a material adverse effect on the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business-- Manufacturing." DEPENDENCE ON LOCAL PARTNERS; INTERNATIONAL BUSINESS All of MagiNet's and Prodac's revenue is generated outside of the United States, subjecting the Company to a variety of risks that, individually or in the aggregate, may adversely affect the Company's business, financial prospects and results of operations. These risks include changes in political and economic conditions; the availability and reliability of local independent contractors for installation and maintenance services; differing legal and business practices, particularly in regard to interpretation and enforceability of contracts; changes in taxes, tariffs, freight rates and foreign exchange regulations; foreign currency fluctuations; censorship by governmental authorities or restrictions imposed by hotels and changes in the regulatory environment relating to the telecommunications and media industries in any of the Company's target markets. MagiNet and Prodac have each entered into joint ventures or similar arrangements in certain markets with local businesses and individuals believed by MagiNet or Prodac to be familiar with local laws, customs and practices and to be otherwise advantageous to the Company's business prospects in that market. The Company believes that its success in penetrating markets for its products depends in large part on its ability to maintain these relationships, to cultivate additional relationships and to cultivate alternative relationships if distribution channels change. Despite these efforts, there can be no assurance that the Company will be successful in avoiding or minimizing such risks or that such arrangements, if successful, will continue to provide significant benefits to the Company and will not expose the Company to potential liability as a consequence of actions taken by the Company's local joint venture partners. Most of the revenue of MagiNet and Prodac is denominated in foreign currencies. The Company has not historically attempted to reduce the risk of currency fluctuations by hedging except in certain limited circumstances. The Company may attempt to reduce these risks by hedging in the future. Changes in the exchange rates of foreign currencies or exchange controls may adversely affect the Company's results of operations. There can be no assurance that the Company's current or any future currency exchange strategy will 11 be successful in avoiding exchange related losses or that any of the factors listed above will not have a material adverse effect on the Company's future international revenue and, consequently, on the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." DEPENDENCE UPON SUPPLIERS; SOLE SOURCES OF SUPPLY MagiNet currently subcontracts the manufacture of its systems, including head-ends, converters and remote controls. The Company's remote controls for the OCV-based systems are manufactured by one company in Hong Kong, the remote controls for the Guestserve-based systems are manufactured by one company in China and the Company's converters are manufactured by three companies, one in each of Taiwan, Japan and Singapore. The OCV-based head-ends are currently available solely from OCV, and the Guestserve-based head-ends are available solely from Guestserve. OCV is a majority-owned subsidiary of Ascent Entertainment Group, Inc., which has recently acquired the assets of SpectraVision, Inc. ("SpectraVision"), a competitor of the Company in the Pacific Rim. MagiNet believes that similar contract manufacturing can be obtained from other vendors, including those located in the Pacific Rim, although no assurance can be given that such manufacturing resources will continue to be available on reasonable terms, or at all. The Company will pursue such alternative manufacturing arrangements when and if it appears likely that significant cost savings or quality improvements can be achieved. At present, the Company has no plans for alternative sourcing of the system or major system sub-assemblies. Prodac manufactures its scheduled broadcast and on-demand systems at its manufacturing facility in Cologne, Germany. The manufacturing process involves the integration of Prodac-produced components with commercially-sourced parts such as modulators, video players, racks and wiring. Certain of these components are currently available from single or limited supply sources. Although Prodac has not experienced any difficulty obtaining such components to date, there can be no assurance that Prodac will not face shortages of one or more necessary components in the future. Any failure to obtain components on a timely basis could have a material adverse effect on the Company's business, financial condition and results of operations. Prodac also relies on Philips N.V. ("Philips") to produce televisions incorporating the Prodac television control module ("TCM"). The arrangement with Philips is the only arrangement Prodac has established for the production of the TCM-equipped televisions that Prodac installs in hotels. Any disruption of the supply of components for the TCMs or disruption in Philips' manufacturing process could have a material adverse effect on the Company's business, financial condition and results of operations. See "Acquisition of Prodac." The Company has experienced delays in receiving converters for installations planned for the Guestserve-based systems, and these delays caused an approximately three to four month delay in installing certain hotels. Delays in receiving products could delay a large number of planned room installations. There can be no assurance that the Company will not face such difficulties or delays in the future. An inability of the Company to obtain sole-sourced or other components in a timely manner could significantly delay installations of systems, which could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, any increase in cost to manufacture the system components from existing or alternative sources could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business--Manufacturing." DEPENDENCE ON KEY PERSONNEL The Company's success depends upon the continued contributions of certain senior corporate managers and key employees, including those of Prodac, the loss of whose services could have a material adverse effect on the Company. The Company also depends on its continued ability to attract and retain other highly skilled and qualified personnel, and there can be no assurance that the Company will be successful in attracting and retaining such personnel. See "Management." COMPETITION MagiNet competes with a number of companies, including SpectraVision, Movielink Corporation Limited ("Movielink") and LodgeNet Entertainment Corporation ("LodgeNet"), that specialize in providing in-room 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 statutes and regulations relating to the use, storage, handling and disposal of certain hazardous substances used in the manufacturing and assembly of its products. The Company believes that Prodac is currently in compliance with all material environmental regulations in connection with its manufacturing operations. Any failure by Prodac to comply with present or future regulations could subject the Company and/or Prodac to the imposition of substantial fines, suspension of production, alteration of manufacturing processes or cessation of operations, any of which could have a material adverse effect on the Company's business, financial condition and results of operations. Compliance with such regulations could require Prodac and/or the Company to acquire expensive remediation equipment or to incur substantial expenses. Any failure of Prodac to control the use, disposal, removal or storage of, or to adequately restrict or discharge of, or assist in the cleanup of hazardous or toxic substances, could subject the Company to significant liabilities. The imposition of such liabilities could have a material adverse effect on the Company's business, financial condition and results of operations. See "Acquisition of Prodac." CONTROL BY CURRENT STOCKHOLDERS MagiNet's officers, directors and principal stockholders and their affiliates, totaling 12 stockholders, will in the aggregate beneficially own approximately 46.1% of the Company's outstanding shares of Common Stock after the Offerings. As a result, these stockholders, acting together, would be able to effectively control most matters requiring approval by the stockholders of the Company, including the election of directors and any merger, consolidation or sale of all the Company's assets. See "Principal Stockholders" and "Description of Capital Stock." SHARES ELIGIBLE FOR FUTURE SALE Future sales of shares by existing stockholders could adversely affect the prevailing market price of the Common Stock. Upon completion of the Offerings, approximately 5,505,000 shares of Common Stock, including the 5,500,000 shares offered hereby, will be eligible for immediate sale in the public market without restriction. Beginning 90 days after the date of this Prospectus, approximately 31,000 additional shares will become eligible for sale in the public market pursuant to Rule 144 or Rule 701 under the Securities Act of 1933, as amended. Beginning 180 days after the date of this Prospectus, approximately 9,100,000 additional shares subject to lock-up agreements will become available for sale in the public market. Of the approximately 9,100,000 shares that will become available for sale in the public market beginning 180 days after the date of this Prospectus, approximately 7,200,000 shares will be subject to certain volume limitations and other resale restrictions pursuant to Rule 144. Thereafter, approximately 3,500,000 shares held by existing stockholders will become eligible for sale at various times over a period of less than two years and could be sold earlier if the holders exercise registration rights. In addition, the shares of Common Stock to be issued in connection with the acquisition of Prodac will be subject to certain registration rights beginning one year after the closing of the Offerings. See "Description of Capital Stock--Registration Rights," "Shares Eligible for Future Sale" and "Underwriting." NO PRIOR PUBLIC MARKET Prior to the Offerings, there has been no public market for MagiNet's Common Stock. There can be no assurance that an active trading market will develop and continue upon the completion of the Offerings or that the market price of the Common Stock will not decline below the initial public offering price. The initial public offering price of the Common Stock will be determined by negotiations between the Company and the Underwriters, in conformity with Rule 2720 of the Conduct Rules of the National Association of Securities Dealers, Inc. As such, the initial public offering price is not necessarily related to the Company's net worth or any other established criteria of value and may not bear any relationship to the market price of the Common Stock following the completion of the Offerings. See "Underwriting." 15 MARKET VOLATILITY The market prices for securities of companies such as the Company have historically been highly volatile. Announcements of technological innovations or new products by the Company or its competitors, developments concerning proprietary rights, including patents and litigation matters, and publicity regarding actual or potential results with respect to products under development by the Company or others may have a significant impact on the market price of the Common Stock. Further, it is likely that in some future quarters the Company's revenue or operating results will be below the expectations of public market analysts and investors. In such event, the price of the Company's Common Stock would likely be materially adversely affected. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." ANTITAKEOVER PROVISIONS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND DELAWARE LAW Certain provisions of MagiNet's Certificate of Incorporation and Bylaws may have the effect of making it more difficult for a third party to acquire, or discouraging a third party from attempting to acquire, control of the Company. Such provisions could limit the price that certain investors might be willing to pay in the future for shares of the Company's Common Stock. Certain of these provisions eliminate the right of stockholders to act by written consent without a meeting and specify procedures for director nominations by stockholders and submission of other proposals for consideration at stockholder meetings. In addition, the Company's Board of Directors has the authority to issue up to 5,000,000 shares of Preferred Stock and to determine the price, rights, preferences, privileges and restrictions of those shares without any further vote or action by the stockholders. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any Preferred Stock that may be issued in the future. The Company has no present plans to issue shares of Preferred Stock. Certain provisions of Delaware law applicable to the Company could also delay or make more difficult a merger, tender offer or proxy contest involving the Company, including Section 203 of the Delaware General Corporation Law, which prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years unless certain conditions are met. Additionally, the issuance of Preferred Stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, may have the effect of delaying, deferring or preventing a change in control of the Company, may discourage bids for the Common Stock at a premium over the market price of the Common Stock and may adversely affect the market price of and the voting and other rights of the holders of the Common Stock. Such provisions could have the effect of delaying, deferring or preventing a change in control of the Company, including without limitation, discouraging a proxy contest or making more difficult the acquisition of a substantial block of the Company's Common Stock. These provisions could also limit the price that investors might be willing to pay in the future for shares of the Company's Common Stock. See "Description of Capital Stock--Preferred Stock," "--Antitakeover Effects of Provisions of Certificate of Incorporation and Bylaws" and "--Effect of Delaware Antitakeover Statute." DILUTION Purchasers of the Common Stock offered hereby will experience immediate, substantial dilution in the net tangible book value per share of the Common Stock from the initial public offering price. The Company is obligated to deliver to the shareholders of Prodac, following the closing of the Offerings, Common Stock of the Company with an aggregate value of DM 5 million based on a discount of 10% to the initial public offering price. The number of such shares to be issued in connection with the acquisition of Prodac will depend on applicable exchange rates on the date of the closing of the Offerings. Any increase in the value of the Deutsche Mark relative to the U.S. Dollar would cause the Company to issue additional shares of Common Stock, thereby resulting in additional dilution to existing shareholders. See "Dilution" and "Acquisition of Prodac." 16 USE OF PROCEEDS The net proceeds to the Company from the sale of the shares of Common Stock in the Offerings are estimated to be approximately $39,520,000 (approximately $45,658,000 if the U.S. Underwriters' and International Managers' over- allotment options are exercised in full) assuming an initial public offering price of $8.00 per share and after deducting the estimated underwriting discounts and commissions and estimated offering expenses. The Company currently anticipates that approximately $13.1 million of the net proceeds of the Offerings will be used to pay the cash portion of the consideration for the acquisition of Prodac. The cash consideration of DM 20 million (plus interest at the rate of 6% per annum from November 6, 1996 through the date of the payment of the acquisition consideration) is payable in Deutsche Marks, however, and any increase in the value of the Deutsche Mark relative to the U.S. Dollar would increase the portion of the net proceeds of the Offerings used in connection with the Prodac acquisition. The balance of the net proceeds of the Offering will be used for system installations by the Company and Prodac, working capital and for general corporate purposes, including the possible repayment of future indebtedness, if any. The Board of Directors has broad discretion in determining how the net proceeds of the Offerings will be applied. In the event opportunities arise, net proceeds of the Offerings also may be used to acquire, in addition to Prodac, businesses, technologies or products that complement MagiNet's business. However, the Company is not currently in negotiations regarding any such acquisitions. Although the Company believes the net proceeds of the Offerings, together with its existing resources will be adequate to satisfy its capital needs until at least December 1997, the timing and amount of spending of such capital resources cannot be accurately determined at this time and will depend upon several factors, including the availability of acquisition candidates, installation costs, costs associated with penetrating new markets, competing technological and market developments and market acceptance and demand for the Company's products. See "Acquisition of Prodac" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." Pending such uses, the Company intends to invest the net proceeds in short- term, interest-bearing investment grade securities. DIVIDEND POLICY The Company has never declared or paid cash dividends on its capital stock. The Company currently expects to retain future earnings, if any, for use in the operation and expansion of its business and does not anticipate paying any cash dividends in the foreseeable future. A note agreement entered in connection with the issuance of the Company's Senior Secured Notes due 2000 contains a restrictive covenant which limits the Company's ability to pay cash dividends or make stock repurchases. See Note 3 of Notes to Consolidated Financial Statements. 17 CAPITALIZATION The following table sets forth as of September 30, 1996 (a) the total capitalization of the Company, (b) the pro forma total capitalization to reflect (i) the reincorporation of the Company into Delaware, (ii) the conversion of all the Company's outstanding shares of Preferred Stock into 10,908,878 shares of Common Stock, which will occur automatically upon the closing of the Offerings, (iii) the filing, upon the closing of the Offerings, of the Company's Restated Certificate of Incorporation authorizing 5,000,000 shares of undesignated Preferred Stock and 45,000,000 shares of Common Stock and (iv) the net exercise of warrants to acquire up to an aggregate maximum of 3,704,840 shares of Common Stock and Preferred Stock into 1,158,918 shares of Common Stock in connection with the Offerings, at an assumed fair market value of $8.00 per share, and (c) the pro forma total capitalization adjusted to reflect (i) the sale by the Company of 5,500,000 shares of Common Stock in the Offerings at an assumed offering price of $8.00 per share and the application of the net proceeds therefrom assuming that the U.S. Underwriters' and International Managers' over-allotment options are not exercised, (ii) the assumed issuance of 455,373 shares of Common Stock in connection with the Company's acquisition of Prodac and (iii) an increase in long-term debt of $14,313,000 and an increase of $12,200,000 in accumulated deficit (decrease in total stockholders' equity) due to the completion of the Prodac acquisition and the estimated related charge for acquired in-process technology. See "Unaudited Pro Forma Condensed Combined Financial Statements." The capitalization information set forth in the table below is qualified by, and should be read in conjunction with, the more detailed Consolidated Financial Statements and Notes thereto appearing elsewhere in this Prospectus.
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, 12,575,668 and 18,531,041 shares issued and outstanding, pro forma and pro forma as adjusted, respectively(2).............................. 504 13 19 Additional paid in capital.................... -- 53,833 96,647 Warrants to purchase Common Stock............. 101 -- -- Deferred compensation......................... (218) (218) (218) Accumulated deficit........................... (37,008) (37,008) (49,208) Cumulative translation adjustment............. (651) (651) (651) -------- -------- ------- Total stockholders' equity................... 15,969 15,969 46,589 -------- -------- ------- Total capitalization......................... $ 41,798 $ 41,798 $86,731 ======== ======== =======
- -------- (1) See Note 3 of Notes to Consolidated Financial Statements. (2) Excludes an aggregate of 1,702,080 shares of Common Stock issuable upon exercise of options outstanding under the Company's 1992 Key Personnel Stock Option Plan and 1992 Stock Option Plan as of September 30, 1996 at a weighted average exercise price of $2.17. Also excludes as of September 30, 1996 an additional 2,318,728 shares reserved for future issuance under the 1992 Key Personnel Stock Option Plan, the 1992 Stock Option Plan, the 1996 Director Stock Option Plan and the 1996 Employee Stock Purchase Plan. See "Management--Stock Plans" and Note 5 of Notes to Consolidated Financial Statements. Also excludes 40,000 shares of Common Stock issuable upon exercise of an outstanding warrant issued in connection with the Company's obtaining a commitment letter for up to $10 million of unsecured subordinated debt. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." 18 DILUTION The pro forma net tangible book value (deficit) of the Company as of September 30, 1996, assuming the acquisition of Prodac on such date, was approximately $(3,305,000) or $(0.25) per share of Common Stock. Pro forma net tangible book value per share represents the Company's pro forma total tangible assets less total liabilities, divided by the number of outstanding shares of Common Stock then outstanding assuming (i) the conversion of all then outstanding Preferred Stock into Common Stock and the net exercise of certain warrants to acquire an aggregate of 3,704,840 shares of Common Stock into 1,158,918 shares of Common Stock and Preferred Stock assuming, for purposes of such net exercises, a fair market value of $8.00 per share of Common Stock and (ii) the issuance of 455,373 shares of Common Stock in connection with the Company's acquisition of Prodac. See "Unaudited Pro Forma Condensed Combined Financial Statements." Dilution per share represents the difference between the amount per share paid by investors in the Offerings and the net tangible book value per share after the Offerings. After giving effect to the sale of 5,500,000 shares in the Offerings (at an assumed initial public offering price of $8.00 per share and after deducting the estimated underwriting discounts and commissions and offering expenses payable by the Company), the Company's pro forma net tangible book value as of September 30, 1996 would have been $36,215,000 or $1.95 per share of Common Stock. This represents an immediate increase in pro forma net tangible book value of $2.20 per share to existing stockholders and an immediate dilution in pro forma net tangible book value of $6.05 per share to new investors. The following table illustrates this per share dilution: Assumed initial public offering price per share.................. $8.00 Pro forma net tangible book value (deficit) per share as of September 30, 1996............................................ $(0.25) Increase in pro forma net tangible book value per share attributable to new investors................................. 2.20 ------ Pro forma net tangible book value per share after offering....... 1.95 ----- Dilution per share to new investors.............................. $6.05 =====
The following table summarizes, on a pro forma basis as of September 30, 1996, the number of shares of Common Stock purchased from the Company, including Common Stock issuable upon the net exercise of warrants and the shares into which the outstanding Preferred Stock (including the Preferred Stock issuable upon net exercise of the warrants) will convert, and the shares issued in connection with the Company's acquisition of Prodac, the total consideration paid and the average price per share paid by the existing stockholders and by new investors purchasing shares in the Offerings (at an assumed initial public offering price of $8.00 per share and before deducting underwriting discounts and commissions and estimated offering expenses payable by the Company).
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE ------------------ -------------------- PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ---------- ------- ------------ ------- --------- Existing stockholders......... 13,031,041 70.3% $ 56,789,000 56.3% $4.36 New investors................. 5,500,000 29.7 44,000,000 43.7 8.00 ---------- ----- ------------ ----- Total....................... 18,531,041 100.0% $100,789,000 100.0% ========== ===== ============ =====
The foregoing computations assume no exercise of stock options after September 30, 1996, the issuance of 455,373 shares of Common Stock in connection with the Company's acquisition of Prodac and the net exercise of outstanding warrants to acquire up to an aggregate of 3,704,840 shares of Common Stock and Preferred Stock into 1,158,918 shares of Common Stock, assuming, for purposes of such net exercises, a fair market value of $8.00 per share of Common Stock. The foregoing net exercises are anticipated to occur upon either the effectiveness of the registration statement covering the Offerings, the closing of the Offerings, or the tenth business day following such closing as set forth in the applicable warrant agreement. As of September 30, 1996, there were outstanding options to purchase 1,702,080 shares of Common Stock under the Company's 1992 Key Personnel Stock Option Plan and 1992 Stock Option Plan at a weighted average price of $2.17 per share. At September 30, 1996, an additional 2,318,728 shares were reserved for issuance under the Company's 1992 Key Personnel Stock Option Plan, the Company's 1996 Director Stock Option Plan and the Company's 1996 Employee Stock Purchase Plan. After September 30, 1996, the Company issued a warrant to acquire 40,000 shares of Common Stock at an exercise price per share of $.01 in connection with obtaining a commitment letter for up to $10 million of unsecured subordinated debt. To the extent that any shares are issued upon exercise of options, warrants or rights that are presently outstanding or granted in the future, or reserved for future issuance under the Company's stock plans, there will be further dilution to new investors. The number of shares of Common Stock to be issued in connection with the acquisition of Prodac will depend on applicable currency exchange rates on the date of the Closing of the Offerings. Any increase in the value of the Deutsche Mark relative to the U.S. Dollar would cause the Company to issue additional shares of Common Stock, thereby resulting in additional dilution to new investors. See "Acquisition of Prodac," "Management--Stock Plans," "Description of Capital Stock" and Note 5 of Notes to Consolidated Financial Statements. 19 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 13,806 7,808 8,455 10,729 Research and development........... -- 665 1,320 856 1,247 1,525 890 1,599 1,809 ----- ------- ------- ------- -------- -------- ------- -------- -------- Operating loss......... (149) (1,181) (3,351) (7,797) (11,499) (15,916) (8,193) (8,985) (9,755) Interest expense and other, net............ -- (43) (28) (253) (991) (2,688) (379) (2,083) (4,019) ----- ------- ------- ------- -------- -------- ------- -------- -------- Loss before income taxes and minority interest in net losses of consolidated subsidiaries.......... (149) (1,224) (3,379) (8,050) (12,490) (18,604) (8,572) (11,068) (13,774) Provision for income taxes................. -- -- -- -- (554) (680) (423) (681) (1,123) Minority interest in net losses of consolidated subsidiaries.......... -- -- -- 124 248 248 204 215 215 ----- ------- ------- ------- -------- -------- ------- -------- -------- Net loss............... $(149) $(1,224) $(3,379) $(7,926) $(12,796) $(19,036) $(8,791) $(11,534) $(14,682) ===== ======= ======= ======= ======== ======== ======= ======== ======== Pro forma net loss per share(3).............. $ (1.03) $ (1.48) $ (0.93) $ (1.14) ======== ======== ======== ======== Shares used in computation of pro forma net loss per share(3).............. 12,392 12,847 12,407 12,862 CONSOLIDATED STATEMENT OF CASH FLOWS DATA:(4) Net cash used in operating activities.. $(1,753) $(6,137) $ (7,619) $(6,680) $ (9,510) Net cash used in investing activities.. (3,091) (9,361) (14,897) (10,967) (16,451) Net cash provided by financing activities.. 5,082 25,715 30,656 23,034 14,540 OTHER DATA: EBITDA (In thousands)(5)......... $(149) $(1,179) $(3,180) $(6,840) $ (7,817) $ (5,980) $(5,629) $ (4,238) $ (389) EBITDA margin.......... -- -- (805)% (292)% (90)% (31)% (100)% (35)% (2)% New rooms installed.... -- -- 2,087 10,929 26,106 37,702 18,075 20,407 33,054 Total rooms served(6).. -- -- 2,087 13,016 39,122 70,132 31,091 59,529 103,186 Rooms in backlog(7).... -- -- -- 10,941 12,194 15,156 16,783 27,099 Average monthly gross video revenue per room(4)............... -- -- -- $ 32.39 $ 29.18 $ 28.74 $ 28.84
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 $ 40,798 Working capital (deficit)............. (24) (386) (1,652) 7,751 14,542 4,857 (15,879) 23,641 Total assets........... 2 1,458 4,711 23,999 46,540 49,484 74,424 113,944 Long-term debt......... 125 349 1,400 -- 24,900 25,829 40,142 40,142 Accumulated deficit.... (149) (1,373) (4,752) (12,678) (25,474) (37,008) (49,208) (49,208) Total stockholders' equity (net deficit).. (149) 648 1,208 19,924 14,611 15,969 7,069 46,589
- -------- (1) Pro forma to give effect to the Company's acquisition of Prodac following the closing of the Offerings as if such acquisition had taken place as of January 1, 1995. See "Acquisition of Prodac," the Unaudited Pro Forma Condensed Combined Financial Statements and Note 8 of Notes to Consolidated Financial Statements. (2) Pro forma to give effect to the Company's acquisition of Prodac following the closing of the Offerings as if such acquisition had taken place as of January 1, 1996. See "Acquisition of Prodac," the Unaudited Pro Forma Condensed Combined Financial Statements and Note 8 of Notes to Consolidated Financial Statements. (3) Reflects the assumed conversion of the Company's outstanding Preferred Stock into 10,908,878 shares of Common Stock upon the closing of the Offerings. See Note 1 of Notes to Consolidated Financial Statements for a discussion of the computation of net loss per share. (4) Data not available on a pro forma basis. (5) Indicates earnings (loss) before interest expense, income taxes, depreciation and amortization, and minority interest in net losses of consolidated subsidiaries and is not intended to represent an alternative to net income (as determined in accordance with generally accepted accounting principles) as a measure of performance. Management of the Company believes that EBITDA provides an additional perspective on the Company's operating results and its ability to service its long-term debt and fund its operations. The primary differences between EBITDA and net cash used in operating activities are that net cash used in operating activities includes interest expense, income tax expense, and changes in operating assets and liabilities, which items are excluded from EBITDA. See "Consolidated Statements of Cash Flows." (6) Includes all rooms installed with Company-owned systems, except for pro forma total rooms served, which also includes Prodac systems. A charge relating to the acquisition of in-process technology of approximately $12.2 million is included in the pro forma balance sheet as a charge to retained earnings. The Company expects to record this charge in its financial results during the three month period ended December 31, 1996. (7) Data not available on a pro forma basis as of December 31, 1995. (8) Pro forma to give effect to the Company's acquisition of Prodac following the closing of the Offerings as if such acquisition had taken place as of September 30, 1996. (9) Adjusted to reflect the net proceeds of the sale of Common Stock offered by the Company hereby at an assumed initial public offering price of $8.00 per share and the application thereof. See "Use of Proceeds." 21 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 television control module ("TCM") and a hand-held remote control. Commencing in 1995, Prodac has generally provided television systems as part of its installations in larger hotels. Since inception, Prodac's cost per installed room has averaged approximately $530. Prodac's revenue is generated primarily from (i) fees paid by guests for viewing Prodac's scheduled broadcast and on-demand video programming, (ii) the sale of video systems to other in-room video service providers and (iii) the provision of programming services to purchasers of Prodac video systems. For the nine months ended September 30, 1996, Prodac generated revenue of $12.9 million, of which approximately $7.0 million related to in-room movie viewing, $4.0 million related to sales of video systems and $1.9 million related to programming and other services. Total costs and expenses include (i) direct costs such as royalties and fees paid for programming, hotel commissions, video materials, maintenance expenses and cost of equipment and systems sold, (ii) depreciation and amortization and (iii) operations, selling, research and development and general and administrative expenses. In connection with the Prodac acquisition, the Company expects to recognize a charge relating to the acquisition of certain in-process research and development technology totalling approximately $12.2 million, which represents the fair value of such technology as determined by an independent appraisal firm. The acquired in-process research and development technology consists of three separate identified development projects, a digital file server intended to replace Prodac's current scheduled broadcast system, a super digital file server intended to replace Prodac's current Videoquest on-demand system and PC/TV, which will offer new services currently unavailable with Prodac's current product offerings. Prodac's digital file server development effort is presently focused on developing hardware architecture and specifying software functionality to provide a cost-effective entry into the small hotel market by offering better price performance than the current scheduled broadcast system. The development effort for the super digital file server is similar to that for Prodac's digital file server but the super digital file server is intended to replace Videoquest systems in the large hotel market. If Prodac's development effort is successful, the super digital file server system will offer greater interactivity and viewing quality than the Videoquest system. Along with video revenues, it is intended that these systems will also be able to provide other services and entertainment products to hotel guests, including video games, in-room casino gaming and database information systems. With its PC/TV development project, Prodac is attempting to define the communication and computing architecture required for delivery of Internet-based information and entertainment products. The ultimate commercial viability and acceptance of PC/TV is predicated upon the assumption that business travelers are increasingly heavy users of 31 computing and communications services. The estimated cost associated with the remaining development effort for these three projects is approximately $1.4 million, which the Company expects to incur principally during 1997. These costs are estimated to be incurred primarily in 1997 and 1998. Significant development hurdles still exist for each of the development projects. The Company currently anticipates that both the digital file server and PC/TV products will be commercially viable in 1997 and that the super digital file server will be commercially viable in 1998. Once available, the Company plans to introduce these products to new Prodac customers and then to existing Prodac customers as their contracts are renewed. The cost of converting existing Prodac customers to the new products will not be significant when compared to the initial installation costs. It is anticipated that, beginning in 1998, the Company could achieve significant revenues from these products if they are successfully completed. The Company has no present plans to install Prodac's new technology in the Pacific Rim market for either current installations or for new installations. Prodac has recorded cumulative net losses of approximately $5.1 million since its inception, including a net loss of approximately $1.2 million for the nine months ended September 30, 1996. Prodac's operations in the United Kingdom produced a net loss of $228,000 for the nine months ended September 30, 1996. In October 1996, Prodac sold its United Kingdom operating assets to UKCEL. In connection with the sale of its United Kingdom operating assets, Prodac entered into a supply agreement to supply its Videoquest on-demand system to UKCEL for a period of three years. Prodac has financed its installed base of equipment principally through lease financing. To date, substantially all of Prodac's installed systems have been sold to one of several leasing companies and leased back to Prodac for a period of five years or less. The primary leasing company is affiliated with Philips N.V., from whom Prodac acquires televisions incorporating its TCMs. In accordance with United States generally accepted accounting principles, such leases have been accounted for as financing leases and the principal amount of the lease liability is reflected in the Prodac consolidated balance sheet as long-term debt. Such debt has been collateralized by various obligations of the two principals of Prodac aggregating approximately $5 million. In connection with the acquisition of Prodac, MagiNet will provide substitute collateral for such loans. The equipment financed by such leases is reflected as video systems on the Prodac consolidated balance sheet. LIQUIDITY AND CAPITAL RESOURCES Since its inception, the Company has financed its operations and funded its capital expenditure requirements primarily through private issuances of Preferred Stock, bank lines of credit, debt securities and capital equipment leases. From inception through September 30, 1996, the Company raised an aggregate of $53.2 million from the sale of Preferred Stock, net of related expenses. In August 1995, the Company issued its Senior Secured Notes due 2000 (the "Notes") with an aggregate principal amount of $24.9 million to New York Life Insurance Company, Mutual Life Insurance Company of New York and two other investors. The Notes currently bear interest at an annual rate of 11.5%, subject to certain adjustments. In connection with the issuance of the Notes, the Company also issued to the purchasers of such Notes warrants to acquire up to an aggregate of 1,422,857 shares of Common Stock at an exercise price of $7.00 per share, subject to adjustments of the number of shares and exercise price as set forth in the applicable warrants. The Notes are secured by a pledge of the stock of each of the Company's subsidiaries. During 1996, the Company failed to comply with certain financial covenants of the Notes, although the Company obtained from the holders of the Notes amendments of the covenants in exchange for warrants to acquire up to an aggregate of 200,000 shares of Common Stock at an exercise price of $7.00 per share, subject to adjustments of the exercise price as set forth in the applicable warrants. Failure of the Company to comply with the covenants, or in the event of non- compliance, to obtain an amendment of the covenants, could result in acceleration of the maturity of the Company's borrowings, which would have a material adverse effect on the Company's business, financial condition and results of operations. The continued expansion of the Company's business will require significant capital investments to finance the installation of equipment in hotel rooms. Historically, cash flow generated from the Company's operations has not been sufficient to fund the costs associated with expanding the Company's business. In addition to the proceeds of the Offerings, the Company has obtained a binding commitment letter from a lender pursuant to which the Company may borrow up to $10 million on an unsecured subordinated basis at a 12% annual interest rate. In the event the Company borrows such funds, it will be required to issue the lender warrants to acquire up to 1,333,333 shares of Common Stock at an exercise price of $7.50, exercisable over seven years. As consideration 32 for such commitment letter, the Company is obligated to pay $350,000 and issue a warrant to purchase 40,000 shares of its Common Stock at an exercise price of $.01 per share, exercisable over seven years. The Company believes that the net proceeds from the Offerings and such committed unsecured subordinated debt financing, together with cash flow from operations, will be sufficient to support the Company's focused expansion plans and capital expenditures as well as working capital requirements until at least December 1997. Thereafter, if cash generated from operations is insufficient to satisfy the Company's capital requirements, the Company may be required to raise additional funds. No assurance can be given that additional financing will be available or that, if available, such financing could be obtained by the Company on terms favorable to the Company and its stockholders. If the Company cannot obtain sufficient funds to support installations of rooms, the Company may have to reduce the rate of room installations. To the extent the Company raises additional capital by issuing equity or convertible debt securities, ownership dilution to the Company's stockholders will result. The Company used cash from operating activities totaling $9,510,000 for the nine months ended September 30, 1996, $7,619,000 in 1995, $6,137,000 in 1994, and $1,753,000 in 1993. The increased use of cash in 1995 as compared to 1994 and 1993 was primarily attributable to expansion into new geographic markets and the expansion of its headquarters and local country offices. The Company used $15,697,000 for the nine months ended September 30, 1996, $14,477,000 in 1995, $8,932,000 in 1994 and $3,091,000 in 1993 to fund capital expenditures, consisting principally of video systems for hotels. For the nine months ended September 30, 1996, financing activities provided $14,540,000. Financing activities provided $30,656,000, $25,715,000 and $5,082,000 for 1995, 1994 and 1993, respectively. 33 BUSINESS The following Business section contains forward-looking statements relating to future events or the future financial performance of the Company, which involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Risk Factors" and elsewhere in this Prospectus. THE COMPANY MagiNet is the leading supplier of on-demand interactive video entertainment and information services to the hospitality industry outside of North America. The Company installs integrated video systems that allow hotel guests to order pay-per-view movies on-demand. MagiNet has recently expanded these systems into entertainment and information gateways that offer an increasingly varied range of services, such as on-demand billing summaries, express checkout, personalized messaging, guest surveys and room service ordering. To date, the Company's principal on-demand video entertainment services have provided a reasonably predictable stream of recurring revenue during the term of its exclusive five-to-seven year contract. The Company expects to implement additional revenue enhancing services such as in-room casino-style gaming, advertising, video games, financial news, Internet access and in-room shopping in selected markets beginning in 1997. To date, the Company has focused principally on leading hotels in the Pacific Rim, which has been experiencing a higher rate of economic expansion and hotel construction than any other region in the world. The Company currently has operations and installations in Thailand, Australia, Japan, Taiwan, Guam/Saipan, Hong Kong, Singapore, South Korea, South Africa, Israel, New Zealand and France, and plans to expand its presence in the Pacific Rim, Europe, the Middle East and Africa. MagiNet began installing its systems in 1993 and as of September 30, 1996 served 59,529 rooms in 169 hotels with an additional 16,783 rooms in backlog. Beginning in early 1996, the Company added several key members to its management team, including its current Chief Executive Officer and Chief Operating Officer, both having over twenty years of experience in the hospitality industry. This management team further defined the Company's strategy to expand its installed room base by (i) leveraging its strong market position to obtain contracts with other leading hotels, (ii) penetrating existing or new target markets, directly or through acquisition and (iii) offering services to mid-market hotels in target regions. In addition, this management team was influential in establishing strategic relationships with Bloomberg for information and news television programming and InterGame for in-room casino-style gaming. On November 6, 1996, the Company entered into the Acquisition Agreement to acquire Prodac, which substantially expands the Company's geographic scope and immediately establishes the Company as a leading provider of in-room entertainment services in Europe, the world's largest hotel market. As of September 30, 1996, Prodac served 43,657 rooms in 242 hotels in Europe with an additional 10,316 rooms in backlog. See "Acquisition of Prodac." INDUSTRY BACKGROUND Pacific Rim Hospitality Industry The Pacific Rim has recently been experiencing a higher rate of economic expansion and hotel construction than any other region in the world. As the number of business and leisure travelers visiting the region has grown, most of the leading hotel chains including Accor, Choice International, Conrad, Hilton International, Holiday Inn Worldwide, Hyatt International, Marriott, Regent/Four Seasons, Shangri-La, Sheraton, Southern Pacific Hotel Corporation and Westin have focused their efforts on expanding in the Pacific Rim. The growth in business and leisure travel has contributed to occupancy rates and average daily room rates higher than those in the United States. In addition, there has been a significant expansion of mid-market hotels, which offer less expensive rooms and fewer services than leading hotels. It is estimated that in 1996 the travel and tourism industry in the Pacific Rim will employ 169 million people and will generate $944 billion of personal, business and government expenditures, capital investment, both public and private, net exports and government operating expenditures to support travellers and travel service providers, and is projected to employ 280 million people and generate $2.1 trillion in 2006. 34 European Hospitality Industry Europe represents the largest hotel market in the world. Between 1985 and 1994, room growth in Europe outpaced growth in North America. Hotels in Europe tend to be smaller and older in comparison to the city-center hotels found in many Pacific Rim business centers. Nevertheless, in Europe there are approximately 1.1 million rooms in the Company's target market of hotels with 100 or more rooms. Europe's major hotel chains include Accor, Forte Hotels, Hilton International, Holiday Inns, Novotel and Sheraton International. Video Entertainment and Information Services Leading hotels throughout the Pacific Rim and Europe have become increasingly focused on providing the same high caliber of guest amenities typically found in leading hotels in the United States including on-demand video entertainment and information services. Mid-market hotels are also increasingly providing on-demand video entertainment and information services as guests in these hotels are becoming accustomed to such hotel amenities. Video entertainment services first appeared in the U.S. hospitality industry over 20 years ago. Originally, "free-to-guest" video entertainment was provided by broadcasting a limited selection of movies to every room in a hotel on fixed schedules for a fee paid by the hotel. In the 1980s, a new service was developed that offered a limited selection of movies available at scheduled intervals on a pay-per-view basis, transferring the expense of the offerings to hotel guests and generally providing hotel operators with a commission based on revenue from these pay-per-view services. Typically, four to eight movies would be offered, each of which would be shown once every two to four hours. The subsequent development of on-demand video technology enabled providers of in-room services to offer scheduling flexibility to guests for movie viewing on a pay-per-view basis. The convenience of on-demand video technology increased average buy rates significantly, increased revenue and related hotel commissions and made on-demand video entertainment the leading segment of the hotel interactive video market. Technological advances have allowed providers of video entertainment and information services to offer other interactive services to hotels and hotel guests, including room billing summaries, express checkout, personalized messaging, interactive guest surveys and room service ordering. New guest pay services such as in-room video games, shopping, advertising, news, Internet access and casino-style gaming are under development in order to provide new amenities to guests and offer additional revenue sources per installation to the system providers and hotels. Today, free-to-guest services and on-demand video entertainment services have become standard amenities offered by most U.S. hotels serving all but the budget hotel market. Leading hotels internationally are now adopting new interactive video technologies. Hotels in the Pacific Rim are installing new on-demand video entertainment and information systems at a rapid rate, and the new international hotels being constructed in this region are expected to install the most current on-demand systems available. In Europe, interactive video systems have been installed in only a few leading hotels, and a number of major hotel chains are beginning to convert to interactive video technology. Some leading hotels in South Africa and Israel have free-to-guest systems, and a number of these hotels are now converting to the Company's in- room interactive on-demand video systems. The remainder of the rooms in Africa and the Middle East are largely unpenetrated. 35 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 36 rooms in its target markets by leveraging the reputation it has established with leading hotels. To date, penetration of on-demand video systems in mid-market hotels has been limited. The Company believes that mid-market hotels represent an attractive additional source of revenue. Implement New Interactive Entertainment and Information Revenue Sources. The Company's current system provides a full range of interactive video entertainment and information services including movies, on-demand billing summaries, express check-out services, personalized messaging, guest surveys and room service ordering. Currently, the Company is in the process of enabling hotels to further maximize guest revenue and differentiate hotel services by offering new interactive entertainment and information services, including in-room casino-style gaming, video advertising, video games, financial news, Internet access and in-room shopping. The Company believes that these new services will appeal to a broader group of users than the traditional purchaser of in-room videos and will serve to increase revenue per installed room. Increase Revenue Per Room by Effectively Merchandising Available Services. The Company is promoting the MagiNet brand name and awareness of the Company's product and service offerings. A key element to the Company's marketing strategy is to work closely with hotels to develop an effective campaign for increasing the use of video-based services. These strategies include in-room advertising and entertainment packages that highlight the Company's services and feature films. The Company also assists hotels in marketing hotel services to their guests through the Company's systems. Employ Cost-Effective, Proven Technology. The Company seeks to minimize technology risk and rapidly incorporate technological enhancements by licensing and purchasing cost-effective, leading-edge equipment and software in addition to developing equipment and software in-house. Currently, the Company utilizes the successful on-demand video technologies developed by OCV and Guestserve. The Company has also developed its own proprietary technology that enables its systems to operate with a number of different television standards that exist in its target markets and to increase functionality and reduce the cost of existing systems. The Company is continuously evaluating new technologies to enable the provision of a wide variety of services at a cost-effective price. For example, the Company is evaluating the use of digital server technology to increase system capacity and allow for the provision of additional interactive services. Utilize Relationships with Local Partners. To facilitate the marketing, installation and maintenance of the Company's systems in certain of its markets, the Company has entered into joint ventures or similar arrangements with local businesses and individuals believed by the Company to be familiar with local customs and practices and to be otherwise advantageous to the Company's business prospects in such markets. The Company has established such joint ventures in South Korea, Taiwan and Thailand and expects to establish further ventures with local partners as and when the need and opportunity arise. Establish Strategic Relationships. The Company establishes strategic relationships to facilitate the introduction of new interactive entertainment and information services. The Company has signed a license agreement with InterGame, Ltd. to provide in-room casino-style gaming in certain countries where such services are permitted. The Company has also entered into an agreement with Bloomberg L.P. to distribute Bloomberg Information Television, a 24-hour financial news program, to hotels in the Pacific Rim, Europe, South Africa and Israel. PRODUCTS AND SERVICES Current Products and Services To date, MagiNet has focused primarily on providing in-room on-demand video entertainment systems. The Company has recently expanded its systems into entertainment and information gateways that offer an increasingly varied range of services to hotel guests. On-Demand Video. The Company's video entertainment and information systems consist of a microprocessor controlling the converter and the television in each room, a handheld remote control and a central 37 "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, 38 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 ====== === ====== ===
39 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 40 and Thailand, and expects to establish further ventures with local partners as and when the need and opportunity arise. In Australia, Hong Kong, Israel, Japan, New Zealand, Singapore and South Africa, the Company operates through its local country subsidiaries and provides sales, installation, service and maintenance through its own local employees and independent contractors. The Company believes that the existing familiarity its local employees and independent contractors have with the business cultures of these countries will enable the Company to further penetrate these markets successfully without the assistance of a joint venture or similar arrangement. Distributors and Representatives The Company installs and services hotels in Guam and Saipan through one distributor and one representative. In addition, the Company has retained a distributor to install and service the Company's Guestserve-based systems in Malaysia, Singapore, Indonesia and Brunei. The representative installs and services systems owned by the Company, in exchange for a monthly fee and a percentage of revenue. The distributors purchase, install and service the systems and pay the Company a royalty based on rooms installed or revenue. Strategic Relationships On Command Video. Pursuant to a Technology License Agreement dated April 15, 1992 (the "OCV License"), OCV has granted the Company an exclusive, transferable license in 30 countries outside North America to manufacture, modify, market and sell products incorporating OCV's proprietary technology. Following an initial term of 10 years, the OCV License is automatically renewable for an indefinite number of five-year periods. Although the Company is not required to use OCV technology, it is currently incorporated into most of the Company's installed systems. Pursuant to the OCV License, the Company pays OCV royalties based on the Company's revenue derived from OCV patented technology. The Company has paid OCV, in advance, a license fee that is credited against its future royalty obligation under the OCV License. These prepaid royalties are expected to be fully amortized before December 1996, at which time the Company will begin to incur a monthly cash payment in order to fulfill its continuing royalty obligations to OCV. Guestserve. Pursuant to a Technology License Agreement dated December 20, 1995 (the "Guestserve License"), Guestserve has granted the Company a transferable license to manufacture, modify, market and sell products incorporating Guestserve's technology in all countries outside of North America. The Guestserve License is exclusive for the hospitality industry and non-exclusive for apartments serviced by hospitality providers. Following an initial term of 10 years, the Guestserve License is automatically renewable for an indefinite number of five-year periods. Guestserve has granted the Company a license to future technological improvements along with the right to purchase hardware on favorable terms, and the Company has granted Guestserve a license to all technological improvements to the Guestserve system engineered by the Company. Pursuant to the Guestserve License, the Company pays Guestserve royalties, payable in installments upon the Company's acceptance of specified Guestserve technology and on a per-room basis. The royalties are capped and payable over a seven-year period. InterGame, Ltd. The Company has entered into an agreement (the "InterGame Agreement"), effective as of July 8, 1996, with InterGame, Ltd. ("InterGame"), a company engaged in designing, implementing and operating electronic video gaming programs for use with interactive PC and other platform-based systems. Pursuant to the InterGame Agreement, InterGame will deliver its network systems and software to MagiNet, develop an interface for the system to operate on MagiNet's interactive video systems, and grant to MagiNet an exclusive worldwide license to provide in-room casino-style gaming in hotels, as permitted by law. The Company will bear the capital costs of the equipment necessary to deliver the gaming services, and net revenue from the operation of the system (after certain payments are made) is to be divided between the Company and InterGame. MagiNet has exclusivity for the hospitality industry with respect to the technology, provided certain installation milestones are achieved. The InterGame Agreement will remain in force until July 8, 2001, and thereafter is automatically renewable for an indefinite number of one-year periods. To the extent the Company 41 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 42 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. 43 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. 44 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. 45 ACQUISITION OF PRODAC BUSINESS OF PRODAC Prodac is one of the leading suppliers of video entertainment and information services in Europe. Prodac develops, manufactures and installs proprietary on-demand video and scheduled broadcast systems which allow guests to order and view movies and which provide other interactive services. As of September 30, 1996, Prodac served 242 hotels with approximately 43,657 rooms, the majority of which were located in Germany, and had a contracted backlog of 10,316 rooms. Approximately 87% of Prodac's installations and 70% of its backlog were scheduled broadcast, and the balance of installations and backlog represented installations and backlog of Prodac's Videoquest on-demand system. The Company believes that the acquisition of Prodac will provide important competitive and strategic advantages. The Prodac acquisition will substantially expand the geographic scope of the Company's operations and establish the Company as an industry leader in Europe. The Company intends to leverage Prodac's relationships with leading hotels to expand the Company's installed base of rooms. The increase in the Company's installed base of rooms may also further the Company's ability to acquire programming on more favorable terms. In addition, Prodac has developed and implemented a proprietary on-demand video system technology, which the Company intends to evaluate for use in its systems. Prodac develops, manufactures and installs a scheduled broadcast system as well as its proprietary Videoquest on-demand system. Prodac's systems consist of a TCM integrated into the television set, a hand-held remote and a central "head-end" video storage unit. The scheduled systems provide up to eight movies available at scheduled intervals for a daily flat fee. Prodac's Videoquest on-demand video system allows hotel guests to choose, at their convenience, from a selection of up to 16 movies. In addition, Prodac's systems offer video and informational services such as guest checkout, in-room billing, room service, mini-bar charging and room status. The OCV and Guestserve systems currently installed by the Company are not compatible with Prodac's scheduled broadcast or on-demand systems. Accordingly, additional development resources will be required to provide either the Company's existing or new products over Prodac's systems. Prodac manufactures its video equipment at its facility in Cologne, Germany. The manufacturing process involves the integration of Prodac-produced components with commercially-sourced parts such as modulators, video players, racks and wiring. Certain of these components are currently available from single or limited supply sources. Prodac estimates that it would require three to six months to find and integrate suitable alternative components in the event existing sources proved to be unavailable. Although Prodac has not experienced any difficulty obtaining such components to date, there can be no assurance that Prodac will not face shortages of one or more necessary components in the future. Any failure to obtain components on a timely basis could delay shipments of Prodac's equipment and could have a material adverse effect on the Company's business, financial condition and results of operations. Prodac believes that its maximum production capacity under its two shift system is approximately 30 systems per month. For the last four years, Prodac has had a manufacturing relationship with Philips N.V. pursuant to which Philips integrates Prodac's TCM into Philips television sets. Philips delivers the integrated television sets either directly to the hotel for installation or to Prodac. In addition, Philips' leasing subsidiary has provided a significant portion of Prodac's equipment lease financing. The arrangement with Philips is the only arrangement Prodac has established for the production of the TCM-equipped televisions that Prodac sells to hotels. Any disruption of the supply of components for the TCMs or disruption in Philips' manufacturing process could have a material adverse effect on the Company's business, financial condition and results of operations. In addition to installing its systems in hotels, Prodac sells its video systems and components to other in-room video service providers and occasionally enters into film supply agreements with hotels and hotel chains. In connection with the sale of its United Kingdom operating assets, Prodac entered into a supply agreement to supply its Videoquest system to UKCEL and licensed certain software to UKCEL. Pursuant to the supply agreement, Prodac agreed to supply such quantities of Prodac's Videoquest system as UKCEL may order from time to time for a period of three years and to supply parts for a period of seven years thereafter. 46 Prodac obtains first-run motion pictures and other programming through a distribution agreement with the authorized distributor of certain major movie studios in the United States, including MGM, United Artists and Universal, in addition to other independent studios and movie production companies. Prodac prepares monthly line-ups for video titles at its hotels, arranges the ordering and duplication of those titles and changes actual video cassettes for new movies monthly. Prodac obtains English, French, German, Greek and Spanish language programming. Typically, Prodac broadcasts movies in English and the language of the country in which the hotel is located. The distribution agreements relating to first-run motion pictures generally provide for a specified license period and percentage of revenue of each motion picture, with the studio receiving a percentage generally ranging from 30% to 45% of Prodac's gross revenue from such motion picture. In addition to first-run motion pictures, all of Prodac's installations also offer programming independent of the major movie studios, including titles considered appropriate for adult audiences only. Such programming is typically obtained for a comparatively small flat-rate fee based on the number of rooms served. For the nine months ended September 30, 1996, such independent programming accounted for approximately 46% of Prodac's total revenues, which includes revenues generated from film rentals, system sales and film programming arrangements. Prodac targets leading hotels generally in excess of 100 rooms in Europe. As of September 30, 1996, Prodac had room installations in Albania, Austria, Belgium, France, Germany, Greece, Luxembourg, the Netherlands and Spain. A substantial majority of Prodac's rooms are located in Germany. Prodac's installed base of rooms consists of rooms installed in hotels that have signed exclusive contracts with Prodac for a fixed term of five to ten years, with the typical contract providing for a seven year term. Based upon contracts entered into as of September 30, 1996, contracts for approximately 7% of Prodac's installed base of rooms expire on or before December 31, 1997, 5% of the Company's installed rooms expire during 1998, 7% during 1999 and 7% during 2000. Prodac has also entered master hotel agreements with certain large hotel chains in Europe, including Dorint AG, Maritim Hotel GmbH and Novotel Hoteltriebs GmbH. These master contracts establish Prodac as a preferred vendor of Prodac's scheduled broadcast or Videoquest entertainment systems without guaranteeing any commitments from individual hotels within the chain. Prodac must sign agreements with individual hotels within the chain to install its systems in such hotels. Prodac also has individual contracts within recognized chains with which it does not have master contracts, including Holiday Inns, Hotel Sofitel and Ramada. Prodac manufactures, sells, markets and installs its products directly through most of Europe using Prodac personnel. In Austria, Prodac operates through a wholly-owned subsidiary. Hotel employees or local maintenance contractors specifically trained by Prodac perform routine maintenance and repairs. Because Prodac's TCM is integrated with the television set, local maintenance personnel are able to remove the module, when necessary, and return it to Prodac's Cologne manufacturing facility for repairs. As of September 30, 1996, Prodac had 97 employees, 35 of which served in operations, 9 of which served in engineering, 25 of which served in sales, marketing and administrative positions and 28 of which served in manufacturing positions. Prodac's employees have established a workers' council, which represents the employees for purposes of negotiating certain terms and conditions of employment and which has certain rights of co-determination with regard to management policy, in particular with regard to personnel issues. In addition, certain of Prodac's employees may be members of trade unions. Although Prodac has not experienced any labor problems to date and believes its relations with employees to be good, any future failure to reach agreements with its employees or their representatives could result in a work stoppage at Prodac, which could have a material adverse effect on the Company's business, financial condition and results of operations. Under applicable German law, in the event Prodac were to effect significant operational changes in its business, including significant reductions in employment, it would be required to implement an "equalization of interest" and social plan designed to compensate dislocated employees. Although the Company has no current plan to implement any such operational changes at Prodac, if Prodac were required to pay substantial amounts in connection with such a plan, including in connection with its integration with the Company, such payments could have an adverse effect on the Company's business, financial condition and results of operations. 47 Prodac's administrative, sales, marketing and product development headquarters are located in Cologne, Germany, where Prodac leases approximately 41,010 square feet under a lease expiring in December 2008. The lessor of such space is a civil law partnership consisting of the two shareholders of Prodac and their wives. See "Certain Transactions." Prodac also leases space in Milton Keynes, England under a real property lease expiring in 2001. The annual rent under the lease is approximately (Pounds)5,000. Prodac intends to continue payments under the lease through December 31, 1996 at which time UKCEL will determine whether it wishes to sublet or seek an assignment of the lease. If UKCEL determines not to lease the space, Prodac will seek a sublessee or assignee. TERMS OF ACQUISITION On November 6, 1996, the Company entered into the Acquisition Agreement to acquire all of the Prodac Shares from Heinrich R. Wirt and Reiner Kaesbach, Prodac's founders and sole shareholders (the "Prodac Founders"). The Acquisition Agreement provides that the transfer of the Prodac Shares from the Prodac Founders to MagiNet GmbH, the Company's German subsidiary, will become effective upon the Company's delivery of acquisition consideration consisting of cash and MagiNet Common Stock with an aggregate value of DM 25 million. Pursuant to the Acquisition Agreement, the Company is obligated to deliver to the Prodac Founders within ten days of the closing of the Offerings cash in the amount of DM 20 million (plus interest at the rate of 6% per annum from November 6, 1996 through the date of the payment of the acquisition consideration) and the aggregate number of shares of MagiNet Common Stock that DM 5 million would purchase at a per share purchase price equal to the initial public offering price, discounted by ten percent. The relevant exchange rates will be determined according to the official middle rate of exchange between the Deutsche Mark and the U.S. Dollar on the Frankfurt am Main exchange on the closing date of the Offerings. Assuming an initial public offering price of $8.00 and an estimated exchange rate of 1.525 DM per U.S. Dollar (the applicable exchange rate at the close of trading in New York on September 30, 1996), MagiNet would be obligated to pay approximately $13.1 million in cash and deliver approximately 455,373 shares of MagiNet Common Stock to the Prodac Founders. The cash consideration for the acquisition is payable in Deutsche Marks, however, and the number of shares of Common Stock issuable to the Prodac Founders is dependent on applicable exchange rates at the time of the closing of the Offerings. Any increase in the value of the Deutsche Mark relative to the U.S. Dollar would increase the Company's U.S. Dollar cash obligation to the Prodac Founders and would increase the number of shares of Common Stock issuable in connection with the acquisition. In addition to the consideration deliverable in connection with the closing of the Offerings, in the event that Prodac achieves certain financial milestones in its fiscal years 1997, 1998 and 1999, the Prodac Founders will be entitled to receive additional consideration of DM 5 million for each year in which such milestones are achieved. The milestones relate to new room installations, average monthly revenue per room, operating costs and per-room installation costs. Such additional consideration will be payable on the date on which the financial audit results for the relevant fiscal year are first published in a combination of cash and MagiNet Common Stock based on the fair market value of MagiNet Common Stock and the exchange rate between the Deutsche Mark and the U.S. Dollar in Frankfurt trading on the payment date. The Acquisition Agreement also provides that the Prodac Founders will be permitted to pay themselves an aggregate of DM 600,000 (approximately $393,000) from the retained earnings of Prodac, calculated based on German GAAP. In addition, in the event the Offerings have not closed on or prior to December 31, 1996, the Prodac Founders will be entitled to receive an additional cash payment equal to all retained earnings in excess of such DM 600,000, calculated under German GAAP, as of December 31, 1996. As of September 30, 1996, Prodac's retained earnings, calculated on a German GAAP basis, totalled approximately DM 2 million (approximately $1.3 million), which will be adjusted for the quarter ending December 31, 1996. In connection with the acquisition, MagiNet has agreed to assume from the Prodac Founders certain guarantees of Prodac indebtedness provided by the Prodac Founders in an aggregate amount of DM 4.6 million and to repay certain loan obligations of Prodac owed to the Prodac Founders in the amount of DM 130,000. Pursuant to the Acquisition Agreement, the Company is obligated to appoint one of the Prodac Founders to its Board of Directors immediately after the effectiveness of the transfer of the Prodac Shares and for so long as the 48 Prodac Founders collectively hold 1% or more of the Company's outstanding Common Stock. The Company expects that Mr. Kaesbach will become a member of its Board of Directors following the Offerings. See "Management" and "Certain Transactions." In connection with the Prodac acquisition, each of the Prodac Founders has entered into an employment agreement with Prodac that will become effective upon the Company's payment of the initial acquisition consideration. Pursuant to the employment agreements, each of the Prodac Founders will be entitled to an annual base salary of DM 338,000 (approximately $222,000). In addition, each of the Prodac Founders is eligible to receive a yearly bonus of up to DM 101,400 (approximately $66,492) if certain business targets are achieved. After December 31, 1999, either of the Prodac Founders may terminate their respective agreement with six months prior notice. Prior to December 31, 1999, the Company may terminate the agreements in any event for cause and on three months prior notice in the event that certain minimum financial targets are not achieved. As employees of Prodac, each of the Prodac Founders will be granted, at the time of the effectiveness of the transfer of the Prodac Shares, an option to acquire 150,000 shares of MagiNet Common Stock at an exercise price per share of $8.00. The option will be issued pursuant to the Company's 1992 Key Personnel Stock Option Plan, will have a five year term, and will be subject to vesting over four years with 25% of the shares vesting one year after the date of grant and the remaining shares vesting ratably over the succeeding 36 months. Prodac is obligated as lessee under a 15-year lease for certain real property owned by a civil law partnership consisting of the Prodac Founders and their wives. The lease relates to Prodac's office and manufacturing facilities in Cologne, Germany. The lease agreement provides for monthly rental payments of DM 79,000 (approximately $52,000), subject to periodic adjustments for inflation based on changes in the Cost of Living Index prepared by Germany's Federal Office of Statistics. The lease expires in December 2008 and provides for automatic one-year extensions thereafter unless terminated in advance of such extension with 6 months notice. See "Certain Transactions." In October 1996, Prodac sold its business operations in the United Kingdom, consisting of approximately 6,700 installed rooms operated by Prodac's English operating subsidiary, to UK Consumer Electronics Limited ("UKCEL"), a subsidiary of Granada Group Plc, a competitor of the Company. In connection with the asset sale, Prodac entered a supply agreement pursuant to which it agreed to supply UKCEL with its requirements of Prodac's interactive video system, Videoquest, for a period of three years, and to continue to supply parts for seven years thereafter. In addition, Prodac agreed that it would not compete with UKCEL in the United Kingdom or Ireland for a period of three years from the date of the asset sale. Pursuant to a master hotel contract with Hyatt International (Europe Africa Middle East) Ltd., the Company is obligated to install Guestserve systems in Hyatt hotels in the United Kingdom and plans to perform such obligations through either a U.K. operating subsidiary or a U.S. subsidiary which is the contracting party to the Guestserve license agreement. In the United Kingdom and Ireland, the Company may be precluded from entering these markets by a non-competition provision in an asset sale agreement executed by Prodac in connection with Prodac's sale of its U.K. operations to UKCEL. 49 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. ................... 55 Executive Vice President and Chief Operating Officer Pang T. Ho, Ph.D........ 51 Vice President of Engineering Reiner Kaesbach(1)...... 45 Director Nominee and Managing Director of Prodac GmbH Stuart J. Ellman(2)(3).. 30 Director Michael D. Granoff(2)... 38 Director Michael Ramsay(3)....... 44 Director James D. Robinson IV(3).................. 34 Director
- -------- (1) Mr. Kaesbach is expected to become a director of the Company following the Offerings upon payment of the acquisition consideration for Prodac. (2)Member of the Audit Committee. (3)Member of the Compensation Committee. Kenneth B. Hamlet has served as the Company's President and Chief Executive Officer and as a member of its Board of Directors since January 1996 and as Chairman of the Board since September 1996. Between 1991 and 1995, Mr. Hamlet was Chairman and Chief Executive Officer of Hamlet & Associates, a private investment banking and consulting firm. During such period, Mr. Hamlet provided management consulting services to a number of companies, including serving as Chairman and Chief Executive Officer of Caretenders Healthcorp, a health care company, and Executive Vice President of NTN Communications, Inc., a telecommunications equipment company. From March 1984 to January 1991, Mr. Hamlet served as President and Chief Executive Officer for Holiday Inns, Inc., a wholly-owned subsidiary of Holiday Corporation that owned, operated and franchised 1,750 hotels worldwide. From 1975 to 1984, Mr. Hamlet served in numerous executive capacities within Holiday Inns, Inc. Mr. Hamlet holds a B.S. in hotel administration from the Cornell University School of Hotel Administration. Robert R. Creager founded the Company and has served as Executive Vice President, Corporate Development, since September 1996 and as a member of the Company's Board of Directors since the Company's inception. From January 1996 to September 1996, Mr. Creager served as the Company's Chairman of the Board. From July 1991 to January 1996, Mr. Creager served as President and Chief Executive Officer of the Company. From 1988 to 1990, Mr. Creager was Vice President, Corporate Development, and General Counsel of Arix Corporation, a UNIX minicomputer manufacturer. Mr. Creager holds a B.A. in Business Administration from Pacific Union College and a J.D. from the University of California, Hastings College of Law. James A. Barth has served as the Company's Executive Vice President since September 1995, and as Chief Financial Officer and Secretary since October 1994. From October 1994 to September 1995, Mr. Barth was Vice President of Finance of the Company. From March 1994 to October 1994, Mr. Barth was Vice President and Chief Financial Officer of ACC Microelectronics Corporation, a semiconductor company. From 1982 to March 1994, he served as Vice President and Chief Financial Officer of Rational Software Corporation, a developer of object-oriented software engineering tools. Mr. Barth is a certified public accountant and holds a B.S. in business administration from the University of California, Los Angeles. Gordon E. (Ned) Druehl, Jr. has served as the Company's Executive Vice President and Chief Operating Officer since August 1996. From January 1992 to July 1996, he served as Chairman and Chief Executive Officer of Sandusky Cabinets Manufacturing, Inc., a metal cabinet manufacturing company. From 1990 through October 50 1991, Mr. Druehl founded and operated NKI Hospitality, a hotel management company, and subsequently worked as Vice President of RFS Real Estate, Inc., a diversified property management company, which acquired NKI Hospitality. From 1975 to 1990, Mr. Druehl held various management positions at Holiday Corporation, including President of the Hotel Services Division and Senior Vice President of U.S. Operations. Mr. Druehl holds a B.S. in hotel administration from the Cornell University School of Hotel Administration. Pang T. Ho, Ph.D. has served as the Company's Vice President of Engineering since August 1994. From February 1994 until August 1994, Dr. Ho served as Chairman of Spectrum, Inc., a cable television equipment distributor in Taiwan. From December 1991 until January 1994, Dr. Ho was President of Po-Hsin Entertainment, Inc., a cable television system operator located in Taiwan. From 1985 to 1991, Dr. Ho served as Vice President of Commercial Products for Pacific Monolithics Inc., a wireless communications equipment company. Dr. Ho holds a B.S. in electrical engineering from National Taiwan University, an M.S. in electrical engineering from Princeton University and a Ph.D. in electrical engineering from Rutgers University. Reiner Kaesbach is expected to become a member of the Company's Board of Directors following the closing of the Offerings upon the Company's delivery of the acquisition consideration for Prodac. In addition, upon such payment, Mr. Kaesbach will be employed as a Managing Director of Prodac pursuant to a Managing Director's Service Agreement dated November 5, 1996. Prior to joining MagiNet, Mr. Kaesbach served as a Managing Director of Prodac since founding Prodac in 1979. Pursuant to the Acquisition Agreement, for so long as the Prodac Founders continue to hold at least 1% of the outstanding Common Stock of the Company and to serve as Managing Directors of Prodac, they will together have the right to one seat on the Company's Board of Directors to be filled by either Mr. Wirt or Mr. Kaesbach on an annual, rotating basis. Following the closing of the Offerings, the Company anticipates that Mr. Kaesbach will become a member of the Board of Directors to serve for the first such rotation. Mr. Kaesbach holds an undergraduate degree in engineering from Siegen University. Stuart J. Ellman has served as a member of the Company's Board of Directors since October 1994. Since August 1994, he has served as a Managing Director of RRE Investors, L.L.C., a venture capital investment firm. From August 1992 to August 1994, he was Vice President of Advisory Capital Partners, an investment firm. From June 1988 to July 1990, Mr. Ellman was an associate at Dillon, Read & Co. Inc., an investment banking firm. Mr. Ellman holds a B.A. from Wesleyan University and an M.B.A. from Harvard University. Michael D. Granoff has served as a member of the Company's Board of Directors since October 1994. Since January 1994, Mr. Granoff has served as Chief Executive Officer of Pomona Capital, L.P., a private investment company. From October 1988 to December 1993, Mr. Granoff was President of Golodetz Ventures and a member of the Board of Directors of Golodetz Corporation. From March 1981 to January 1985, Mr. Granoff served on the staff of the U.S. House of Representatives Appropriations Subcommittee on Foreign Operations and was a member of the 1992 Presidential Transition Team. Mr. Granoff holds a B.A. from the University of Pennsylvania and a J.D. from Georgetown University Law Center. Michael Ramsay has served as a member of the Company's Board of Directors since September 1993. Since April 1996, he has served as a Senior Vice President of Silicon Desktop Group of Silicon Graphics, Inc., a developer and manufacturer of computer workstations. From August 1994 to March 1996, he served as President of Silicon Studio, Inc., a subsidiary of Silicon Graphics, Inc. From July 1992 to August 1994, he served as Senior Vice President of Silicon Graphics' Visual System Group, from February 1987 to July 1992, he served as Senior Vice President of Silicon Graphics' Entry Systems Division, and from May 1986 to July 1991, he served as Director of Engineering, Vice President and Senior Vice President of various Silicon Graphics divisions. Mr. Ramsay received his B.S. degree in electrical engineering from the University of Edinburgh in Scotland. James D. Robinson IV has served as a member of the Company's Board of Directors since October 1994. Since December 1994, he has served as Managing Director of RRE Investors, L.L.C., a venture capital investment firm. From September 1992 to December 1994, he served as Vice President of Hambrecht & Quist Venture Partners, a venture capital firm. From July 1986 to March 1990, he was an associate at J.P. Morgan & Co. Incorporated, a commercial and investment banking firm. From January 1984 to June 1986, 51 he was President of IV Systems, Inc., a software consulting firm. Mr. Robinson holds a B.A. from Antioch College and an M.B.A. from Harvard University. DIRECTOR COMPENSATION The Company reimburses each member of the Company's Board of Directors for out-of-pocket expenses incurred in connection with attending Board meetings. No member of the Company's Board of Directors currently receives any compensation for serving as a Director. The Company's 1996 Director Stock Option Plan provides that options will be granted to non-employee directors of the Company pursuant to an automatic nondiscretionary grant mechanism. On the effective date of the Offerings, each of the Company's non-employee directors who is neither the beneficial owner nor an affiliate of a beneficial owner of more than 3% of the Company's outstanding Common Stock will automatically be granted an option to purchase 25,000 shares of the Company's Common Stock at an exercise price equal to the initial public offering price. In addition, upon joining the Board of Directors, each new non-employee director will automatically be granted an option to purchase 25,000 shares of Common Stock. Each non-employee director will subsequently be granted an option to purchase 5,000 shares of Common Stock at each annual meeting of stockholders beginning with the 1997 Annual Meeting of Stockholders. Each such option will be granted at the fair market value of the Common Stock on the date of grant. The initial options granted to non-employee directors will vest at a rate of 25% on the first anniversary of the date of grant and at a rate of 1/48 of the shares per month thereafter, and subsequent options granted to non-employee directors will become exercisable at a rate of 1/48 of the shares subject to such additional options on the monthly anniversary of the date of grant subject to continued Board service. See "--Stock Plans--1996 Director Stock Option Plan." COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Compensation Committee is responsible for determining salaries, incentives and other forms of compensation for directors, officers and other employees of the Company and administers various incentive compensation and benefit plans. The Compensation Committee currently consists of Stuart J. Ellman, Michael Ramsay and James D. Robinson IV. During 1995, the Compensation Committee consisted of Michael Ramsay, Michael D. Granoff, James D. Robinson III and James D. Robinson IV. Kenneth B. Hamlet, Chairman of the Board, President and Chief Executive Officer of the Company, participates in all discussions and decisions regarding salaries and incentive compensation for all employees and consultants of the Company, except that he is excluded from discussions regarding his own salary and incentive compensation. No interlocking relationship exists between any member of the Company's Compensation Committee and any member of any other company's board of directors or compensation committee. EXECUTIVE COMPENSATION The following table sets forth in summary form information concerning the compensation awarded to, earned by, or paid for services rendered to the Company in all capacities during the fiscal year ended December 31, 1995 by (i) the Company's Chief Executive Officer as of the end of fiscal year 1995, (ii) the Company's next four most highly compensated executive officers whose salary and bonus for such fiscal year exceeded $100,000 and who were serving as an officer of the Company as of the end of such fiscal year, (iii) Kenneth B. Hamlet, who became the Company's President and Chief Executive Officer in January 1996, and (iv) Gordon E. (Ned) Druehl, Jr., who became the Company's Executive Vice President and Chief Operating Officer in August 1996 (collectively, the "Named Executive Officers"). 52 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. 53 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. 54 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 ......... 135,917 213,583 951,419 1,495,081 James A. Barth............. 32,292 117,708 222,919 777,081 Gordon E. (Ned) Druehl, Jr.(3).................... -- -- -- -- Pang T. Ho, Ph.D. ......... 29,583 75,417 205,831 509,169 Former Executive Officers Jeffrey A. Bixler(4)....... -- -- -- -- Eric S. Hass(5)............ 73,000 146,000 511,000 1,022,000
- -------- (1) Based on an initial public offering price of $8.00 per share minus the exercise price of outstanding options. (2) Mr. Hamlet became President and Chief Executive Officer of the Company in January 1996 and, accordingly, held no outstanding options as of December 31, 1995. In January 1996, the Company granted Mr. Hamlet an option expiring January 2001 to acquire 654,324 shares of the Company's Common Stock at an exercise price per share of $2.00 with vesting to occur ratably over 36 months. (3) Mr. Druehl became Executive Vice President and Chief Operating Officer in August 1996 and, accordingly, held no outstanding options as of December 31, 1995. In August 1996, the Company granted Mr. Druehl an option expiring August 2001 to acquire 150,000 shares of the Company's Common Stock at an exercise price per share of $5.25 with 25% of the shares vesting in July 1997 and the remaining shares vesting ratably over the succeeding 36 months of service. (4) Mr. Bixler resigned from the Company effective in December 1995. No shares subject to the option granted to Mr. Bixler had vested as of the date of his resignation, and the option terminated as of such date. Accordingly, Mr. Bixler held no outstanding options as of December 31, 1995. (5) Mr. Hass resigned from the Company effective in March 1996. In connection with his resignation, Mr. Hass exercised two outstanding options for 19,791 and 66,895 shares, respectively. All remaining shares subject to options held by Mr. Hass were unvested and terminated on the effective date of his resignation. STOCK PLANS 1992 Key Personnel Stock Option Plan. The Company's Restated 1992 Key Personnel Stock Option Plan (the "1992 Plan") was originally adopted by the Board of Directors in December 1992 and approved by the Company's stockholders in December 1993. The Board of Directors approved the amendment and restatement of the 1992 Plan in September 1996. A total of 3,800,000 shares of Common Stock, less the number of shares issued under and not returned to the Company's now-terminated 1992 Stock Option Plan, has been reserved for issuance under the 1992 Plan. The 1992 Plan provides for the grant to employees of incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code"), and for the grant to employees and consultants of nonstatutory stock options. Unless terminated sooner, the 1992 Plan will terminate automatically in December 2002. The 1992 Plan may be administered by the Board of Directors or a committee of the Board (the "Committee"), which Committee shall, in the case of options intended to qualify as "performance-based compensation" within the meaning of Section 162(m) of the Code, consist of two or more "outside directors" within the meaning of Section 162(m) of the Code. The Committee has the power to determine the terms of the 55 options granted, including the exercise price, the number of shares subject to each option, the exercisability thereof and the form of consideration payable upon such exercise. In addition, the Committee has the authority to amend, suspend or terminate the 1992 Plan, provided that no such action may affect any share of Common Stock previously issued and sold or any option previously granted under the 1992 Plan. Options granted under the 1992 Plan are not generally transferable by the optionee, and each option is exercisable during the lifetime of the optionee only by the optionee. Options granted under the 1992 Plan must generally be exercised within three months of the end of the optionee's status as an employee or consultant of the Company, or within twelve months after the optionee's termination by death or disability, but in no event later than the expiration of the option's term. The exercise price of all incentive stock options granted under the 1992 Plan must be at least equal to the fair market value of the Common Stock on the date of grant. The exercise price of nonstatutory stock options granted under the 1992 Plan is determined by the Committee, but with respect to nonstatutory stock options intended to qualify as "performance-based compensation" within the meaning of Section 162(m) of the Code, the exercise price must be at least equal to the fair market value of the Common Stock on the date of grant. With respect to any participant who owns stock possessing more than 10% of the voting power of all classes of the Company's outstanding capital stock, the exercise price of any incentive stock option granted must equal at least 110% of the fair market value on the date of grant, and the term of such incentive stock option may not exceed five years. The term of all other options granted under the 1992 Plan may not exceed ten years. The 1992 Plan provides that in the event of a merger of the Company with or into another corporation, a sale of substantially all of the Company's assets or a like transaction involving the Company, each option shall be assumed or an equivalent option substituted by the successor corporation. If the outstanding options are not assumed or substituted for as described in the preceding sentence, the Committee shall provide for the Optionee to have the right to exercise the option as to all of the optioned stock, including shares as to which it would not otherwise be exercisable. If the Committee makes an option exercisable in full in the event of a merger or sale of assets, the Administrator shall notify the optionee that the option shall be fully exercisable for a period of fifteen (15) days from the date of such notice, and the option will terminate upon the expiration of such period. Certain options outstanding under the 1992 Plan contain a provision providing for accelerated vesting of options following an assumption by the successor corporation in the event the optionee's employment is terminated within certain time periods after the consummation of the merger. The Committee may, in its discretion, include such provision in the vesting arrangement for future option grants. 1992 Stock Option Plan. The Company's now-terminated 1992 Stock Option Plan (the "1992 Stock Option Plan") provided for the granting to employees of incentive stock options within the meaning of Section 422 of the Internal Revenue Code and for the granting to employees and consultants of nonstatutory stock options. The 1992 Stock Option Plan was approved by the Board of Directors in December 1992 and by the Company's stockholders in December 1993. A total of 236,430 shares of Common Stock were reserved for issuance pursuant to the 1992 Stock Option Plan. The Board terminated the 1992 Stock Option Plan in September 1996, although the 47,986 shares of Common Stock previously issued and sold and any option previously granted under the 1992 Stock Option Plan will not be affected by the termination of this plan. No further grants will be made under the 1992 Stock Option Plan. Options granted under the 1992 Stock Option Plan are not generally transferable by the optionee, and each option is exercisable during the lifetime of the optionee only by such optionee. Options granted under the 1992 Stock Option Plan must generally be exercised within three months of the end of the optionee's status as an employee or consultant of the Company, within six months after such optionee's termination by disability or within twelve months after such optionee's termination by death (but in no event later than the expiration of the option's ten year term). The exercise price of all incentive stock options granted under the 1992 Stock Option Plan was at least equal to the fair market value of the Common Stock on the date of grant. The exercise price of nonstatutory stock options granted under the 1992 Stock Option Plan was at least equal to 85% of the fair market value of the Common Stock on the date of grant. With respect to any participant who owned stock possessing more than 10% of the voting power of all classes of the Company's outstanding capital stock at the date of grant, 56 the exercise price of any option granted was at least 110% of the fair market value on the date of grant, and the term of such option did not exceed five years. The term of all other options granted under the 1992 Stock Option Plan did not exceed ten years. The 1992 Stock Option Plan provides that in the event of a merger of the Company with or into another corporation, a sale of substantially all of the Company's assets or a like transaction involving the Company, each option shall be assumed or an equivalent option substituted by the successor corporation. If the outstanding options are not assumed or substituted for as described in the preceding sentence, the Committee shall notify the optionee that the option shall be exercisable to the extent it has vested for a period of fifteen (15) days from the date of such notice, and the option shall terminate upon the expiration of such period. 1996 Employee Stock Purchase Plan. The Company's 1996 Employee Stock Purchase Plan (the "Purchase Plan") was adopted by the Board of Directors in September 1996 but will not become effective until the effectiveness of the Registration Statement related to the Offerings. A total of 200,000 shares of Common Stock has been reserved for issuance under the Purchase Plan. The Purchase Plan, which is intended to qualify under Section 423 of the Internal Revenue Code, is implemented by consecutive and overlapping twenty-four month offering periods beginning on the first trading day on or after May 1 and November 1 each year, except for the first such offering period which commences on the first trading day on or after the effective date of the Offerings and ends on the last trading day on or before October 31, 1998. Each offering period contains four intervening purchase periods of approximately six months duration, during which payroll deductions of participants are accumulated and, at the end of which, shares of Common Stock are purchased. The Purchase Plan is administered by the Board of Directors or by a committee appointed by the Board. Employees are eligible to participate if they are customarily employed by the Company or any participating subsidiary for at least 20 hours per week and more than five months in any calendar year. The Purchase Plan permits eligible employees to purchase Common Stock through payroll deductions of up to 15% of an employee's compensation (excluding commissions, overtime and other bonuses and incentive compensation). The price of stock purchased under the Purchase Plan is 85% of the lower of the fair market value of the Common Stock at the beginning of the offering period or the end of the purchase period. Employees may end their participation at any time during an offering period, and they will be paid their payroll deductions to date. Participation ends automatically upon termination of employment with the Company. Rights granted under the Purchase Plan are not transferable by a participant other than by will, the laws of descent and distribution, or as otherwise provided under the Purchase Plan. The Purchase Plan provides that, in the event of a merger of the Company with or into another corporation or a sale of substantially all of the Company's assets, the Board of Directors shall shorten the offering period then in progress (so that employees' rights to purchase stock under the Plan are exercised prior to the merger or sale of assets). The Purchase Plan will terminate in September 2006. The Board of Directors has the authority to amend or terminate the Purchase Plan, except that no such action may adversely affect any outstanding rights to purchase stock under the Purchase Plan. 1996 Director Stock Option Plan. The Company's 1996 Director Stock Option Plan (the "Director Plan") was adopted by the Board of Directors in September 1996 but will not become effective until the date of the effectiveness of the Registration Statement relating to the Offerings. Non-employee directors are entitled to participate in the Director Plan. The Director Plan has a term of ten years, unless terminated sooner by the Board. A total of 200,000 shares of Common Stock have been reserved for issuance under the Director Plan. The Director Plan provides for the grant of 25,000 shares of Common Stock (the "First Option"), to each non-employee director on the later of (i) the effective date of the Director Plan or (ii) the date on which the person first becomes a non-employee director. No non-employee director will be granted a First Option if either (i) immediately prior to becoming a non-employee director, such person was a director of the Company or (ii) such individual is the direct or indirect beneficial owner or an affiliate of a direct or indirect beneficial owner of 3% or more of the Company's outstanding Common Stock. Each non-employee director, including non-employee directors not entitled to receive a First Option, will also be granted an option to purchase 5,000 shares 57 of Common Stock (a "Subsequent Option") each year on the date of the annual shareholder's meeting of the Company, if on such date he or she shall have served on the Board for at least six months. The First Option shall have a term of 10 years and the shares subject to each such option shall vest as to 25% of the shares of Common Stock subject to the option one year after its date of grant, and as to 1/48th of the shares subject to the option each month thereafter, and each Subsequent Option will become exercisable at a rate of 1/48 of the shares subject to such additional options on the monthly anniversary of the date of grant. The exercise prices of the First Option and each Subsequent Option shall be 100% of the fair market value per share of the Common Stock, generally determined with reference to the closing price of the Common Stock as reported on the Nasdaq National Market on the date of grant. In the event of a merger of the Company or the sale of substantially all of the assets of the Company, each option may be assumed or an equivalent option substituted by the successor corporation. If an option is assumed or substituted for, it shall continue to vest as provided in the Director Plan. If a non-employee director's status as a director of the Company or the successor corporation, as applicable, is terminated other than upon a voluntary resignation by the non-employee director, each option granted to such non-employee director shall become fully vested and exercisable. If the successor does not agree to assume or substitute the option, each option shall also become fully vested and exercisable for a period of thirty days, after which period the option shall terminate. Options granted under the Director Plan must be exercised within three months of the end of the optionee's tenure as a director of the Company, or within twelve months after termination of the director's tenure by death or disability, but in no event later than the expiration of the option's ten year term. No option granted under the Director Plan is transferable by the optionee other than by will or the laws of descent and distribution, and each option is exercisable, during the lifetime of the optionee, only by such optionee. 401(k) Plan. The Company maintains the MagiNet Corporation 401(k) Savings Plan (the "401(k) Plan") which covers all of the Company's U.S. employees who have completed 1/12 of a year of service. Pursuant to the 401(k) Plan, eligible employees may elect to defer their current compensation by up the statutorily prescribed annual limit and have the amount of such reduction contributed to the 401(k) Plan on their behalf as an elective deferral contribution. The 401(k) Plan is intended to qualify under Section 401 of the Internal Revenue Code of 1986, as amended, so that contributions to the 401(k) Plan, and income earned on such contributions, are not includible in the participant's gross income until withdrawn from the 401(k) Plan. The trustee under the 401(k) Plan, at the direction of each participant, invests the assets of the 401(k) Plan in any of a number of investment options. EMPLOYMENT AGREEMENTS AND CHANGE IN CONTROL ARRANGEMENTS The Company currently has employment agreements in effect with Kenneth B. Hamlet, the Company's Chairman of the Board, President and Chief Executive Officer and Gordon E. (Ned) Druehl, Jr., the Company's Executive Vice President and Chief Operating Officer. In addition, in connection with its acquisition by MagiNet, Prodac entered into employment agreements with each of the Prodac Founders. Pursuant to the Acquisition Agreement, the Prodac Founders are together entitled to one seat on the Board of Directors; the Prodac Founder who will serve on the board will alternate annually. Following the closing of the Offerings, Reiner Kaesbach will serve as a member of the Board of Directors for the first rotation. On November 28, 1995, the Company entered into an at-will employment agreement with Mr. Hamlet pursuant to which the Company retained his services as President and Chief Executive Officer beginning January 15, 1996. The agreement provides for an annual base salary of $250,000, subject to annual review concerning increases. In addition, Mr. Hamlet is eligible to receive an annual bonus based upon certain financial criteria to be agreed upon by Mr. Hamlet and the Board of Directors, including revenue and profitability targets and other organizational milestones. Such bonus shall be payable in part in cash and in part in Common Stock of the Company. The number of shares of Common Stock issuable in connection with Mr. Hamlet's bonus shall, upon the closing of the Offerings, be determined by dividing the cash portion of the bonus by a price per share to be determined by negotiation between the Company and Mr. Hamlet. Such shares shall be fully vested at the time of issuance. 58 On June 20, 1996, the Company entered into an at-will employment letter agreement with Mr. Druehl which provides for an annual base salary of $155,000 and an annual cash bonus based on the achievement of individual and Company performance objectives. On November 5, 1996, Prodac entered into a Managing Director's Service Agreement with Reiner Kaesbach pursuant to which Prodac retained his services as Managing Director effective upon the Company's payment of the acquisition consideration for Prodac. The agreement provides for an annual base salary of DM 338,000 (approximately $222,000). In addition, Mr. Kaesbach is eligible to receive a yearly bonus of up to DM 101,400 (approximately $66,492) if certain business targets are achieved. After December 31, 1999, either Mr. Kaesbach or Prodac may terminate the service agreement with six months prior notice. Prior to December 31, 1999, the Company may terminate the agreements in any event for cause and on three months prior notice in the event that certain minimum financial targets for Prodac are not achieved. Prodac and Heinrich R. Wirt are parties to a separate Managing Director's Service Agreement containing substantially equivalent terms. Under the 1992 Plan, in the event of a merger or change-of-control of the Company, the successor corporation may assume outstanding options or substitute equivalent options. If such successor corporation does not assume such options or substitute equivalent options, vesting of outstanding options under the 1992 Plan will automatically accelerate. In addition, currently outstanding options under the 1992 Plan for the Named Executive Officers provide that if such option is assumed or an equivalent option is substituted, vesting of such option will automatically accelerate if such officer's employment with the successor corporation is terminated within twelve months of the merger or change-of-control transaction. LIMITATIONS ON LIABILITY AND INDEMNIFICATION MATTERS The Company has adopted provisions in its Certificate of Incorporation that eliminate to the fullest extent permissible under Delaware law the liability of its directors to the Company for monetary damages. Such limitation of liability does not affect the availability of equitable remedies such as injunctive relief or rescission. The Company's Bylaws provide that the Company shall indemnify its directors and officers to the fullest extent permitted by Delaware law, including in circumstances in which indemnification is otherwise discretionary under Delaware law. The Company has entered into indemnification agreements with its officers and directors containing provisions which may require the Company, among other things, to indemnify the officers and directors against certain liabilities that may arise by reason of their status or service as directors or officers (other than liabilities arising from willful misconduct of a culpable nature), and to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified. There is no currently pending litigation or proceeding involving a director, officer, employee or other agent of the Company in which indemnification would be required or permitted. The Company is not aware of any threatened litigation or proceeding that may result in a claim for such indemnification. 59 CERTAIN TRANSACTIONS Between October 1992 and May 1996, the Company sold and issued 10,908,878 shares of its Preferred Stock for an aggregate consideration of $56,402,000. The Company sold the Preferred Stock in series as follows: (i) 150,000 shares of Series A Preferred Stock in October 1992 at a price of $2.00 per share; (ii) 339,887 shares and 100,181 shares of Series B Preferred Stock in October 1992 at prices of $4.00 and $4.50 per share, respectively; (iii) 888,859 shares of Series B Preferred Stock in March 1993 at a price of $4.50 per share and warrants to acquire 174,993 shares of Common Stock at an exercise price of $4.50 per share; (iv) 6,287,093 shares of Series C Preferred Stock in September 1994 and December 1994 at a price of $4.50 per share and warrants to acquire 1,111,111 shares of Series C Preferred Stock in September 1994 at an exercise price of $4.50 per share; (v) an aggregate of 3,142,858 shares of Series D Preferred Stock in December 1995 and May 1996 at a price of $7.00 per share and warrants to acquire up to an aggregate 200,000 shares of Common Stock (subject to adjustment) at an exercise price of $7.00 per share. The following table summarizes purchases, valued in excess of $60,000, of shares of Preferred Stock and Common Stock by directors, executive officers and 5% stockholders of the Company:
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. Stuart J. Ellman and James D. Robinson IV, members of the Company's Board of Directors, are Managing Directors of RRE Investors, L.L.C. (5) Includes shares purchased by Pomona Capital, L.P., SOF Venture Capital, L.P., SP Offshore Venture Capital, L.P. and SP Venture Capital, L.P. Michael D. Granoff, a member of the Company's Board of Directors, is the sole shareholder of Pomona Partners, Inc., the general partner of SOF Venture Capital, L.P., SP Offshore Venture Capital, L.P. and SP Venture Capital, L.P. and the general partner of Pomona Associates, L.P. which serves as the general partner of Pomona Capital, L.P. (6) Mr. Hamlet is Chairman of the Board, President and Chief Executive Officer of the Company. (7) Mr. Barth is Executive Vice President and Chief Financial Officer of the Company. (8) Mr. Hamlet and Mr. Barth purchased the number of shares of Common Stock indicated on May 30, 1996 at a purchase price per share of $2.00. On September 29, 1994, the Company entered into a consulting agreement with RRE Investors, L.L.C. ("RRE"), which terminates on September 28, 1997. RRE is the general partner of each of Sunset Partners, L.P., Sunset Partners, L.P. and Sunset Partners III, L.P., which collectively hold greater than 5% of the outstanding 60 Common Stock of the Company. The agreement provides that RRE will provide consulting and advisory services to the Company regarding strategic planning and business and financial matters for a fee of $150,000 for the first year of the agreement and $200,000 for each of the following two years. The agreement also provides that the Company will reimburse RRE for reasonable business expenses incurred by RRE, its employees and its agents in providing such services. The Company has entered into employment agreements with certain directors and officers of the Company. See "Management--Employment Agreements and Change in Control Arrangements." On November 6, 1996, the Company entered into the Acquisition Agreement pursuant to which the Company agreed to acquire all the outstanding shares of Prodac from the Prodac Founders for an aggregate consideration of DM 25 million, consisting of DM 20 million in cash (plus interest at the rate of 6% per annum from November 6, 1996 through the date of the payment of the acquisition consideration) and shares of MagiNet Common Stock with an aggregate value of DM 5,000,000 based on a 10% discount to the initial public offering price. The Prodac Founders are also entitled to a distribution of approximately DM 600,000 to be paid from Prodac's retained earnings. If the closing of the Offerings occurs after December 31, 1996, the Prodac Founders will be entitled to any additional retained earnings in excess of such DM 600,000, calculated based on German GAAP. In addition, the Company will pay up to an aggregate of DM 15 million in cash and MagiNet Common Stock contingent upon Prodac achieving certain financial targets in fiscal 1997, 1998 and 1999. The Company will also assume from the Prodac Founders certain guarantees of Prodac indebtedness provided by the Prodac Founders in the amount of DM 4.6 million and will repay certain loan obligations of Prodac owed to the Prodac Founders in the amount of DM 130,000. The cash portion of the acquisition consideration will be paid in Deutsche Marks out of the net proceeds of the Offerings based on the applicable exchange rate on the Frankfurt am Main exchange on the closing date of the Offerings. Any increase in the value of the Deutsche Mark relative to the U.S. Dollar will increase the portion of the net proceeds of the Offerings used in connection with the Prodac acquisition and will result in the Company's issuing a greater number of shares of MagiNet Common Stock to the shareholders of Prodac. See "Use of Proceeds," "Dilution," "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" and "Acquisition of Prodac." Prodac leases approximately 41,010 square feet of office and manufacturing space in Cologne, Germany from a civil law partnership consisting of each of the Prodac Founders and their wives. The lease agreement provides for monthly rental payments of DM 79,000 (approximately $52,000), subject to periodic adjustments for inflation based on changes in the Cost of Living Index prepared by Germany's Federal Office of Statistics. The lease expires in December 2008 and provides for automatic one-year extensions thereafter unless terminated in advance of such extension with 6 months notice. See "Acquisition of Prodac." 61 PRINCIPAL STOCKHOLDERS The following table sets forth certain information regarding the beneficial ownership of the Company's Common Stock as of September 30, 1996 and as adjusted to reflect the sale of the 5,500,000 shares of Common Stock offered hereby and the assumed issuance of 455,373 shares of Common Stock in connection with the Company's acquisition of Prodac by (i) each person or entity who is known by the Company to own beneficially 5% or more of the Company's outstanding Common Stock; (ii) each director and director nominee of the Company; (iii) each of the Named Executive Officers and (iv) all directors, including one nominee, and executive officers of the Company as a group.
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).... 4,486,109 34.4% 24.2% 126 East 56th Street, 22nd Floor New York, NY 10022 Equity-Linked Investors II 1,511,931 11.6% 8.2% (4)......................... c/o Desai Capital Management, Inc. 540 Madison Avenue, 36th Floor New York, NY 10022 Festival Company, Inc. ..... 1,007,954 7.7% 5.4% Wisma Barito Pacific, Tower B Lt. 11, J1 S. Paman Kav. 62-63 Jakarta 11410 Indonesia Pomona Capital, L.P.(5)..... 731,649 5.6% 3.9% 780 Third Avenue New York, NY 10017-7076 Kenneth B. Hamlet(6)........ 237,979 1.8% 1.3% Robert R. Creager(7)........ 432,708 3.3% 2.3% James A. Barth(8)........... 88,762 * * Gordon E. (Ned) Druehl, Jr. ............................ -- -- -- Pang T. Ho, Ph.D.(9) ....... 53,645 * * Reiner Kaesbach(10)......... 227,687 1.7% 1.2% Stuart J. Ellman(11)........ 4,486,109 34.4% 24.2% Michael D. Granoff(12)...... 731,649 5.6% 3.9% Michael Ramsay(13).......... 7,500 * * James D. Robinson IV(14).... 4,486,109 34.4% 24.2% Jeffrey A. Bixler(15)....... -- -- -- Eric S. Hass(16)............ 131,698 1.0% * All current executive officers and directors as a group (10 persons)(17)............ 6,266,039 46.2% 32.9%
- -------- * Less than 1%. (1) Unless otherwise indicated, the address for each listed stockholder is c/o MagiNet Corporation, 405 Tasman Drive, Sunnyvale, California 94089. Except as otherwise indicated, and subject to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all shares of Common Stock held by them. (2) Applicable percentage ownership is based on 13,031,041 shares of Common Stock outstanding as of September 30, 1996 and 18,531,041 shares immediately following the completion of the Offerings (assuming no exercise of the Underwriters' over-allotment option), together with applicable options for such stockholder and including the assumed issuance of 455,373 shares of Common Stock in connection with the Company's acquisition of Prodac within 10 business days after the closing of the Offerings. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities, subject to community property laws, where applicable. Shares of Common Stock subject to options that are presently exercisable or exercisable within 60 days of September 30, 1996 are deemed to be beneficially owned by the person holding such options for the purpose of computing the percentage of ownership of such person but are not treated as outstanding for the purpose of computing the percentage of any other person. To the extent that any shares are issued upon exercise of options or other rights to acquire the Company's capital stock that are presently outstanding or granted in the future or reserved for future issuance under the Company's stock plans, there will be further dilution to new public investors. 62 (3) Includes 1,716,907 shares held by Sunset Partners, L.P. ("Sunset"), 1,510,474 shares held by Sunset Partners II, L.P. ("Sunset II") and 1,258,728 shares held by Sunset Partners III, L.P. ("Sunset III"). RRE Investors, L.L.C. is the general partner of each of Sunset Partners, L.P., Sunset Partners II, L.P. and Sunset Partners III, L.P. (collectively, the "Sunset Partnerships"). Stuart J. Ellman, James D. Robinson III and James D. Robinson IV may exercise voting control over the shares held by the Sunset Partnerships. Stuart J. Ellman and James D. Robinson IV are currently directors of the Company. (4) Rohit Desai may exercise voting control over the shares held by Equity- Linked Investors II. (5) Includes 243,883 shares held by Pomona Capital, L.P. ("Pomona"), 195,106 shares held by SOF Venture Capital, L.P. ("SOF Venture"), 175,596 shares held by SP Offshore Venture Capital, L.P. ("SP Offshore") and 117,064 shares held by SP Venture Capital, L.P. ("SP Venture"). Michael D. Granoff, a director of the Company, is the sole shareholder of Pomona Partners, Inc., which serves as the general partner of SOF Venture, SP Offshore and SP Venture, and which also serves as the general partner of Pomona Associates, L.P., the general partner of Pomona. Mr. Granoff, Francis Janis and Steve Futrell may exercise voting control over the shares held by Pomona, SOF Venture, SP Offshore and SP Venture. (6) Includes 181,757 shares of Common Stock issuable upon exercise of stock options which are presently exercisable or will become exercisable within 60 days of September 30, 1996. Mr. Hamlet is the Company's President and Chief Executive Officer and Chairman of its Board of Directors. (7) Includes 242,708 shares of Common Stock issuable upon exercise of stock options which are presently exercisable or will become exercisable within 60 days of September 30, 1996. Mr. Creager is the Company's founder and Executive Vice President of Corporate Development. (8) Includes (i) 66,667 shares of Common Stock issuable upon exercise of stock options which are presently exercisable or will become exercisable within 60 days of September 30, 1996, (ii) 5,000 shares of Common Stock held by Mr. Barth's wife and (iii) 1,000 shares held by Mr. Barth's son. Mr. Barth is the Company's Executive Vice President and Chief Financial Officer. (9) Includes 29,645 shares of Common Stock issuable upon exercise of stock options which are presently exercisable or will become exercisable within 60 days of September 30, 1996 and 4,000 shares held by Dr. Ho's children. Dr. Ho is the Company's Vice President of Engineering. (10) Upon the Company's delivery of acquisition consideration for Prodac and for so long as the Prodac Founders continue to hold collectively at least 1% of the Company's outstanding Common Stock and serve as Managing Directors of Prodac, the Prodac Founders have the right to one seat on the Company's Board of Directors to be filled by either of them on an annual, rotating basis. Following the closing of the Offerings, the Company anticipates that Mr. Kaesbach will serve as a member of the Board of Directors for the first such rotation. In connection with the Prodac acquisition, Mr. Kaesbach will initially receive an assumed 227,687 shares of Common Stock, subject to additional issuances in the event Prodac achieves certain financial milestones. In addition, in connection with his employment by Prodac, the Company has agreed to grant Mr. Kaesbach an option to acquire 150,000 shares of Common Stock at an exercise price of $8.00 per share under the 1992 Key Personnel Stock Option Plan, subject to vesting over four years, with 25% of the shares vesting one year after the date of grant and the remaining shares vesting ratably over the succeeding 36 months. (11) Includes 1,716,907 shares held by Sunset, 1,510,474 shares held by Sunset II and 1,258,728 shares held by Sunset III. Mr. Ellman is a member of the Company's Board of Directors and a member of RRE Investors, L.L.C., a limited liability company that serves as general partner of each of the Sunset Partnerships. Mr. Ellman disclaims beneficial ownership of such shares except to the extent of his pecuniary interest therein. (12) Includes 243,883 shares held by Pomona, 195,106 shares held by SOF Venture, 175,596 shares held by SP Offshore and 117,064 shares held by SP Venture. Mr. Granoff, a member of the Company's Board of Directors, is the sole shareholder of Pomona Partners, Inc., the general partner of SOF Venture, SP Offshore and SP Venture and the general partner of Pomona Associates, L.P., which serves as the general partner of Pomona. Mr. Granoff disclaims beneficial ownership of such shares except to the extent of his pecuniary interest therein. (13) Includes 7,500 shares of Common Stock issuable upon exercise of stock options which are presently exercisable or will become exercisable within 60 days of September 30, 1996. Mr. Ramsay is a member of the Company's Board of Directors. (14) Includes 1,716,907 shares held by Sunset, 1,510,474 shares held by Sunset II and 1,258,728 shares held by Sunset III. Mr. Robinson is a member of the Company's Board of Directors and a member of RRE Investors, L.L.C., a limited liability company that serves as general partner of each of the Sunset Partnerships. Mr. Robinson disclaims beneficial ownership of such shares except to the extent of his pecuniary interest therein. (15) Mr. Bixler resigned from the Company effective in December 1995. (16) Includes 43,706 shares held by Mr. Hass individually and 87,992 shares held by Mr. Hass and his wife, as trustees of the Hass Community Property Trust. Mr. Hass resigned from the Company effective in March 1996. (17) Includes 528,277 shares of Common Stock issuable upon exercise of outstanding stock options which are presently exercisable or will become exercisable within 60 days of September 30, 1996. Excludes 131,698 shares beneficially held by Eric S. Hass, who resigned as an officer of the Company effective in March 1996. Includes an assumed 227,687 shares issuable to Reiner Kaesbach in connection with the Company's acquisition of Prodac within 10 business days after the closing of the Offerings. 63 DESCRIPTION OF CAPITAL STOCK GENERAL Upon the completion of the Offerings, the Company will be authorized to issue 45,000,000 shares of Common Stock, $0.001 par value, and 5,000,000 shares of undesignated Preferred Stock, $0.001 par value. The following description of the Company's capital stock does not purport to be complete and is subject to and qualified in its entirety by the Company's Restated Certificate of Incorporation and Bylaws, which are included as exhibits to the Registration Statement of which this Prospectus forms a part, and by the provisions of applicable Delaware law. COMMON STOCK Upon conversion of the Preferred Stock and prior to the issuance of the Common Stock in connection with the Offering and the acquisition of Prodac, there will be 12,575,668 shares of Common Stock outstanding held of record by approximately 90 holders. Holders of Common Stock are entitled to one vote per share on all matters to be voted upon by the stockholders. Holders of Common Stock do not have cumulative voting rights, and, therefore, holders of a majority of the shares voting for the election of directors can elect all of the directors. In such event, the holders of the remaining shares will not be able to elect any directors. Holders of the Common Stock are entitled to receive such dividends as may be declared from time to time by the Board of Directors out of funds legally available therefor, subject to the terms of any existing or future agreements between the Company and its debtholders. The Company has never declared or paid cash dividends on its capital stock, expects to retain future earnings, if any, for use in the operation and expansion of its business, and does not anticipate paying any cash dividends in the foreseeable future. See "Dividend Policy." In the event of the liquidation, dissolution or winding up of the Company, the holders of Common Stock are entitled to share ratably in all assets legally available for distribution after payment of all debts and other liabilities and subject to the prior rights of any holders of Preferred Stock then outstanding. PREFERRED STOCK Effective upon the closing of the Offerings, the Company will be authorized to issue 5,000,000 shares of undesignated Preferred Stock. The Board of Directors has the authority to issue the Preferred Stock in one or more series and to fix the price, rights, preferences, privileges and restrictions thereof, including dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences and the number of shares constituting a series or the designation of such series, without any further vote or action by the Company's stockholders. The issuance of Preferred Stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of delaying, deferring or preventing a change in control of the Company without further action by the stockholders and may adversely affect the market price of, and the voting and other rights of, the holders of Common Stock. The issuance of Preferred Stock with voting and conversion rights may adversely affect the voting power of the holders of Common Stock, including the loss of voting control to others. The Company has no current plans to issue any shares of Preferred Stock. ANTITAKEOVER EFFECTS OF PROVISIONS OF CERTIFICATE OF INCORPORATION AND BYLAWS The Company's Restated Certificate of Incorporation provides that all stockholder actions must be effected at a duly called annual or special meeting and may not be effected by written consent. The Company's Bylaws provide that, except as otherwise required by law, special meetings of the stockholders can only be called pursuant to a resolution adopted by a majority of the Board of Directors, by the chief executive officer of the Company, or by stockholders holding shares in the aggregate entitled to cast not less than 10% of the votes at such meeting. In addition, the Company's Bylaws establish an advance notice procedure for stockholder proposals to be brought before an annual meeting of stockholders, including proposed nominations of persons for election to the Board. Stockholders at an annual meeting may only consider proposals or nominations 64 specified in the notice of meeting or brought before the meeting by or at the direction of the Board of Directors or by a stockholder who was a stockholder of record on the record date for the meeting, who is entitled to vote at the meeting and who has delivered timely written notice in proper form to the Company's Secretary of the stockholder's intention to bring such business before the meeting. The foregoing provisions of the Company's Restated Certificate of Incorporation and Bylaws are intended to enhance the likelihood of continuity and stability in the composition of the Board of Directors and in the policies formulated by the Board of Directors and to discourage certain types of transactions which may involve an actual or threatened change of control of the Company. Such provisions are designed to reduce the vulnerability of the Company to an unsolicited acquisition proposal and, accordingly, could discourage potential acquisition proposals and could delay or prevent a change in control of the Company. Such provisions are also intended to discourage certain tactics that may be used in proxy fights but could, however, have the effect of discouraging others from making tender offers for the Company's shares and, consequently, may also inhibit fluctuations in the market price of the Company's shares that could result from actual or rumored takeover attempts. These provisions may also have the effect of preventing changes in the management of the Company. See "Risk Factors--Effect of Certain Charter Provisions; Antitakeover Effects of Certificate of Incorporation, Bylaws and Delaware Law." EFFECT OF DELAWARE ANTITAKEOVER STATUTE The Company is subject to Section 203 of the Delaware General Corporation Law (the "Antitakeover Law"), which regulates corporate acquisitions. The Antitakeover Law prevents certain Delaware corporations, including those whose securities are listed for trading on the Nasdaq National Market, from engaging, under certain circumstances in a "business combination" with any "interested stockholder" for three years following the date that such stockholder became an interested stockholder. For purposes of the Antitakeover Law, a "business combination" includes, among other things, a merger or consolidation involving the Company and the interested stockholder and the sale of more than ten percent (10%) of the Company's assets. In general, the Antitakeover Law defines an "interested stockholder" as any entity or person beneficially owning 15% or more the outstanding voting stock of the Company and any entity or person affiliated with or controlling or controlled by such entity or person. A Delaware corporation may "opt out" of the Antitakeover Law with an express provision in its original certificate of incorporation or an express provision in its certificate of incorporation or bylaws resulting from amendments approved by the holders of at least a majority of the Company's outstanding voting shares. The Company has not "opted out" of the provisions of the Antitakeover Law. See "Risk Factors--Effect of Certain Charter Provisions; Antitakeover Effects of Certificate of Incorporation, Bylaws and Delaware Law." REGISTRATION RIGHTS After the Offerings, the holders of approximately 4,020,000 shares of Common Stock and the holder of a warrant to acquire 40,000 shares of Common Stock will be entitled upon expiration of lock-up agreements with the Underwriters to certain rights with respect to the registration of such shares under the Securities Act. Under the terms of the agreement between the Company and the holders of such registrable securities, if the Company proposes to register any of its securities under the Securities Act, either for its own account or for the account of other securityholders exercising registration rights, such holders are entitled to notice of such registration and are entitled to include shares of such Common Stock therein. Holders of registration rights may also require the Company to file a registration statement under the Securities Act at the Company's expense with respect to their shares of Common Stock, and the Company is required to use its best efforts to effect such registration. Further, holders may require the Company to file registration statements on Form S-3 at the Company's expense when such form becomes available for use to the Company. All such registration rights are subject to certain conditions and limitations, including the right of the underwriters of an offering to limit the number of shares to be included in such registration. In addition to the 4,060,000 shares indicated above as being subject to registration rights, the Company has granted certain registration rights to the Prodac Founders with respect to the Prodac Shares and any shares 65 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. 66 SHARES ELIGIBLE FOR FUTURE SALE Prior to the Offerings, there has been no market for the Common Stock and there is no assurance that a significant public market for the Common Stock will develop or be sustained after the Offerings. Sales of substantial amounts of Common Stock in the public market could adversely affect the market price of the Common Stock and could impair the Company's future ability to raise capital through the sale of its equity securities. Upon completion of the Offerings, the Company will have outstanding 18,531,041 shares of Common Stock based upon shares outstanding as of September 30, 1996. In addition to the 5,500,000 shares of Common Stock offered hereby (assuming no exercise of the Underwriters' over-allotment option), as of the effective date of the Registration Statement (the "Effective Date"), there will be 13,031,041 shares of Common Stock outstanding, including the assumed issuance of 455,373 shares of Common Stock in connection with the acquisition of Prodac, all of which are "restricted" shares (the "Restricted Shares") under the Securities Act of 1933, as amended (the "Securities Act"). Approximately 5,000 Restricted Shares will be eligible for sale immediately following the Effective Date in reliance on Rule 144(k) of the Securities Act. Beginning 90 days after the Effective Date, approximately 31,000 Restricted Shares of Common Stock will become eligible for sale in the public market pursuant to Rule 144 and Rule 701 under the Securities Act. Beginning 180 days after the Effective Date, approximately 9,100,000 additional Restricted Shares of Common Stock subject to lock-up agreements will become eligible for sale in the public market. Of the approximately 9,100,000 Restricted Shares that will become available for sale in the public market beginning 180 days after the Effective Date, approximately 7,200,000 shares will be subject to certain volume and other resale restrictions pursuant to Rule 144. Thereafter, approximately 3,500,000 shares held by existing stockholders will become eligible for sale at various times over a period of less than two years and could be sold earlier if the holders exercise registration rights. In addition, the shares of Common Stock to be issued in connection with the acquisition of Prodac will be subject to certain registration rights beginning one year after the closing of the Offerings. See "Description of Capital Stock--Registration Rights." As of September 30, 1996, options to purchase 1,702,080 shares were outstanding, of which options to purchase approximately 521,933 shares were then exercisable. See "Management--1992 Key Personnel Stock Option Plan." The Company intends to file a Form S-8 registration statement under the Securities Act to register shares reserved for issuance under this stock option plan and upon exercise of outstanding options. Shares of Common Stock issued upon exercise of options after the effective date of the Form S-8 will be available for sale in the public market, subject to Rule 144 volume limitations applicable to affiliates and lock-up agreements. Beginning 180 days after the Effective Date, approximately 802,000 shares issuable upon the exercise of vested options will be eligible for sale. In general, under Rule 144 as currently in effect, an affiliate of the Company, or person (or persons whose shares are aggregated) who has beneficially owned Restricted Shares for at least two years but less than three years, will be entitled to sell in any three-month period a number of shares that does not exceed the greater of (i) 1% of the then outstanding shares of the Common Stock (approximately 185,000 shares immediately after the Offerings) or (ii) the average weekly trading volume during the four calendar weeks immediately preceding the date on which notice of the sale is filed with the Securities and Exchange Commission (the "Commission"). Sales pursuant to Rule 144 are subject to certain requirements relating to manner of sale, notice and availability of current public information about the Company. A person (or persons whose shares are aggregated) who is not deemed to have been an affiliate of the Company at any time during the 90 days immediately preceding the sale and who has beneficially owned his or her shares for at least three years is entitled to sell such shares pursuant to Rule 144(k) without regard to the limitations described above. Under Rule 701, shares issued under certain compensatory stock-based plans, such as the Company's option plan, may be resold under Rule 144 by non-affiliates subject only to the manner of sale requirements, and by affiliates without regard to the two- year holding period requirements, commencing 90 days after the date of the Offerings. 67 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 68 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. 69 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. 70 After the initial public offering, the public offering price, the concession to selected dealers and reallowance may be changed by the Representative and the Lead Managers. Prior to the Offerings, there has been no public market for the Common Stock. There can be no assurance that an active trading market will develop for shares of the Common Stock or as to the price at which shares of the Common Stock may trade in the public market from time to time subsequent to the Offerings. The initial public offering price for the Common Stock will be determined by negotiations among the Company, the Representatives and the Lead Managers. Among the factors to be considered in determining the initial public offering price of the Common Stock, in addition to prevailing market conditions, will be the financial and operating history and condition of the Company, the Company's business and financial prospects, the prospects for the industry in which the Company operates, the recent market prices of securities of companies in businesses similar to that of the Company and other relevant factors. The Company has granted to the U.S. Underwriters and the International Managers options to purchase up to an aggregate of 660,000 and 165,000 additional shares of Common Stock, respectively, exercisable solely to cover over-allotments, at the initial price to the public less the aggregate underwriting discounts, shown on the cover page of this Prospectus. Either or both options may be exercised at any time up to 30 days after the date of this Prospectus. To the extent that the U.S. Underwriters or International Managers exercise such options, each of the U.S. Underwriters or International Managers, as the case may be, will be committed, subject to certain conditions, to purchase a number of the additional shares of Common Stock proportionate to such U.S. Underwriter's or International Manager's initial commitment. The U.S. Underwriters and the International Managers have entered into an Agreement between U.S. Underwriters and International Managers pursuant to which such U.S. Underwriter has agreed that as part of the distribution of the shares (plus any of the shares to cover over-allotments) of Common Stock offered in the U.S. Offering, (i) it is not purchasing any of such shares for the account of anyone other than a U.S. Person (as defined below) and (ii) it has not offered or sold, and will not offer, sell, resell or deliver, directly or indirectly, any of such shares or distribute any Prospectus relating to the U.S. Offering to anyone other than a U.S. Person. In addition, pursuant to the same Agreement, each International Manager has agreed that, as part of the distribution of the shares (plus any of the shares to cover over-allotments) of Common Stock offered in the International Offering, (i) it is not purchasing any of such shares for the account of a U.S. Person and (ii) it has not offered or sold, and will not offer, sell, resell or deliver, directly or indirectly, any of such shares or distribute any Prospectus relating to the International Offering to any U.S. Person. Each International Manager has also agreed that it will offer to sell shares only in compliance with all relevant requirements of any applicable laws. The foregoing limitations do not apply to stabilization transactions or to certain other transactions specified in the Underwriting Agreements and the Agreement Between U.S. Underwriters and International Managers, including (i) certain purchases and sales between the U.S. Underwriters and International Managers, (ii) certain offers, sales, resales, deliveries or distributions to or through investment advisors or other persons exercising investing discretion, (iii) purchases, offers or sales by a U.S. Underwriter who is also acting as an International Manager or by an International Manager who is also acting as a U.S. Underwriter and (iv) other transactions specifically approved by the Representatives and the Lead Managers. As used herein, "U.S. Person" means any resident or citizen of the United States or Canada and its provinces, any corporation or other entity created or organized in or under the laws of the United States or Canada and its provinces or any estate or trust the income of which is subject to United States or Canadian federal income taxation regardless of the source of its income. The term "United States" means the United States of America (including the District of Columbia) and its territories, its possessions and other areas subject to its jurisdiction. Pursuant to the Agreement Between U.S. Underwriters and International Managers, sales may be made between the U.S. Underwriters and the International Managers of such number of shares of Common Stock as may be mutually agreed upon. The price of any shares so sold shall be the public offering price as then in effect for Common Stock being sold by the U.S. Underwriters and the International Managers, less an amount not greater than the selling concession allocable to such Common Stock. To the extent there are sales between the 71 U.S. Underwriters and the International Managers pursuant to the Agreement Between U.S. Underwriters and International Managers, the number of shares initially available for sale by the U.S. Underwriters or by the International Managers may be more or less than the amount appearing on the cover page of this Prospectus. Each International Manager has represented and agreed that (i) it has not offered or sold, and will not offer or sell, in the United Kingdom, by means of any document, any shares of the Common Stock other than to persons whose ordinary business it is to buy or sell shares or debentures, whether as principal or agent (except under circumstances which do not constitute an offer to the public within the meaning of the Companies Act 1985); (ii) it has complied and will comply with all applicable provisions of the Financial Services Act 1986 with respect to anything done by it in relation to the Common Stock in, from or otherwise involving the United Kingdom; and (iii) it has only issued or passed on, and will only issue and pass on to any person in the United Kingdom, any document received by it in connection with the issue of the Common Stock if that person is of a kind described in Article 11(3) of the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1995 or is a person to whom the document may otherwise be lawfully issued or passed on. Purchasers of the shares offered pursuant to the Offerings may be required to pay stamp taxes and other charges in accordance with the laws and practices of the country to purchase in addition to the initial public offering price set forth on the cover page hereof. The Company has agreed to indemnify the U.S. Underwriters and the International Managers against certain liabilities, including liabilities under the Securities Act or to contribute to payments that U.S. Underwriters and the International Managers may be required to make in respect thereof. In connection with the Offerings, the officers and directors of the Company, certain other securityholders and the Company have agreed, with certain exceptions, not to sell or otherwise dispose of any shares of Common Stock for a period of 180 days from the date of this Prospectus, in each case, without first obtaining the written consent of Lehman Brothers. The Representatives have informed the Company that the U.S. Underwriters do not intend to confirm sales of Common Stock to any accounts over which they exercise discretionary authority. The U.S. Underwriters and International Managers have reserved for sale, at the initial public offering price, up to 5% of the shares of Common Stock offered hereby for certain employees, customers and vendors of the Company, and certain other individuals and entities, who have expressed an interest in purchasing such shares of Common Stock in the Offerings. The number of shares available for sale to the general public will be reduced to the extent such persons purchase such reserved shares. Any reserved shares not so purchased will be offered by the U.S. Underwriters and International Managers to the general public on the same basis as other shares offered hereby. LEGAL MATTERS Certain legal matters with respect to the legality of the issuance of the shares of Common Stock offered hereby will be passed upon for the Company by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California, and for the U.S. Underwriters and International Managers by Brobeck, Phleger & Harrison LLP, Palo Alto, California. As of the date of this Prospectus, a member of Wilson Sonsini Goodrich & Rosati, Professional Corporation, and investment partnerships of which members of such firm are partners beneficially own 17,314 shares of the Company's Common Stock. 72 EXPERTS The consolidated financial statements of MagiNet Corporation at December 31, 1994 and 1995 and for each of the three years in the period ended December 31, 1995, appearing in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein and in the Registration Statement, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. The consolidated financial statements of PRODAC Prozessdatentechnik GmbH at December 31, 1994 and 1995 and for each of the three years in the period ended December 31, 1995 appearing in this Prospectus and Registration Statement have been audited by Ernst & Young GmbH, independent auditors, as set forth in their report thereon appearing elsewhere herein and in the Registration Statement, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission") a Registration Statement on Form S-1 (the "Registration Statement") under the Securities Act with respect to the securities offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto. For further information with respect to the Company and the Common Stock, reference is made to the Registration Statement and the exhibits and schedules filed as a part thereof. Statements contained in this Prospectus as to the contents of any contract or any other document referred to are not necessarily complete. In each instance, reference is made to the copy of such contract or document filed as an exhibit to the Registration Statement, and each such statement is qualified in all respects by such reference. The Registration Statement, including exhibits and schedules thereto, may be inspected without charge at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of the Commission located at Seven World Trade Center, 13th Floor, New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such materials may be obtained from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission maintains a World Wide Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. The address of the Commission's Web site is http://www.sec.gov. The Company intends to furnish its stockholders with annual reports containing financial statements audited by independent accountants and with quarterly reports containing unaudited summary financial information for each of the first three quarters of each fiscal year. 73 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-20 Consolidated Balance Sheets............................................ F-21 Consolidated Statements of Operations.................................. F-22 Consolidated Statements of Shareholders' Deficiency.................... F-23 Consolidated Statements of Cash Flows.................................. F-24 Notes to Consolidated Financial Statements............................. F-25 MagiNet Corporation Unaudited Pro Forma Condensed Combined Financial Statements: Unaudited Pro Forma Condensed Combined Financial Information........... F-36 Unaudited Pro Forma Condensed Combined Balance Sheets.................. F-38 Unaudited Pro Forma Condensed Combined Statements of Operations........ F-39 Notes to Unaudited Pro Forma Condensed Combined Financial Statements... F-41
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)
UNAUDITED PRO FORMA STOCKHOLDERS' DECEMBER 31, 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 23 504 11 Additional paid-in capital.................. -- -- -- 53,734 Warrants to purchase common stock............. -- 101 101 101 Deferred compensation..... -- -- (218) (218) Accumulated deficit....... (12,678) (25,474) (37,008) (37,008) Cumulative translation adjustment............... -- (270) (651) (651) -------- -------- -------- -------- Total stockholders' equity................... 19,924 14,611 15,969 $ 15,969 -------- -------- -------- ======== Total liabilities and stockholders' equity...... $ 23,999 $ 46,540 $ 49,484 ======== ======== ========
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 ---------------- ------------- DEFERRED ACCUMULATED TRANSLATION STOCKHOLDERS' SHARES AMOUNT SHARES AMOUNT WARRANTS COMPENSATION 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 Deferred compensation related to grant of stock options (unaudited)........... -- -- -- 218 -- (218) -- -- -- Translation adjustment (unaudited)........... -- -- -- -- -- -- -- (381) (381) Net loss (unaudited)... -- -- -- -- -- -- (11,534) -- (11,534) ------- -------- --- ---- ----- ----- -------- ----- ------- BALANCES AT SEPTEMBER 30, 1996 (unaudited)... 10,909 $ 53,241 508 $504 $ 101 $(218) $(37,008) $(651) $15,969 ======= ======== === ==== ===== ===== ======== ===== =======
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. Upon completion of the IPO, all of the Company's 10,908,878 shares of convertible Preferred Stock outstanding as of September 30, 1996 will be converted into 10,908,878 shares of Common Stock. The pro forma effect of these conversions has been reflected on the accompanying unaudited pro forma balance sheet assuming they had occurred at September 30, 1996. On August 8, 1996, the Board of Directors approved the reincorporation of the Company in the State of Delaware, which was approved by the shareholders in October 1996 and effected in December 1996. In addition, effective upon the closing of the IPO, the Board of Directors and stockholders of the Company have approved the filing of a restated certificate of incorporation to authorize 45,000,000 shares of Common Stock and 5,000,000 shares of Undesignated Preferred Stock. BASIS OF PRESENTATION The consolidated financial statements include the accounts of MagiNet Corporation and its subsidiaries primarily located in the Pacific Rim. All significant intercompany balances and transactions have been eliminated. In order for the Company to remain in compliance with the amended senior note covenants (see Note 3) through September 1997, the Company must achieve its operating plan and/or raise new capital. If the Company is unable to achieve the revenue element of its operating plan it may have to substantially reduce its level of spending in order to remain in compliance with the amended senior note covenants through September 1997. Management believes it can achieve its operating plan and/or raise additional equity. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. INTERIM FINANCIAL DATA The interim financial data for the nine months ended September 30, 1995 and 1996 is unaudited; however, in the opinion of management, the interim data includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for the interim periods ended September 30, 1995, and 1996. Results for the nine months ended September 30, 1996 are not necessarily indicative of the results that may be expected for the entire year ending December 31, 1996. NET LOSS PER SHARE Except as noted below, historical net loss per share is computed using the weighted average number of common shares outstanding. Common equivalent shares from stock options, convertible Preferred Stock and warrants are excluded from the computation as their effect is antidilutive, except that, pursuant to the Securities and Exchange Commission Staff Accounting Bulletins, common and common share equivalent shares issued during the period beginning 12 months prior to the initial filing of the Company's Registration Statement at prices below the assumed public offering price have been included in the calculation as if they were outstanding for all periods presented (using the treasury stock method and the assumed public offering price for stock options and warrants and the if-converted method for convertible Preferred Stock). F-7 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 and certain other conditions. At September 30, 1996, the Company had reserved 10,908,878 shares of Common Stock to be issued to stockholders upon conversion of the outstanding Preferred Stock. Holders of Preferred Stock are entitled to noncumulative dividends (per share) as follows: 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. The Company has recorded deferred compensation expense of $218,000 for the difference between the grant price and the deemed fair value of certain of the Company's stock options granted in the second and third quarters of 1996. This amount is being amortized over the options' 48 month vesting periods. On August 8, 1996, the Board of Directors approved the 1996 Director's Stock Option Plan and reserved a total of 200,000 shares of the Company's authorized but unissued Common Stock for issuance to non-employee directors upon the exercise of options granted. Options must be granted with exercise prices at least equal to the fair market value of the Common Stock on the date of grant as determined by the Company's Board of Directors. On August 8, 1996, the Board of Directors approved the 1996 Employee Stock Purchase Plan and reserved a total of 200,000 shares of the Company's authorized but unissued Common Stock for issuance thereunder. At September 30, 1996, the Company has reserved 4,020,808 shares of authorized Common Stock for issuance under all of the Company's stock option plans. F-14 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. In December 1996, the Company entered into a commitment letter pursuant to which a lender agreed to lend the Company up to $10 million on a senior subordinated basis. In the event the Company borrows any funds under the commitment letter, the related notes will bear interest at 12% per annum, payable semi-annually, with the principal repayable in full in 2004. In connection with the issuance of these notes, the Company will be required to issue warrants to acquire up to an aggregate of 1,333,333 shares of Common Stock, on a pro-rata basis equal to the principal amount of notes ultimately issued. These warrants would have an exercise price of $7.50 per share, subject to certain dilution adjustments, and would expire seven years from the date of issuance. F-18 In connection with obtaining the lender's commitment letter, the Company issued a warrant to acquire up to 40,000 shares of common stock at an exercise price of $.01 per share and further agreed to issue, in the event it borrowed any funds under the commitment letter and upon each annual anniversary of the issuance of the notes for so long as they are outstanding, warrants to acquire 200,000 shares of common stock. These warrants have a nominal exercise price and also expire 7 years from the date of their issuance. The lender's commitment terminates on January 15, 1997 but contains one and two month extension options, exercisable by the Company upon the payment of a commitment fee and delivery of warrants to acquire 50,000 and 75,000 shares of common stock, respectively. These warrants would have an exercise price of $7.50 per share, subject to certain dilution adjustments, and would expire seven years from the date of issuance. F-19 REPORT OF ERNST & YOUNG GMBH, INDEPENDENT AUDITORS Board of Directors PRODAC Prozessdatentechnik GmbH. We have audited the accompanying consolidated balance sheets of PRODAC Prozessdatentechnik GmbH (a German Limited Liability Company) and subsidiaries as of December 31, 1994 and 1995, and the related consolidated statements of operations, shareholders' deficiency and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of PRODAC Prozessdatentechnik GmbH and subsidiaries at December 31, 1994 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1995 in conformity with accounting principles generally accepted in the United States of America. Ernst & Young GmbH Dusseldorf, Germany August 30, 1996 F-20 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-21 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...................... 3,140 2,974 3,714 2,079 3,823 Research and development............. 338 357 398 298 314 ------ ------ ------ ------ ------ Total costs and expenses............... 12,786 13,919 19,148 12,890 18,852 ------ ------ ------ ------ ------ Operating profit (loss)................ (517) (83) (2,269) (1,113) 386 Interest expense, net.................. 1,176 1,384 1,713 1,166 1,933 Foreign exchange (gain) loss........... (99) 146 23 -- (216) Other (income) expense, net............ (438) (242) (414) (103) (172) ------ ------ ------ ------ ------ Loss before income taxes............... (1,156) (1,371) (3,591) (2,176) (1,159) Provision (benefit) for income taxes: Current.............................. 12 68 181 138 2,069 Deferred............................. (51) -- -- -- (1,409) ------ ------ ------ ------ ------ (39) 68 181 138 660 ------ ------ ------ ------ ------ Net loss............................... (1,117) (1,439) (3,772) (2,314) (1,819) ====== ====== ====== ====== ======
See accompanying notes. F-22 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-23 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-24 PRODAC PROZESSDATENTECHNIK GMBH AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED) 1. ORGANIZATION OF BUSINESS AND BASIS OF PRESENTATION ORGANIZATION AND NATURE OF OPERATIONS PRODAC Prozessdatentechnik GmbH (the "Company" or "PRODAC") was merged effective January 1, 1993, with Protronic Electronicgerate GmbH with an original capitalization of TDM 260 ("TDM" is thousands of Deutsche Mark). In 1993, the shareowners contributed an additional TDM 740 in capital to bring the registered capital to DM 1.0 million. In 1991 the Company purchased a 17% interest in Hogodata Deutschland GmbH, located in Bad Wiessee, Germany. The Company sold its investment in June 1994 for a net book value of TDM 133. The Company formed a subsidiary, PRODAC Hotelvideo-Communicationssystems Ltd., ("PRODAC Ltd.") located in Bedford, UK, in 1992 whereby it obtained a 75% ownership interest. PRODAC Ltd. is included in the consolidated financial statements. Also in 1992, the Company founded a subsidiary, PRODAC Hotelvideosysteme Vertriebs-GmbH ("PRODAC Austria") located in Vienna, Austria and originally obtained a 75% ownership interest. In 1996, the Company acquired the remaining 25% of PRODAC Austria for TOS 100 (TDM 15), ("TOS" is thousands of Austrian Schilling). PRODAC Austria is included in the consolidated financial statements. The Company is one of the leading providers to the hospitality industry in Europe of interactive video entertainment and information systems. The Company develops, manufactures and installs its own scheduled broadcast and interactive video entertainment and information systems. On November 6, 1996, the shareowners and directors have entered into an agreement with MagiNet Corporation for the sale of the Company. The Company's continued level of operations is dependent upon continuing to grow its business and obtaining additional financing for that growth. BASIS OF PRESENTATION The accompanying financial statements have been prepared in accordance with United States generally accepted accounting principles ("U.S. GAAP"). The Company maintains its financial records in accordance with the German Commercial Code, which represents generally accepted accounting principles in Germany ("German GAAP"). Generally accepted accounting principles in Germany vary in certain respects from U.S. GAAP. Accordingly, the Company has recorded certain adjustments in order that these financial statements be in accordance with U.S. GAAP. INTERIM FINANCIAL DATA The interim financial information for the nine months ended September 30, 1995 and 1996 is unaudited, however, in the opinion of management, the interim data included all adjustments, consisting only of normal F-25 PRODAC PROZESSDATENTECHNIK GMBH AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED) recurring adjustments, necessary for a fair presentation of the results for the interim periods ended September 30, 1995 and 1996. Results for the nine months ended September 30, 1996 are not necessarily indicative of the results that may be expected for the entire year ending December 31, 1996. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its majority owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. CASH EQUIVALENTS All highly liquid investments purchased with an original maturity of three months or less are considered cash equivalents. REVENUE RECOGNITION The Company owns, installs and operates its video systems in hotels primarily in Germany, the United Kingdom and Austria and issues invoices to hotels and recognizes revenue, less an allowance for denials, each month based on reported viewings. The Company recognizes revenue on video systems it sells directly to distributors upon shipment. Revenues for direct sales to hotels are recognized upon installation. The hotels are not required to enter into service agreements with the Company upon installation and there are no circumstances under which the video systems cannot be operated without video service agreements with the Company. CONCENTRATION OF CREDIT RISK The Company performs ongoing credit evaluations of its installed hotels and generally requires no collateral. Reserves are maintained for potential credit losses and such losses have been within management's expectations. FOREIGN CURRENCY TRANSLATION The Company's foreign subsidiaries use as their functional currency the local currencies of the countries in which they operate. Their assets and liabilities are translated into Deutsche Mark at the exchange rates in effect at the balance sheet date. Revenues and expenses are translated at average rates of exchange prevailing during the period. The resulting cumulative translation adjustments are disclosed as a separate component of shareholders' deficiency. INVENTORY Inventories are stated at the lower of cost or market, with cost principally determined on an average basis. Goods awaiting installation in hotels are classified as finished goods until installation is complete. While the Company does directly sell a portion of its inventory, this inventory is not segregated until a sales contract has been signed and the level of inventory that will be recovered within the next year is not ascertainable at the balance sheet date. F-26 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 to manage its exposure to fluctuations in foreign currency exchange rates. The fair values of forward exchange contracts, which approximate their carrying amount, are estimated based on quoted market prices of comparable contracts. Realized gains and losses from forward exchange contracts are included in operations. F-27 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-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) 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 to manage its exposure to fluctuations in foreign currency exchange rates. These contracts involve the exchange of one currency for another at a future date and generally mature within three months. At December 31, 1995 and September 30, 1996, the Company had a notional principal amount of approximately TDM 748 and TDM 789, respectively, in contracts to buy sterling in the future. Realized gains and losses from such contracts were immaterial. F-29 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-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) 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-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) 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-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) 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-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) 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 1,844 1,349 1,520 Operating loss.......................... (663) (27) (154) (23) (287) Net loss................................ (678) (469) (452) (184) (347) Video system--net....................... 930 3,049 2,486 2,719 2,724 Total assets............................ 1,912 3,680 4,149 4,406 3,676 Total debt.............................. 992 3,241 2,779 3,009 3,149
F-34 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 1,844 1,520 Other................................ 458 229 513 1,444 ------ ------ ------ ------ 12,269 13,836 16,879 19,238 ====== ====== ====== ====== Operating income (loss) Germany.............................. (166) (381) (2,237) (87) United Kingdom....................... (663) (27) (154) (287) Other................................ (116) (18) (219) 234 Intercompany elimination............. -- -- (137) 137 ------ ------ ------ ------ (945) (426) (2,747) (3) ====== ====== ====== ====== Identifiable assets Germany.............................. 12,257 13,908 20,255 31,763 United Kingdom....................... 1,912 3,680 4,149 3,676 Other................................ 658 426 3,262 2,992 Intercompany elimination............. (646) (974) (2,649) (2,855) ------ ------ ------ ------ 14,181 17,040 25,017 35,576 ====== ====== ====== ======
F-35 MAGINET CORPORATION UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION On November 5, 1996, MagiNet, Corporation. ("MagiNet" or the "Company") entered into a definitive Share Purchase and Transfer Agreement (the Acquisition Agreement) to acquire all of the outstanding shares (the "Prodac Shares") of Prodac Prozessdatentechnik GmbH, a corporation organized under German law ("Prodac"). Pursuant to the Acquisition Agreement, and subject to certain conditions described below, the Company will pay cash in the amount of approximately DM 20,800,000 (approximately $13,600,000) and an aggregate number of shares of MagiNet Common Stock that DM 5 million (approximately $3,300,000) would purchase at a per share price equal to ninety percent of the initial public offering price per share (estimated to be approximately 455,000 shares). The acquisition is expected to be completed in December 1996. A foreign exchange rate of 1.525 Deutsche Marks per U.S. Dollar, the rate at September 30, 1996, was used for translation purposes. In addition, the Company has agreed to pay up to DM 15 million (approximately $9,800,000) to the former employees/owners of Prodac, contingent upon the achievement of certain financial and performance milestones over the years 1997 through 1999. These contingent payments will be treated as period expenses and are accordingly not included in the purchase price. The effectiveness of the Acquisition Agreement is subject to the completion by the Company of a minimum equity offering of $40,000,000 and subsequent approval of the Acquisition Agreement by the Company's Board of Directors. Prodac, headquartered in Cologne, Germany and operating through subsidiaries in Austria, and through distributors or sales representatives in other countries, is one of the leading providers to the hospitality industry in Europe of interactive video entertainment and information systems. The Company intends to fund the acquisition primarily through the proceeds of the initial public offering. The unaudited pro forma condensed combined financial statements give effect to the acquisition of Prodac under the purchase method of accounting. Under the purchase method of accounting, the amount relating to acquired in-process technology will be charged to operations as of the purchase date. The purchase price allocations are based on preliminary appraisals received by MagiNet, and will be finalized upon the closings to reflect the final balance sheet of Prodac. The Company presently expects to record a charge of approximately $12.2 million relating to the acquisition of in-process technology in the quarter ending December 31, 1996. The unaudited pro forma condensed combined financial statements also give effect to the sale on October 1, 1996 of substantially all of the assets and liabilities of Prodac's operations in Great Britain. The unaudited pro forma condensed combined balance sheet assumes the acquisition of Prodac occurred as of September 30, 1996 and presents the combined financial position of MagiNet and Prodac. Such unaudited pro forma information is based on the historical balance sheets for MagiNet and Prodac and gives effect for the pro forma adjustments described in the notes accompanying the unaudited pro forma condensed combined financial statements. The charge relating to the acquisition of in-process technology described above is included in the pro forma condensed combined balance sheet as a charge to retained earnings. The pro forma condensed combined statements of operations presents the combined year and nine months results of MagiNet and Prodac and, assumes the acquisition took place on January 1, 1995 and January 1, 1996. Such unaudited pro forma information is based on the historical statements of operations for MagiNet and Prodac and gives effect for the pro forma adjustments described in the notes accompanying the unaudited pro forma condensed combined financial statements. The charge relating to the acquisition of in-process technology F-36 MAGINET CORPORATION UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION--(CONTINUED) described above is excluded from the pro forma statements of operations as it represents a nonrecurring item directly related to the acquisition. The pro forma condensed combined statement of operations for the year ended December 31, 1995 combines the historical statement of operations of MagiNet and Prodac for the year ended December 31, 1995. The pro forma condensed combined statement of operations for the nine months ended September 30, 1996 combines the historical statement of operations information for MagiNet and Prodac for the nine months ended September 30, 1996. These pro forma statements may not be indicative of the results that actually would have occurred if the combinations had been in effect on the dates indicated or which may be realized in the future. F-37 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................ 605 656 3,300 (A) 3,905 (656)(E) Deferred compensation....... (218) -- -- (218) Accumulated deficit......... (37,008) (5,113) (12,200)(F) (49,208) 5,113 (E) Cumulative translation adjustment................. (651) (14) 14 (E) (651) --------- -------- ------- ------- Total stockholders' equity.. 15,969 (4,471) (4,429) 7,069 --------- -------- ------- ------- Total liabilities and stockholders' equity......... $ 49,484 $ 23,329 $ 1,611 $74,424 ========= ======== ======= =======
See accompanying notes. F-38 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 2,591 (313)(K) 13,806 Research and development..... 1,247 278 -- 1,525 --------- -------- ------- -------- Total costs and expenses....... 20,188 13,358 1,624 35,170 Operating loss................. (11,499) (1,584) (2,833) (15,916) Interest expense............... (1,297) (1,195) (971)(D) (3,258) 205 (K) Interest income and other, net........................... 306 273 (9)(K) 570 --------- -------- ------- -------- Loss before income taxes and minority interest in net losses of consolidated subsidiaries.................. (12,490) (2,506) (3,608) (18,604) Provision for income taxes..... (554) (126) -- (680) Minority interest in net losses of consolidated subsidiaries.. 248 -- -- 248 --------- -------- ------- -------- Net loss....................... $ (12,796) $ (2,632) $(3,608) $(19,036) ========= ======== ======= ======== Net loss per share............. $ (1.03) $ (1.48) Shares used in computation of net loss per share............ 12,392 12,847 (H)
See accompanying notes. F-39 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 2,562 (288)(L) 10,729 Research and development..... 1,599 210 -- 1,809 --------- -------- ------- -------- Total costs and expenses....... 21,033 12,632 31 33,696 Operating loss................. (8,985) 258 (1,028) (9,755) Interest expense............... (2,710) (1,295) (941)(D) (4,753) 193 (L) Interest income and other, net........................... 627 260 (153)(L) 734 --------- -------- ------- -------- Loss before income taxes and minority interest in net losses of consolidated subsidiaries.................. (11,068) (777) (1,929) (13,774) Provision for income taxes..... (681) (442) -- (1,123) Minority interest in net losses of consolidated subsidiaries.. 215 -- -- 215 --------- -------- ------- -------- Net loss....................... $ (11,534) $ (1,219) $(1,929) $(14,682) ========= ======== ======= ======== Net loss per share............. $ (0.93) $ (1.14) Shares used in computation of net loss per share............ 12,407 12,862 (G)
See accompanying notes. F-40 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. The assumed interest rate on the additional assumed debt was 10.5% in 1995 and 11.5% in 1996. (E) Elimination of Prodac stockholders' equity amounts. (F) The pro forma statement of operations excludes the charge of $12.2 million for purchased in-process technology which arose from the acquisition. These charges will be included in the Company's consolidated financial statements for the three month period ending December 31, 1996. (G) Shares used in the net loss per share calculation have been adjusted to reflect the pro forma issuance of approximately 455,000 shares of MagiNet Common Stock as if the transaction had occurred on January 1, 1996. F-41 MAGINET CORPORATION NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS)--(CONTINUED) (H) Shares used in the net loss per share calculation have been adjusted to reflect the pro forma issuance of approximately 455,000 shares of MagiNet Common Stock as if the transaction had occurred on January 1, 1995. (I) Short-term debt has been adjusted to reflect the excess of the cash portion of the purchase price over the Company's cash balance at September 30, 1996. (J) The September 30, 1996 unaudited pro forma condensed combined balance sheet has been adjusted as follows for the sale on October 1, 1996 of substantially all of the net liabilities of Prodac's operations in Great Britain of approximately $232,000 for approximately $292,000 in cash: 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-42 MAGINET CORPORATION NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS)--(CONTINUED) The 1995 Prodac statement of operations was converted to U.S. Dollars at an average rate of 1.4336 Deutsche Marks per U.S. Dollar. The Prodac statement of operations for the nine months ended September 30, 1996 was converted to U.S. Dollars at an average rate of 1.4926 Deutsche Marks per U.S. Dollar. The Prodac balance sheet at September 30, 1996 was converted to U.S. Dollars using a rate of 1.525 Deutsche Marks per U.S. Dollar. F-43 [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.......................................................... 17 Dividend Policy.......................................................... 17 Capitalization........................................................... 18 Dilution................................................................. 19 Selected Consolidated Financial and Other Data........................... 20 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 22 Business................................................................. 34 Acquisition of Prodac.................................................... 46 Management............................................................... 50 Certain Transactions..................................................... 60 Principal Stockholders................................................... 62 Description of Capital Stock............................................. 64 Shares Eligible for Future Sale.......................................... 67 Certain United States Federal Tax Considerations for Non-U.S. Holders of Common Stock............................................................ 68 Underwriting............................................................. 70 Legal Matters............................................................ 72 Experts.................................................................. 73 Additional Information................................................... 73 Index to Consolidated Financial Statements............................... F-1
------------------ UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICI- PATING IN THE DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DE- LIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOT- MENTS OR SUBSCRIPTIONS. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 5,500,000 SHARES [LOGO OF MAGINET APPEARS HERE] COMMON STOCK ------------------ PROSPECTUS , 1996 ------------------ LEHMAN BROTHERS HAMBRECHT & QUIST - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR + +THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE + +UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF + +ANY SUCH STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subject to Completion, dated December 16, 1996 PROSPECTUS 5,500,000 SHARES [LOGO OF MAGINET APPEARS HERE] COMMON STOCK ------------- Of the 5,500,000 shares of Common Stock, $.001 par value ("Common Stock"), of MagiNet Corporation ("MagiNet" or the "Company") being offered hereby, 1,100,000 shares are being offered initially outside the United States and Canada by the International Managers (the "International Offering") and 4,400,000 shares are being offered initially in the United States and Canada by the U.S. Underwriters (the "U.S. Offering"). Such offerings are referred to collectively as the "Offerings." Prior to the Offerings, there has been no public market for the Common Stock of the Company. It is currently estimated that the initial public offering price per share will be between $8.00 and $9.00 per share. See "Underwriting" for a discussion of factors to be considered in determining the initial public offering price. The Common Stock has been approved for listing on the Nasdaq National Market under the symbol "MGNT." ------------- THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 7. ------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
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.......................................................... 17 Dividend Policy.......................................................... 17 Capitalization........................................................... 18 Dilution................................................................. 19 Selected Consolidated Financial and Other Data........................... 20 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 22 Business................................................................. 34 Acquisition of Prodac.................................................... 46 Management............................................................... 50 Certain Transactions..................................................... 60 Principal Stockholders................................................... 62 Description of Capital Stock............................................. 64 Shares Eligible for Future Sale.......................................... 67 Certain United States Federal Tax Considerations for Non-U.S. Holders of Common Stock............................................................ 68 Underwriting............................................................. 70 Legal Matters............................................................ 72 Experts.................................................................. 73 Additional Information................................................... 73 Index to Consolidated Financial Statements............................... F-1
------------------ UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICI- PATING IN THE DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DE- LIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOT- MENTS OR SUBSCRIPTIONS. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 5,500,000 SHARES [LOGO OF MAGINET APPEARS HERE] COMMON STOCK ------------------ PROSPECTUS , 1996 ------------------ LEHMAN BROTHERS HAMBRECHT & QUIST - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 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 October 15, 1992, the Registrant issued and sold 339,887 and 100,181 shares of Series B Preferred Stock to 11 investors at sale prices of $4.00 and $4.50 per share respectively. 5. On March 15, 1993, the Registrant issued and sold 888,859 shares of Series B Preferred Stock to 19 investors at a sale price of $4.50 per share. In connection with the issuance of such shares of Series B Preferred Stock, the Company also issued the investors warrants to acquire up to an aggregate of 182,993 shares of Common Stock. II-1 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 16. On December 11, 1993, the Registrant issued a warrant to purchase 40,000 shares of its Common Stock at an exercise price per share of $.01. The sales of the above securities were deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act, or Regulation D promulgated thereunder, or Rule 701 promulgated under Section 3(b) of the Securities Act as transactions by an issuer not involving a public offering or transactions pursuant to compensatory benefit plans and contracts relating to compensation as provided under such Rule 701. The recipients of securities in each such transaction represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the share certificates and warrants issued in such transactions. All recipients had adequate access, through their relationships with the Company, to information about the Registrant. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(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. 10.16 Pledge Agreement between Registrant and The Chase Manhattan Bank, N.A., dated August 15, 1995. 10.17+** Agreement between Registrant and United International Pictures, dated June 28, 1996. 10.18** Employment Agreement between Registrant and Kenneth B. Hamlet, dated November 28, 1995. 10.19** Employment Agreement between Registrant and Robert R. Creager, dated September 22, 1995. 10.20** Offer of Employment Letter from Registrant to Gordon E. (Ned) Druehl, Jr., dated June 18, 1996. 10.21** Lease for the Registrant's headquarters in Sunnyvale, CA, dated February 16, 1994. 10.22** Pledge of Shares Agreement among Registrant, New York Life Insurance Company, The Mutual Life Insurance Company of New York, WASLIC Company II, Namtor BVC LP and The Chase Manhattan Bank, N.A., dated December 29, 1995. 10.23** Pledge Agreement between Registrant and The Chase Manhattan Bank N.A., dated December 28, 1995. 10.24** Shareholders Agreement between Registrant, Mr. Arun Churdboonchart and AC Telecom Limited, dated June 6, 1995. 10.25+ Bloomberg Information Television Programming Affiliation Agreement between Registrant and Bloomberg, L.P., dated October 3, 1996. 10.26** Shareholder Agreement between Registrant and Spectrum, Inc., dated August 1, 1994. 10.27** Master Guest Video Services Agreement by and among MagiNet International Corporation, Hyatt International (Europe Africa Middle East) Ltd., Hyatt Chain Services Limited and Guestserve Development Group, dated November 15, 1995. 10.28 Summary of Terms for Second Amendment to Note Agreement, by and among Registrant and New York Life Insurance Company, The Mutual Life Insurance Company of New York, WASLIC Company II, and Namtor BVC LP, dated November 21, 1996. 10.29 Agreement of Assignment as Collateral among Registrant, The Chase Manhattan Bank, N.A., New York Life Insurance Company, The Mutual Life Insurance Company of New York, WASLIC Company II, and Namtor BVC LP, dated August 15, 1995. 10.30** Joint Venture Agreement by and among Registrant and Nag Yong Lee, dated March 1, 1995. 10.31+** 1996 Annual Agreement between Prodac Prozessdatentechnik GmbH and Philips Mietsystem GmbH, dated June 18, 1996. 10.32** Managing Director's Service Agreement between Prodac Prozessdatentechnik GmbH and Reiner Kaesbach, dated November 5, 1996. 10.33** Managing Director's Service Agreement between Prodac Prozessdatentechnik GmbH and Heinrich R. Wirt, dated November 5, 1996. 10.34** Lease Contract by and between Kaesbach & Wirt GbR and Prodac Prozessdatentechnik GmbH, dated December 15, 1993. 10.35** Modification agreement of Lease Contract by and between Kaesbach & Wirt GbR and Prodac Prozessdatentechnik GmbH, dated October 7, 1996. 10.36+** Agreement between Prodac Prozessdatentechnik GmbH and United International Pictures GmbH, dated February 8, 1996. 10.37+** 1996 Bonus Agreement between Prodac Prozessdatechnik GmbH and Philips Mietsystem GmbH, dated October 25, 1996.
II-4 10.38** Form of standard Leasing Contract between Prodac Prozessdatentechnik GmbH and Philips Mietsystem GmbH. 10.39+** Framework Distributor Contract between Prodac Prozessdatentechnik GmbH and Dorint Aktiengesellschaft, dated May 5, 1994. 10.40+** Framework Operator Agreement between Prodac Prozessdatentechnik GmbH and Novotel Hotelbetriebs mbH, dated October 10, 1996. 10.41+** Framework Distributor Contract between Prodac Prozessdatentechnik GmbH and Maritim Hotelgesellschaft mbH, dated September 21, 1995. 10.42** Agreement for the Sale and Purchase of Part of the business of Prodac Prozessdatentechnik GmbH and Prodac Hotelvideo Communicationsystems Limited between Prodac Prozessdatentechnik GmbH, Prodac Hotelvideo Communicationsystems Limited and UK Consumer Electronics Limited. 10.43+** Supply Agreement between Prodac Prozessdatentechnik GmbH and UK Consumer Electronics Limited. 10.44** Software License and Technical Support Agreement between Prodac Prozessdatentechnik GmbH and UK Consumer Electronics Limited. 10.45** Source Code Agreement by and among Prodac Prozessdatentechnik GmbH and UK Consumer Electronics Limited. 10.46 Collateral Assignment Agreement between the Registrant and The Chase Manhattan Bank, N.A., dated August 15, 1995. 10.47 Commitment Letter between Registrant and CIBC WG Argosy Merchant Fund 2, L.L.C. 11.1** Calculation of earnings per share. 21.1** List of Subsidiaries of the Registrant. 23.1 Consent of Ernst & Young LLP, Independent Auditors. 23.2 Consent of Ernst & Young GmbH, Independent Auditors. 23.3 Consent of Counsel (included in Exhibit 5.1). 24.1** Power of Attorney (see page II-5). 27.1 Financial Data Schedule.
- -------- ** Previously filed. + Confidential treatment has been requested with respect to certain portions of this exhibit pursuant to a request for confidential treatment filed with the Securities and Exchange Commission on September 18, 1996, as amended. Omitted portions have been filed separately with the Commission. (b) Financial Statement Schedules None. Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or notes thereto. ITEM 17. UNDERTAKINGS The undersigned Registrant hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. Insofar as indemnification by the Registrant for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions referenced in Item 14 of this Registration Statement or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the II-5 payment by the Registrant of expenses incurred or paid by a director, officer, or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered hereunder, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-6 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE REGISTRANT HAS DULY CAUSED THIS AMENDMENT NO. 4 TO REGISTRATION STATEMENT ON FORM S-1 TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF SUNNYVALE, STATE OF CALIFORNIA, ON THE 16TH DAY OF DECEMBER, 1996. MAGINET CORPORATION /s/ James A. Barth By __________________________________ JAMES A. BARTH EXECUTIVE VICE PRESIDENT, CHIEF FINANCIAL OFFICER AND SECRETARY PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT NO. 4 TO REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED
SIGNATURE TITLE DATE Kenneth B. Hamlet* Chairman of the - ------------------------------------- Board, President December 16, 1996 (KENNETH B. HAMLET) and Chief Executive Officer (Principal Executive Officer) /s/ James A. Barth Executive Vice - ------------------------------------- President, Chief December 16, 1996 (JAMES A. BARTH) Financial Officer and Secretary (Principal Financial and Accounting Officer) Robert R. Creager* Director - ------------------------------------- December 16, 1996 (ROBERT R. CREAGER) Stuart J. Ellman* Director - ------------------------------------- December 16, 1996 (STUART J. ELLMAN) Michael D. Granoff* Director - ------------------------------------- December 16, 1996 (MICHAEL D. GRANOFF) Michael Ramsay* Director - ------------------------------------- December 16, 1996 (MICHAEL RAMSAY) James D. Robinson IV* Director - ------------------------------------- December 16, 1996 (JAMES D. ROBINSON IV) /s/ James A. Barth -------------------------------- * By: (JAMES A. BARTH) (ATTORNEY-IN-FACT)
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.
10.16 Pledge Agreement between Registrant and The Chase Manhattan Bank, N.A., dated August 15, 1995. 10.17+** Agreement between Registrant and United International Pictures, dated June 28, 1996. 10.18** Employment Agreement between Registrant and Kenneth B. Hamlet, dated November 28, 1995. 10.19** Employment Agreement between Registrant and Robert R. Creager, dated September 22, 1995. 10.20** Offer of Employment Letter from Registrant to Gordon E. (Ned) Druehl, Jr., dated June 18, 1996. 10.21** Lease for the Registrant's headquarters in Sunnyvale, CA, dated February 16, 1994. 10.22** Pledge of Shares Agreement among Registrant, New York Life Insurance Company, The Mutual Life Insurance Company of New York, WASLIC Company II, Namtor BVC LP and The Chase Manhattan Bank, N.A., dated December 29, 1995. 10.23** Pledge Agreement between Registrant and The Chase Manhattan Bank N.A., dated December 28, 1995. 10.24** Shareholders Agreement between Registrant, Mr. Arun Churdboonchart and AC Telecom Limited, dated June 6, 1995. 10.25+ Bloomberg Information Television Programming Affiliation Agreement between Registrant and Bloomberg, L.P., dated October 3, 1996. 10.26** Shareholder Agreement between Registrant and Spectrum, Inc., dated August 1, 1994. 10.27** Master Guest Video Services Agreement by and among MagiNet International Corporation, Hyatt International (Europe Africa Middle East) Ltd., Hyatt Chain Services Limited and Guestserve Development Group, dated November 15, 1995. 10.28 Summary of Terms for Second Amendment to Note Agreement by and among Registrant and New York Life Insurance Company, The Mutual Life Insurance Company of New York, WASLIC Company II, and Namtor BVC LP, dated November 21, 1996. 10.29 Agreement of Assignment as Collateral among Registrant, The Chase Manhattan Bank, N.A., New York Life Insurance Company, The Mutual Life Insurance Company of New York, WASLIC Company II, and Namtor BVC LP, dated August 15, 1995. 10.30** Joint Venture Agreement by and among Registrant and Nag Yong Lee, dated March 1, 1995. 10.31+** 1996 Annual Agreement between Prodac Prozessdatentechnik GmbH and Philip Mietsystem GmbH, dated June 18, 1996. 10.32** Managing Director's Service Agreement between Prodac Prozessdatentechnik GmbH and Reiner Kaesbach, dated November 5, 1996. 10.33** Managing Director's Service Agreement between Prodac Prozessdatentechnik GmbH and Heinrich R. Wirt, dated November 5, 1996. 10.34** Lease Contract by and between Kaesbach & Wirt GbR and Prodac Prozessdatentechnik GmbH, dated December 15, 1993. 10.35** Modification agreement of Lease Contract by and between Kaesbach & Wirt GbR and Prodac Prozessdatentechnik GmbH, dated October 7, 1996. 10.36+** Agreement between Prodac Prozessdatentechnik GmbH and United International Pictures GmbH, dated February 8, 1996. 10.37+** 1996 Bonus Agreement between Prodac Prozessdatentechnik GmbH and Philips Mietsystem GmbH, dated October 25, 1996. 10.38** Form of standard Leasing Contract between Prodac Prozessdatentechnik GmbH and Philips Mietsystem GmbH.
10.39+** Framework Distributor Contract among Prodac Prozessdatentechnik GmbH and Dorint Aktiengesellschaft, dated May 5, 1994. 10.40+** Framework Operator Agreement between Prodac Prozessdatentechnik GmbH and Novotel Hotelbetriebs mbH, dated October 10, 1996. 10.41+** Framework Distributor Contract between Prodac Prozessdatentechnik GmbH and Maritim Hotelgesellschaft mbH, dated September 21, 1995. 10.42** Agreement for the Sale and Purchase of Part of the business of Prodac Prozessdatentechnik GmbH and Prodac Hotelvideo Communicationsystems Limited between Prodac Prozessdatentechnik GmbH, Prodac Hotelvideo Communicationsystems Limited and UK Consumer Electronics Limited. 10.43+** Supply Agreement between Prodac Prozessdatentechnik GmbH and UK Consumer Electronics Limited. 10.44+** Software License and Technical Support Agreement between Prodac Prozessdatentechnik GmbH and UK Consumer Electronics Limited. 10.45** Source Code Agreement by and among Prodac Prozessdatentechnik GmbH and UK Consumer Electronics Limited. 10.46 Collateral Assignment Agreement between the Registrant and The Chase Manhattan Bank, N.A., dated August 15, 1995. 10.47 Commitment Letter between Registrant and CIBC WG Argosy Merchant Fund 2, L.L.C. 11.1** Calculation of earnings per share. 21.1** List of Subsidiaries of the Registrant. 23.1 Consent of Ernst & Young LLP, Independent Auditors. 23.2 Consent of Ernst & Young GmbH, Independent Auditors. 23.3 Consent of Counsel (included in Exhibit 5.1). 24.1** Power of Attorney (see page II-5). 27.1 Financial Data Schedule.
- -------- ** 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-10.10 2 NOTE AGREEMENT AMONG REGISTRANT EXHIBIT 10.10 ================================================================================ MAGINET CORPORATION UP TO $30,000,000 10.5% SENIOR SECURED NOTES DUE 2000 ______________________ NOTE AGREEMENT ______________________ Dated August 15, 1995 ================================================================================ TABLE OF CONTENTS Page ----
1.AUTHORIZATION OF ISSUE OF SECURITIES 1.1 Series A Notes.................................................... 1 1.2 Series B Notes.................................................... 1 1.3 Pledge Agreement.................................................. 2 1.4 Warrants.......................................................... 2 1.5 Reference to Notes................................................ 2 2. PURCHASE AND SALE OF SECURITIES......................................... 2 2.1 Purchase and Sale of Securities................................... 2 2.2 Purchase and Sale of Series B Notes............................... 3 3. CONDITIONS OF CLOSING................................................... 4 3.1 Representations and Warranties.................................... 4 3.2 Performance; No Default........................................... 4 3.3 Compliance Certificate............................................ 4 3.4 Opinion of Purchasers' Special Counsel............................ 4 3.5 Opinion of Company's Counsel...................................... 4 3.6 Opinions of Local Counsel......................................... 5 3.7 Opinion of Agent's Counsel........................................ 5 3.8 Pledge Agreement.................................................. 5 3.9 Collateral Assignment Agreement................................... 5 3.10 Shareholders' Agreement........................................... 5 3.11 Corporate Reorganization.......................................... 6 3.12 Purchase Permitted by Applicable Laws............................. 6 3.13 Payment of Closing Fees........................................... 6 3.14 Private Placement Number.......................................... 6 3.15 Proceedings....................................................... 6 3.16 Appointment of Agent.............................................. 6 3.17 Additional Financing.............................................. 6 3.18 Sale of Securities to other Initial Purchasers.................... 7 3.19 Conditions at Second Closing Date................................. 7 3.20 Principal Amount of Series B Notes................................ 7 3.21 Accession to Appointment Agreement................................ 7 4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY........................... 7 4.1 Organization, Standing, etc....................................... 7 4.2 Authorization; Enforceability..................................... 8 4.3 Warrants and Warrant Shares....................................... 8 4.4 Qualification..................................................... 8 4.5 Financial Statements.............................................. 8 4.6 Actions Pending................................................... 9 4.7 Outstanding Debt.................................................. 9 4.8 Title to Properties............................................... 9 4.9 Intellectual Properties........................................... 9 4.10 Taxes............................................................. 10
4.11 Compliance with Laws, etc......................................... 10 4.12 Conflicting Agreements and Other Matters.......................... 10 4.13 Offering of Securities............................................ 11 4.14 Use of Proceeds................................................... 11 4.15 ERISA............................................................. 11 4.16 Governmental Consent.............................................. 13 4.17 Zoning and Environmental Compliance............................... 13 4.18 Investment Company Act and Holding Company........................ 13 4.19 Disclosure........................................................ 14 4.20 Solvency.......................................................... 14 4.21 Foreign Assets Control Regulations, etc........................... 14 4.22 Hotel Contracts................................................... 14 4.23 Joint Venture Agreements.......................................... 15 5. REPRESENTATIONS OF EACH PURCHASER....................................... 15 5.1 Nature of Purchase................................................ 15 5.2 Source of Funds................................................... 15 5.3 Release of Collateral............................................. 16 6. PREPAYMENTS............................................................. 17 6.1 Optional Prepayment............................................... 17 6.2 Notice of Optional Prepayment..................................... 17 6.3 Partial Payments Pro Rata......................................... 18 6.4 Retirement of Notes............................................... 18 6.5 Surrender of Notes on Prepayment.................................. 18 7. COVENANTS............................................................... 18 7.1 Books of Record and Account....................................... 18 7.2 Financial Statements, Notices, etc................................ 18 7.3 Inspection of Property............................................ 22 7.4 Covenant to Secure Notes Equally.................................. 22 7.5 Maintenance of Corporate Existence................................ 23 7.6 Maintenance of Properties......................................... 23 7.7 Insurance......................................................... 23 7.8 Taxes............................................................. 23 7.9 Compliance with Laws, etc......................................... 24 7.10 Environmental Compliance.......................................... 24 7.11 Pari Passu Ranking................................................ 24 7.12 Payment of Notes.................................................. 24 7.13 Security Documents; Further Assurances............................ 25 7.14 Foreign Subsidiaries' Security.................................... 25 7.15 Pledge of Shares of New Subsidiaries.............................. 26 7.16 Notification of Registration...................................... 26 7.17 Sub-licences or Assignments and Consents.......................... 26 7.18 Removal of Legends................................................ 26 8. NEGATIVE COVENANTS...................................................... 26 8.1 Liens.............................................................. 27
8.2 Restricted Payments................................................ 29 8.3 Adjusted Consolidated Net Worth.................................... 30 8.4 Total Debt to Total Adjusted Capitalization........................ 30 8.5 Total Debt to Historical EBITDA.................................... 30 8.6 Historical EBITDA.................................................. 30 8.7 Merger, Consolidation, etc......................................... 31 8.8 Sale of Assets..................................................... 32 8.9 Cumulative Installed Rooms......................................... 33 8.10 Offering of Adult Titles........................................... 34 8.11 Amendments to the Technology License Agreement..................... 34 8.12 Transactions with Affiliates....................................... 34 8.13 Additional Pledged Securities; Restrictions on PPV............................................................. 34 9. EVENTS OF DEFAULT AND ENFORCEMENT........................................ 36 9.1 Events of Default; Acceleration.................................... 36 9.2 Rescission of Acceleration......................................... 38 9.3 Notice of Acceleration or Rescission............................... 38 9.4 Other Remedies..................................................... 39 10. DEFINITIONS AND INTERPRETATION, ETC...................................... 39 10.1 Defined Terms...................................................... 39 10.2 Accounting Principles, Terms and Determinations.................... 47 11. MISCELLANEOUS............................................................ 47 11.1 Payments........................................................... 48 11.2 Expenses........................................................... 49 11.3 Consent to Amendments.............................................. 50 11.4 Solicitation of Holders of Notes................................... 50 11.5 Form, Registration, Transfer and Exchange of Notes; Lost Notes.................................................. 50 11.6 Persons Deemed Owners.............................................. 51 11.7 Survival of Representations and Warranties......................... 51 11.8 Successors and Assigns............................................. 52 11.9 Disclosure to Other Persons........................................ 52 11.10 Notices............................................................ 52 11.11 Payments Due on Non-Business Days.................................. 53 11.12 Satisfaction Requirement........................................... 53 11.13 Entire Agreement................................................... 53 11.14 Governing Law...................................................... 53 11.15 Severability....................................................... 53 11.16 Descriptive Headings............................................... 53 11.17 Counterparts....................................................... 53 11.18 Severalty of Obligations........................................... 54 11.19 Consent to Jurisdiction; Service of Process........................ 54 11.20 Waiver of Jury Trial............................................... 54
PURCHASER SCHEDULE SCHEDULE 1.2 - Pledged Security SCHEDULE 3.11 - Description of Reorganization SCHEDULE 4.1 - Subsidiaries SCHEDULE 4.7 - Outstanding Debt SCHEDULE 4.9 - Related Interests in Intellectual Property SCHEDULE 4.12 - Restrictive Covenants SCHEDULE 4.15 - ERISA SCHEDULE 4.16 - Governmental Consents SCHEDULE 8.1 - Liens EXHIBIT A-1 - Form of Series A Note EXHIBIT A-2 - Form of Series B Note EXHIBIT B-1 - Form of Pledge Agreement EXHIBIT B-2 - Form of Pledge Agreement (Japanese law) EXHIBIT C - Form of Warrant EXHIBIT D-1 - Form of Opinion of Counsel to the Company EXHIBIT D-2 - Form of Opinion of Counsel to the Agent EXHIBIT D-3 - Form of Local Counsel Opinion EXHIBIT E - Form of Collateral Assignment Agreement EXHIBIT F - Form of Appointment Agreement EXHIBIT G - Form of Second Amendment to Shareholders' Agreement EXHIBIT H - Gross Revenue Analysis MAGINET CORPORATION 405 TASMAN DRIVE SUNNYVALE, CALIFORNIA 94089 Senior Secured Notes due 2000 with Warrants August 15, 1995 To Each of the Purchasers Named in the Purchaser Schedule Attached Hereto Ladies and Gentlemen: The undersigned, MagiNet Corporation, a company organized under the laws of the State of California (the "Company"), hereby agrees with each of the purchasers named in the Purchaser Schedule attached hereto (herein called the "Initial Purchasers") and any subsequent purchaser which executes an instrument of accession to this Note Agreement in the form of Annex I attached hereto (herein called the "Subsequent Purchasers" and together with the Initial Purchasers, the "Purchasers") as follows: SECTION 1. AUTHORIZATION OF ISSUE OF SECURITIES. 1.1. Series A Notes. The Company has authorized the issue and sale of its senior promissory notes (herein called the "Series A Notes") in the aggregate principal amount of $24,900,000 to be dated the date of issue thereof, to mature August 15, 2000, to bear interest on the unpaid balance thereof from the date thereof until the principal thereof shall have become due and payable at the rate of 10.5% per annum (subject to adjustment pursuant to Sections 8.6 and 8.9) and on overdue payments at the rate specified therein, each such promissory note to be substantially in the form of Exhibit A-1 attached hereto. The Series A Notes issued pursuant hereto will constitute direct, and, except as provided herein, secured obligations of the Company and will rank at least pari passu with all other outstanding obligations of the Company, present or future. 1.2. Series B Notes. On or before December 31, 1995, the Company may authorize the issue and sale of senior promissory notes (herein 2 called the "Series B Notes") to one or more Subsequent Purchasers reasonably acceptable to the Initial Purchasers, in the aggregate principal amount of up to $5,100,000, to be dated the date of issue thereof, to mature on August 15, 2000, to bear interest on the unpaid balance thereof from the date thereof until the principal thereof shall have become due and payable at a rate per of 10.5% annum (subject to adjustment pursuant to Sections 8.6 and 8.9) and on overdue payments at the rate specified therein, each such promissory note to be substantially in the form of Exhibit A-2 attached hereto. Any Series B Notes issued pursuant hereto will constitute direct, and, except as provided herein, secured obligations of the Company and will rank at least pari passu with all other outstanding obligations of the Company, present or future. 1.3. Pledge Agreement. The obligations of the Company hereunder and under each of the Notes shall be secured by way of a pledge of the amount of capital stock or similar equity interests specified in Schedule 1.2 opposite the name of each of the companies listed on Schedule 1.2, together with all proceeds thereof (collectively, the "Pledged Securities") in favor of The Chase Manhattan Bank, N.A., as collateral agent (the "Agent") for the Purchasers, pursuant to one or more pledge agreements in substantially the form of Exhibit B-1 attached hereto, other than with respect to PPV Japan, Inc, the Pledged Securities of which shall be pledged pursuant to an agreement of assignment of collateral in substantially the form of Exhibit B-2 attached hereto (each a "Pledge Agreement"). 1.4. Warrants. The Company will authorize the issue of warrants in substantially the form of Exhibit C hereto (the "Warrants") to subscribe at the price per share (subject to adjustment as set forth in the Warrants) set forth in the Warrants for up to 1,714,286 (subject to adjustment as set forth in Section 4.3 and in the Warrants) shares of common stock of the Company, no par value per share (the "Common Stock"). 1.5. Reference to Notes. The term "Notes" as used herein shall include each of the Series A Notes and Series B Notes (each a "Series") and any Note delivered pursuant to any provision of this Agreement and each such senior promissory note delivered in substitution or exchange for any other Note pursuant to any such provision. The term "Warrants" as used herein shall include each such common stock purchase warrant delivered pursuant to any provision of this Agreement and each such warrant delivered in substitution or exchange for any other Warrant pursuant to any such provision. The term "Securities" shall include both the Notes and the Warrants. SECTION 2. PURCHASE AND SALE OF SECURITIES. 2.1. Purchase and Sale of Securities. The Company hereby agrees to sell to each Initial Purchaser, and, subject to the terms and conditions hereof, each Initial Purchaser hereby agrees (x) to purchase from the Company the aggregate principal amount of the Series A Notes set forth opposite such NOTE AGREEMENT 3 Initial Purchaser's name in the Purchaser Schedule attached hereto at the purchase price of 100% of such aggregate principal amount and (y) to accept from the Company the aggregate number of Warrants set forth opposite such Initial Purchaser's name in the Purchaser Schedule attached hereto. The Company will deliver to such Initial Purchaser, at the offices of White & Case, at 1155 Avenue of the Americas, New York, New York 10036, (i) one or more Series A Notes registered in such Initial Purchaser's name (or in the name of such Initial Purchaser's nominee), evidencing Series A Notes in the aggregate principal amount of Series A Notes to be purchased by such Initial Purchaser and in the denomination or denominations specified with respect to such Initial Purchaser in the Purchaser Schedule against payment by such Initial Purchaser of the purchase price thereof by transfer of immediately available funds for credit to the Company's account #035004328-7 at Silicon Valley Bank, Santa Clara, California, ABA No. 121-140-399, and (ii) one or more Warrants registered in such Initial Purchaser's name, evidencing the aggregate number of Warrants to be delivered to such Initial Purchaser, on the date of closing, which shall be August 15, 1995 or any other date on or before August 31, 1995 upon which the Company and the Initial Purchasers may mutually agree (herein called the "First Closing Date"). If at the First Closing Date the Company fails to tender the Securities to each Initial Purchaser as provided or any of the conditions specified in Section 3 shall not have been fulfilled to the satisfaction of each Initial Purchaser, such Initial Purchaser will, at its election, be relieved of all further obligations under this Agreement, without thereby waiving any other rights that it may have by reason of such failure or nonfulfillment. 2.2. Purchase and Sale of Series B Notes. The Company may from time to time agree to sell to a Subsequent Purchaser reasonably acceptable to the holders of the Series A Notes, and, subject to the terms and conditions hereof, each such Subsequent Purchaser shall (x) execute and deliver an instrument of accession in the form of Annex I hereto which shall provide the information for the Purchaser Schedule, which shall be supplemented accordingly, (y) purchase from the Company the aggregate principal amount of the Series B Notes set forth opposite such Subsequent Purchaser's name in the Purchaser Schedule as so supplemented at the purchase price of 100% of such aggregate principal amount and (y) if applicable accept from the Company, the aggregate number of Warrants offered to such Purchaser. The Company will deliver to such Subsequent Purchaser at the offices of White & Case at 1155 Avenue of the Americas, New York, New York 10036, (i) one or more Series B Notes registered in such Subsequent Purchaser's name (or in the name of such Subsequent Purchaser's nominee), evidencing Series B Notes in the aggregate principal amount of Series B Notes to be purchased by such Subsequent Purchaser and in the denomination or denominations specified with respect to such Subsequent Purchaser in the Purchaser Schedule against payment by such Subsequent Purchaser of the purchase price thereof by transfer of immediately available funds for credit to the bank account of the Company NOTE AGREEMENT 4 with a bank in the United States, as specified by the Company and (ii) if applicable, one or more Warrants registered in such Subsequent Purchaser's name, evidencing the aggregate number of Warrants to be delivered to such Subsequent Purchaser, on the second closing date, which shall be on such date on or before December 31, 1995 as the Company and the Subsequent Purchasers may mutually agree (herein called the "Second Closing Date"). The term "closing date" or "date of closing" shall mean either the First Closing Date or the Second Closing Date, as the case may be. SECTION 3. CONDITIONS OF CLOSING. Each Initial Purchaser's obligation to purchase and pay for the Series A Notes to be purchased by such Initial Purchaser hereunder and each Initial Purchaser's obligation to accept the Warrants to be issued to each Initial Purchaser hereunder is subject to the satisfaction, on or before the First Closing Date, of the conditions set forth in Sections 3.1 through 3.18, inclusive. Each Subsequent Purchaser's obligation to purchase and pay for the Series B Notes which may be purchased by a Subsequent Purchaser hereunder and each Subsequent Purchaser's obligation to accept Warrants, if any, which may be issued to each Subsequent Purchaser hereunder is subject to the satisfaction, on or before the Second Closing Date, of the conditions set forth in Sections 3.19 through 3.21, inclusive. 3.1. Representations and Warranties. The representations and warranties of the Company contained in this Agreement and the other Note Documents and those otherwise made in writing by or on behalf of the Company in connection with the transactions contemplated by this Agreement shall be true on and as of the First Closing Date, except as affected by the consummation of such transactions. 3.2. Performance; No Default. The Company shall have performed and complied with all agreements and conditions contained in this Agreement and any other Note Document required to be performed or complied with by it prior to or at the closing and at the time of the closing there shall exist no Event of Default or Default. 3.3. Compliance Certificate. The Company shall have delivered to such Initial Purchaser an Officers' Certificate, dated the First Closing Date, certifying that the conditions specified in Sections 3.1 and 3.2 have been complied with or fulfilled. 3.4. Opinion of Initial Purchasers' Special Counsel. Such Initial Purchaser shall have received from White & Case, who are acting as special counsel for the Initial Purchasers in connection with this transaction, a favorable opinion satisfactory to such Initial Purchaser as to such matters incident to the matters herein contemplated as such Initial Purchaser may reasonably request. NOTE AGREEMENT 5 3.5. Opinion of Company's Counsel. Such Initial Purchaser shall have received from Wilson, Sonsini, Goodrich & Rosati, U.S. counsel for the Company, a favorable opinion satisfactory to such Initial Purchaser and substantially in the form of Exhibit D-1 attached hereto. 3.6. Opinions of Local Counsel. Such Initial Purchaser shall have received from local counsel in the respective jurisdictions of organization for each Subsidiary and Joint Venture Vehicle listed on Schedule 1.2, favorable opinions satisfactory to such Initial Purchaser and substantially in the form of Exhibit D-2 attached hereto. 3.7. Opinion of Agent's Counsel. Such Initial Purchaser shall have received from White & Case, counsel for the Agent, a favorable opinion satisfactory to such Initial Purchaser and substantially in the form of Exhibit D-3 attached hereto. 3.8. Pledge Agreement. The Company shall have duly authorized, executed and delivered a Pledge Agreement, and any other Pledge Agreements as such Initial Purchaser reasonably deems advisable in connection with the Pledged Securities and such Initial Purchaser shall have received a certified copy thereof, and at the First Closing Date such Pledge Agreement(s) shall be in full force and effect and shall constitute a valid, binding and enforceable obligation in accordance with its terms, and the Company shall cause to be delivered to the Agent all the certificated Pledged Securities, if any, referred to in any such Pledge Agreement, together with executed and undated stock powers, and such Initial Purchaser shall have received such confirmation from the Company and the Agent with respect thereto as it may reasonably request. At the First Closing Date, such Initial Purchaser shall receive copies of such Pledge Agreement(s) in the form executed and delivered by the parties thereto. 3.9. Collateral Assignment Agreement. The Company shall have caused PPV to have duly authorized, executed and delivered a collateral assignment agreement with respect to the Technology License Agreement in substantially the form of Exhibit E hereto (the "Collateral Assignment Agreement") in favor of the Agent for the benefit of the Noteholders and such Initial Purchaser shall have received a certified copy thereof, and at the First Closing Date such Collateral Assignment Agreement shall be in full force and effect and shall constitute a valid, binding and enforceable obligation in accordance with its terms. At the First Closing Date, such Initial Purchaser shall receive copies of such Collateral Assignment Agreement in the form executed and delivered by the parties thereto. The Collateral Assignment Agreement shall allow Pacific Pay Video Limited to sublicense or to assign rights under the Technology License Agreement to Subsidiaries and Joint Venture Vehicles of the Company. NOTE AGREEMENT 6 3.10. Shareholders' Agreement. The second amendment to the Shareholders' Agreement substantially in the form of Exhibit G hereto shall have been duly authorized, executed and delivered by the parties thereto, and such Initial Purchaser shall have received fully executed counterparts thereof, and on the date of the First Closing Date, the Shareholders' Agreement, as amended, shall be in full force and effect and such Initial Purchaser shall have received such confirmation from the Company with respect thereto as such Initial Purchaser may reasonably request. 3.11. Corporate Reorganization. The corporate reorganization described in Schedule 3.11 shall have occurred and except as described in Schedule 3.11, all of the assets of PPV shall have been duly and validly transferred to the Company and such Initial Purchaser shall have received such confirmation from the Company with respect thereto as such Initial Purchaser may reasonably request. 3.12. Purchase Permitted By Applicable Laws. The purchase of and payment for the Notes and acceptance of the Warrants by such Initial Purchaser on the First Closing Date on the terms and conditions herein provided (including the use of the proceeds of such Notes by the Company) shall not violate any applicable law or governmental regulation (including, without limitation, section 5 of the Securities Act or Regulation G, T, U or X of the Board of Governors of the Federal Reserve System), shall not subject such Initial Purchaser to any tax, penalty, liability or other undesirable condition under or pursuant to any applicable law or governmental regulation, shall not require reliance by such Initial Purchaser on provisions (such as Section 1405(a)(8) of the New York Insurance Law) permitting limited investments by insurance companies without restriction as to the character of the particular investment, and such Initial Purchaser shall have received such certificates or other evidence as it may request to establish compliance with this condition. 3.13. Payment of Closing Fees. The Company shall have paid the reasonable fees, charges and disbursements of White & Case, special counsel to the Initial Purchasers and Agent and of local counsel, if any, retained by the Initial Purchasers, which are reflected in statements of such counsel rendered to the Company prior to or on the First Closing Date. 3.14. Private Placement Number. White & Case shall have obtained for the Notes a private placement number issued by Standard & Poor's CUSIP Service Bureau (in cooperation with the Securities Valuation Office of the National Association of Insurance Commissioners). 3.15. Proceedings. All corporate and other proceedings taken or to be taken in connection with the transactions contemplated hereby and all documents incident thereto shall be satisfactory in substance and form to such Initial Purchaser, and such Initial Purchaser shall have received all such NOTE AGREEMENT 7 counterpart originals or certified or other copies of such documents as it may reasonably request. 3.16. Appointment of Agent. The Company, the Agent and each of the Initial Purchasers shall have executed and delivered the Appointment Agreement. 3.17. Additional Financing. The Company shall have provided evidence in form and substance satisfactory to such Initial Purchaser that an investor acceptable to such Initial Purchaser shall be committed to make equity and/or debt investments in the Company on terms and conditions satisfactory to such Initial Purchaser in an aggregate amount of at least $5,100,000 prior to January 1, 1996. 3.18. Sale of Securities to other Initial Purchasers. The Company shall have sold to the Initial Purchasers the Notes to be purchased by them at the First Closing Date and shall have received payment in full therefor and the Company shall have issued to the other Initial Purchasers the Warrants to be issued to them at the First Closing Date. 3.19. Conditions at Second Closing Date. The Series A Notes shall be outstanding and the conditions specified in Sections 3.1 through 3.15, inclusive, shall have been satisfied as of the Second Closing Date with respect to the Series B Notes (unless otherwise waived by the Subsequent Purchasers) with all references in such Sections (and in the exhibits referenced therein) to Series A Notes being read as Series B Notes, Initial Purchaser being read as Subsequent Purchaser and to First Closing Date being read as the Second Closing Date, mutatis mutandis. 3.20. Principal Amount of Series B Notes. The outstanding aggregate principal amount of the Series B Notes shall be not greater than $5,100,000. 3.21. Accession to Appointment Agreement. Such Subsequent Purchasers shall have acceded to the Appointment Agreement in accordance with the terms thereof. SECTION 4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants as follows: 4.1. Organization, Standing, etc. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of California. Schedule 4.1 sets forth (i) the name of each Subsidiary and Joint - Venture Vehicle of the Company, (ii) its jurisdiction of incorporation or, if -- not incorporated, operations and (iii) the percentage of its Voting Shares owned --- by the Company and each other Subsidiary or Joint NOTE AGREEMENT 8 Venture Vehicle of the Company. All of the Voting Shares of each Subsidiary and Joint Venture Vehicle shown in Schedule 4.1 as being owned by the Company and its Subsidiaries have been validly issued, are fully paid and nonassessable and are owned by the Company or another Subsidiary free and clear of any Lien (except for Liens arising under the Security Documents or otherwise disclosed in Schedule 4.1). Each Subsidiary and Joint Venture Vehicle is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization and has all requisite corporate power and authority and all material rights and permits to own and operate its properties and to carry on its business as now conducted and as proposed to be conducted. 4.2. Authorization; Enforceability. The Company has all requisite corporate power and authority and all material rights and permits to own and operate its properties, to carry on its business as now conducted and as proposed to be conducted, to enter into this Agreement, the other Note Documents, to issue and sell the Securities and to carry out the terms of the Note Documents. The execution and delivery of this Agreement and each of the other Note Documents and the consummation of the transactions contemplated hereby and thereby have been duly authorized by all necessary corporate action on the part of the Company, and this Agreement and the other Note Documents constitute, and the Securities when issued hereunder for value will each constitute, a legal, valid and binding obligation of the Company, enforceable in accordance with their respective terms. 4.3. Warrants and Warrant Shares. The Company has reserved and unissued shares of its Common Stock at least equal to the shares of Common Stock issuable upon exercise of the Warrants. The shares of Common Stock issuable upon exercise of any Warrant have been duly authorized, and upon payment therefor in accordance with the terms of such Warrant, shall be validly issued, fully paid and nonassessable shares, with no liability on the part of the exercising holder with respect to obligations of the Company. As of the First Closing Date, on a fully-diluted basis the Common Stock into which the Warrants are exercisable represents approximately 11.4% of the capital stock of the Company; provided, that if the conditions specified in Section 1.b of the Warrants are not satisfied on or before December 31, 1995, the stock into which the Warrants are exercisable will represent approximately 23.2% of the capital stock of the Company. 4.4. Qualification. Each of the Company, its Subsidiaries and its Joint Venture Vehicles is duly qualified or authorized to do business and is in good standing in every jurisdiction in which the properties owned, leased or operated by the Company or such Subsidiary or Joint Venture Vehicle or the nature of the business now conducted by the Company or such Subsidiary or Joint Venture Vehicle makes such qualification necessary, except where the failure to be so qualified would not have a Material Adverse Effect. 9 4.5. Financial Statements. The Company has furnished each Purchaser with the following financial statements, identified by a principal financial officer of the Company: (i) the audited consolidated balance sheets of PPV and - its Subsidiaries at December 31, in each of the years 1992, 1993 and 1994, and the related consolidated statements of income, stockholders' equity and cash flows of PPV and its Subsidiaries for the fiscal years ended on such dates and (ii) the unaudited consolidated balance sheets of PPV and its Subsidiaries at -- June 30, 1995 and the related consolidated statements of income, stockholders' equity and cash flows of PPV and its Subsidiaries for the 6 month period ended on such date. Such financial statements (including any related schedules and/or notes and subject, as to interim statements, to changes resulting from audits and year-end adjustments and the absence of footnotes), have been prepared in accordance with generally accepted accounting principles consistently followed throughout the periods involved and show all liabilities, direct and contingent, of PPV and its Subsidiaries required to be shown in accordance with such principles. The consolidated financial statements fairly present the financial condition of PPV and its Subsidiaries as at the dates thereof and for the periods indicated. There has been no material adverse change in the business, operations, affairs, condition (financial or other), properties or prospects of the Company and its Subsidiaries taken as a whole since December 31, 1994. 4.6. Actions Pending. There is (x) no action, suit, investigation or proceeding pending or, to the knowledge of the Company, threatened against the Company or any of its Subsidiaries or Joint Venture Vehicles or any properties or rights of the Company or any of its Subsidiaries, and (y) to the knowledge of the Company, no action, suit, investigation or proceeding pending or threatened against On Command Video Corporation or any of its properties, by or before any court, arbitrator or administrative or governmental body which (i) questions the validity of this Agreement or any other Note Document or any - action taken or to be taken pursuant to this Agreement or any other Note Document or (ii) could reasonably be expected to result in any Material Adverse -- Effect. 4.7. Outstanding Debt. Schedule 4.7 sets forth all outstanding Debt of the Company, its Subsidiaries and its Joint Venture Vehicles (including all Financing Leases and purchase money mortgages). There exists no default or event of default under the provisions of any instrument evidencing any Debt of the Company or its Subsidiaries or its Joint Venture Vehicles or of any agreement relating thereto. 10 4.8. Title to Properties. The Company and each of its Subsidiaries and its Joint Venture Vehicles has good and marketable title to its real properties (other than properties to which it has perpetual easements or which it leases) and good title to all of its other properties, including the properties reflected in the balance sheet as at December 31, 1994 referred to in Section 4.5 (other than properties and assets disposed of in the ordinary course of business). The Company and each of its Subsidiaries and its Joint Venture Vehicles enjoys peaceful and undisturbed possession under all leases necessary in any material respect for the conduct of its business, and all such leases are valid and subsisting and are in full force and effect. 4.9. Intellectual Properties. Except as disclosed in Schedule 4.9, the Company and each of its Subsidiaries and its Joint Venture Vehicles owns or possesses rights to all patents, patent applications, copyrights, copyright applications, trade secrets, trade names and trademarks, technologies, methods, processes or other proprietary properties or information and all rights with respect to the foregoing (collectively, "Intellectual Properties") necessary for the conduct of their respective businesses as now conducted. Neither the Company nor any Subsidiary nor any Joint Venture Vehicle has received a notification of infringement of any Intellectual Property that, if adversely determined, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect. Except as disclosed in Schedule 4.9, no officer, director, employee or shareholder of the Company or any Subsidiary or any Joint Venture Vehicle (other than the Company or another Subsidiary) owns or has, nor at the date of closing will own or have, any interest in any Intellectual Property owned or used by the Company or any Subsidiary or any Joint Venture Vehicle in connection with its businesses. 4.10. Taxes. The Company and each of its Subsidiaries and its Joint Venture Vehicles has filed all federal, state, foreign and other income tax returns which are required to be filed, and has paid all taxes as shown on such returns and on all assessments received by it to the extent that such taxes have become due, except such taxes as are being contested in good faith by appropriate proceedings for which adequate reserves have been established in accordance with generally accepted accounting principles. The consolidated Federal income tax returns of the Company and its Subsidiaries (i) for all - calendar years through 1993, inclusive, have been filed with the Internal Revenue Service, (ii) none have been audited by the Internal Revenue Service and -- (iii) all returns remain open. The state income tax returns required to be --- filed by the Company and its Subsidiaries (a) for all calendar years through - 1993, inclusive, have been filed and (b) none have been audited and all are - open. 4.11. Compliance with Laws, Etc. Neither the Company nor any of its Subsidiaries nor any of its Joint Venture Vehicles is in violation of (i) any - laws, ordinances, governmental rules or regulations to which it is subject or by which it or any of its assets might be bound, (ii) any order, judgment or -- 11 decree of any court, arbitrator or administrative or governmental body to which it is subject or by which it or any of its assets might be bound, (iii) any term --- of any contract, agreement or other instrument to which it is a party or by which it or any of its assets might be bound, or (iv) any term of its charter or -- by-laws, except which, either in any case specified in clauses (i), (ii), (iii) and (iv) or in the aggregate, could not reasonably be expected to have a Material Adverse Effect. 4.12. Conflicting Agreements and Other Matters. Neither the Company nor any of its Subsidiaries nor any of its Joint Venture Vehicles is a party to any contract or agreement or subject to any charter or other corporate restriction which could reasonably be expected to result in a Material Adverse Effect. Neither the execution and/or delivery of this Agreement or any of the other Note Documents, nor the offering, issuance and sale of the Securities, nor fulfillment of nor compliance with the terms and provisions hereof and of any other Note Documents will conflict with, or result in a breach of the terms, conditions or provisions of, or constitute a default under, or result in any violation of, or result in the creation of any Lien (other than Liens in favor of the Purchasers) upon any of the properties of the Company or any of its Subsidiaries or any of its Joint Venture Vehicles pursuant to, the charter or by-laws of the Company or such Subsidiary or such Joint Venture Vehicle, any award of any arbitrator or any agreement (including any agreement with stockholders), instrument, order, judgment, decree, statute, law, rule or regulation to which the Company or any Subsidiary is or may be subject. The Company is not a party to, or otherwise subject to any provision contained in, any instrument evidencing Debt of the Company, any agreement relating thereto or any other contract or agreement (including its charter) which limits the amount of, or otherwise imposes restrictions on the incurring of, Debt of the Company of the type to be evidenced by the Notes except as set forth in the agreements listed in Schedule 4.12. 4.13. Offering of Securities. Neither the Company nor any agent acting on its behalf has, directly or indirectly, offered the Notes or the Warrants or any similar security of the Company for sale to, or solicited any offers to buy either the Notes or the Warrants or any similar securities of the Company from, or otherwise approached or negotiated with respect thereto with, any Person other than the Purchasers and not more than 100 other institutional investors, and neither the Company nor any agent acting on its behalf has taken or will take any action which would subject the issuance or sale of either the Notes or the Warrants to the provisions of section 5 of the Securities Act or to the provisions of any securities or Blue Sky law of any applicable jurisdiction. 4.14. Use of Proceeds. The proceeds of the sale of the Notes will be used for working capital and other general corporate purposes (including without limitation the funding of the operations of Subsidiaries and Joint Venture Vehicles and the acquisition of businesses or assets of businesses that 12 are compatible with the Company). None of the transactions contemplated by this Agreement will violate or result in a violation of section 7 of the Exchange Act or any regulations issued pursuant thereto, including, without limitation, Regulations G, T, U and X of the Board of Governors of the Federal Reserve System. None of such proceeds will be used, directly or indirectly, for the purpose, whether immediate, incidental or ultimate, of purchasing or carrying any margin stock or for the purpose of maintaining, reducing or retiring any Debt which was originally incurred to purchase or carry any stock that is currently a margin stock or for any other purpose which might constitute this transaction a "purpose credit" within the meaning of such Regulation G. 4.15. ERISA. (a) The present value of the benefit liabilities (within the meaning of section 4001(a)(16) of ERISA) under each Plan does not exceed the current value (within the meaning of section 3(26) of ERISA) of the assets of such Plan allocable to such benefit liabilities, determined on the basis of assumptions and methods (including, without limitation, those used in valuing Plan assets) each of which is reasonable and in accordance with actuarial standards and applicable law. (b) None of the Company, any of its Subsidiaries or any ERISA Affiliate has breached the fiduciary rules of ERISA or engaged in any prohibited transaction, and no such breach or prohibited transaction has occurred, that could result in any direct or indirect liability (including as a result of an indemnification obligation) of the Company, any of its Subsidiaries or any ERISA Affiliate in connection with a suit for damages or pursuant to section 409(i) or 502(1) of ERISA or section 4975 of the Code. (c) No accumulated funding deficiency (as defined in section 302 of ERISA or section 412 of the Code), whether or not waived, has been incurred or exists with respect to any Plan. Full payment has been made within the time required under the Code or the terms of any Plan of all amounts which the Company or any Subsidiary or ERISA Affiliate is required under applicable law to have paid as contributions to each Plan. (d) Other than for premiums payable in the normal course that are not past due, none of the Company, any Subsidiary or any ERISA Affiliate has incurred (either directly or indirectly, including as a result of an indemnification obligation) any material liability under or pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the Code relating to employee benefit plans and no event, transaction or condition has occurred or exists or, to the Company's best knowledge, is expected to occur or exist with respect to any Plan which would result in any such liability to the Company, any Subsidiary or any ERISA Affiliate. There has been no reportable event (within the meaning of section 4043(c) of ERISA) or any other event or condition with respect to any Plan which presents a risk of termination of, or the appointment 13 of a trustee to administer, any such Plan by the PBGC. No Plan is a Multiemployer Plan or a "multiple employer" plan. (e) Except liability for continuation coverage provided pursuant to section 4980B of the Code, no postretirement benefits are provided under any welfare benefit plan (as defined in Section 3(l) of ERISA) of the Company, any Subsidiary or the ERISA Affiliates. (f) The execution and delivery of this Agreement and of each of the Note Documents and the issuance and sale of the Securities thereunder will be exempt from, or will not involve any transaction which is subject to, the prohibitions of section 406 of ERISA and section 4975 of the Code and will not involve any transaction in connection with which a penalty could be imposed under section 502(i) of ERISA or a tax could be imposed pursuant to section 4975 of the Code. The representation by the Company in the immediately preceding sentence is made in reliance upon and subject to the accuracy of each Purchaser's representation in Section 5.2 of this Agreement. (g) Neither the Company, nor any Subsidiary of the Company, nor any ERISA Affiliate is either a "party in interest" (as defined in Title I, Section 3(14) of ERISA), nor a "disqualified person" (as defined in section 4975(e)(2) of the Code) nor are the Securities "employer securities" (as defined in Title I, Section 407(d)(i) of ERISA) with respect to any employee benefit plan other than those identified in Schedule 4.15 attached hereto. (h) Each Foreign Pension Plan has been maintained in substantial compliance with its terms and with the requirements of any and all applicable laws, statutes, rules, regulations and orders and has been maintained, where required, in good standing with applicable regulatory authorities. Neither the Company nor any of its Subsidiaries nor any of its Joint Venture Vehicles has incurred any obligation in connection with the termination of or withdrawal from any Foreign Pension Plan. The present value of the accrued benefit liabilities (whether or not vested) under each Foreign Pension Plan, determined as of the end of the Company's most recently ended fiscal year on the basis of actuarial assumptions, each of which is reasonable, did not exceed the current value of the assets of such Foreign Pension Plan allocable to such benefit liabilities. 4.16. Governmental Consent. Neither the nature of the Company and its businesses or properties, nor any relationship between the Company and any other Person, nor any circumstance in connection either with the offering, issuance, sale or delivery of the Securities or with performance under the Note Documents is such as to require any authorization, consent, approval, exemption or other action by or notice to or filing with any court or administrative or governmental body in connection with the execution and delivery of this Agreement or any other Note Document, the offering, issuance, sale or delivery of the Securities or performance under, fulfillment of or NOTE AGREEMENT 14 compliance with the terms and provisions hereof, of the Securities or of any other Note Document except for such actions, notices or filings as have been made prior to the date hereof or shall be timely made after the date hereof and listed on Schedule 4.16. 4.17. Zoning and Environmental Compliance. The Company, each of its Subsidiaries and its Joint Venture Vehicles and all of their respective properties and facilities have complied at all times and in all respects with all Environmental Laws, except where failure to comply could not reasonably be expected to result in a Material Adverse Effect. Neither the Company nor any of its Subsidiaries nor any of its Joint Venture Vehicles is aware of any claim or demand against it or any of its Subsidiaries or any of its Joint Venture Vehicles seeking damages, responses, costs, clean-up or any other form of relief in equity or at law arising out of or relating to the treatment, disposal, release, threatened release or presence of Hazardous Materials, which claim or demand, individually or in the aggregate, might reasonably be expected to have a Material Adverse Effect. Neither the Company nor any of its Subsidiaries nor any of its Joint Venture Vehicles has acquired, incurred or assumed, directly or indirectly, any contingent liability in connection with the release of any Hazardous Material into the environment, which liability might result in a Material Adverse Effect. 4.18. Investment Company Act and Holding Company Status. Neither the Company nor any Subsidiary is an investment company or a person directly or indirectly controlled by or acting on behalf of an investment company within the meaning of the United States Investment Company Act of 1940, as amended. Neither the Company nor any Subsidiary is a "holding company" or "subsidiary company" of a "holding company", or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company", or a "public utility", within the meaning of the United States Public Utility Holding Company Act of 1935, as amended. 4.19. Disclosure. Neither this Agreement, any other Note Document, the Private Placement Memorandum, nor any other document, certificate or statement furnished to the Purchasers by or on behalf of the Company or any Subsidiary in connection herewith contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein and therein not misleading (it being understood that with respect to pro forma calculations and estimates regarding future developments contained in the Private Placement Memorandum, such pro forma calculations and estimates are based on assumptions the Company in good faith believes are reasonable and there are no facts presently known to the Company which would cause the Company to change such projections and estimates in any material respect). There is no fact known to the Company or any of its Subsidiaries which materially adversely affects or in the future may (so far as the Company can now foresee) materially adversely affect the business, operations, affairs, condition (financial or other), properties or NOTE AGREEMENT 15 prospects of the Company and its Subsidiaries taken as a whole, or the ability of the Company to perform its obligations under this Agreement or any other Note Document and which has not been set forth in this Agreement, any other Note Document, the Private Placement Memorandum or in the other documents, certificates and statements furnished to the Purchasers by or on behalf of the Company prior to the date hereof in connection with the transactions contemplated hereby. 4.20. Solvency. The Company is, and upon giving effect to the issuance of the Securities will be, a "solvent institution", as said term is used in Section 1405(c) of the New York Insurance Law, whose "obligations are not in default as to principal or interest", as said terms are used in said Section 1405(c). 4.21. Foreign Assets Control Regulations, Etc. None of the transactions contemplated by this Agreement (including the use of proceeds of the sale from the Securities) or any other Note Document will result in a violation of any of the foreign assets control regulations of the United States Treasury Department (31 CFR, Subtitle B, Chapter V, as amended), or any enabling legislation or Presidential Executive Order in connection therewith. 4.22. Hotel Contracts. Each Hotel Contract of each Subsidiary and Joint Venture Vehicle of the Company constitutes a legal, valid and binding obligation of such Subsidiary and such Joint Venture Vehicle, as the case may be, and is in full force and effect. 4.23. Joint Venture Agreements. (a) Each Joint Venture Agreement of the Company and each of its Subsidiaries constitutes a legal, valid and binding obligation of the Company or such Subsidiary and is in full force and effect. (b) The Joint Venture Agreement between PPV and JAFTA Japan Co., Inc. dated July 15, 1992 has been superseded in its entirety by the Amended and Restated Joint Venture Agreement between PPV, JAFTA Japan Co., Inc. and Izumi Kikaku Co. Ltd. dated November 11, 1993 and is no longer in full force and effect. SECTION 5. REPRESENTATIONS OF EACH PURCHASER. On the First Closing Date, each Initial Purchaser represents, and on the Second Closing Date, each Subsequent Purchaser represents as follows: 5.1. Nature of Purchase. Such Purchaser is acquiring the Securities for its own account and not with a view to or for sale in connection with any distribution thereof within the meaning of the Securities Act, provided that the -------- disposition of such Purchaser's property shall at all times be and remain within its control. NOTE AGREEMENT 16 5.2. Source of Funds. Each Purchaser represents that at least one of the following statements concerning each source of funds to be used by it to pay the purchase price of the Securities (a "Source") is accurate on and as of the date of closing: (a) the Source is an insurance company pooled separate account that is maintained solely in connection with the Purchaser's fixed contractual obligations under which the amounts payable, or credited, to an employee benefit plan and to any participant or beneficiary of such plan (including any annuitant) are not affected in any manner by the investment performance of the separate account; or (b) the Source is either (i) an insurance company pooled separate account, within the meaning of Prohibited Transaction Class Exemption ("PTCE") 90-1 (issued January 29, 1990), or (ii) a bank collective investment fund, within the meaning of the PTCE 91-38 (issued July 12, 1991) and, except as the Purchaser has disclosed to the Company in writing pursuant to this clause (b), no employee benefit plan or group of plans maintained by the same employer or employee organization beneficially owns more than 10% of all assets allocated to such pooled separate account or collective investment fund; or (c) the Source is an "investment fund" managed by a "qualified professional asset manager" or "QPAM" (as defined in Part V of PTCE 84-14, issued March 13, 1984), no employee benefit plan's assets that are included in such investment fund, when combined with the assets of all other employee benefit plans established or maintained by the same employer or by an affiliate (within the meaning of Section V(c)(1) of PTCE 84-14) of such employer or by the same employee organization and managed by such QPAM, exceed 20% of the total client assets managed by such QPAM, the conditions of Part I(c) and (g) of PTCE 84-14 are satisfied, and (i) the identity of such QPAM and (ii) the names of all employee benefit plans whose assets are included in such investment fund have been disclosed to the Company in writing pursuant to this clause (c); or (d) the Source is a governmental plan; or (e) the Source is one or more employee benefit plans, or a separate account or trust fund comprised of one or more employee benefit plans, each of which has been identified to the Company in writing pursuant to this clause (e); or (f) the Source is an "insurance company general account," as such term is defined in the Department of Labor Prohibited Transaction Class Exemption 95-60 (issued July 12, 1995) ("PTCE 95-60") and as of the date of this Agreement there is no "employee benefit NOTE AGREEMENT 17 plan" with respect to which the aggregate amount of such general account's reserves and liabilities for the contracts held by or on behalf of such "employee benefit plan" and all other "employee benefit plans" maintained by the same employer (and affiliates thereof as defined in Section V(a)(1) of PTCE 95-60) exceeds 10% of the total reserves and liabilities of such general account (as determined under PTCE 95-60) (exclusive of separate account liabilities) plus surplus as set forth in the National Association of Insurance Commissioners Annual Statement filed with the state of domicile of the Purchaser; or (g) the Source is not an "employee benefit plan" as defined in Title I, Section 3(3) of ERISA or a "plan" as defined in Section 4975(c) of the Code (collectively a "plan"). As used in this Section 5.2, the terms "employee benefit plan", "governmental plan" and "separate account" shall have the respective meanings assigned to such terms in Section 3 of ERISA. 5.3. Release of Collateral. Each Purchaser agrees that it shall instruct the Agent to release any and all security interests in the Collateral in the event that each of the following conditions shall have been, and at the relevant date of determination, continue to be satisfied: (i) the ratio of Total Debt to Historical EBITDA of the Company is less than 3.5:1; (ii) Cumulative Installed Rooms is greater than or equal to 66.67% of Projected Cumulative Installed Rooms; and (iii) any such Collateral securing indebtedness for borrowed money of the Company or its Subsidiaries in favor of any Person (other than the Noteholders) shall have been released. For purposes of determining whether the requirements of clauses (i) and (ii) have been met, such determination shall be made on a quarterly basis as of each of March 31, June 30, September 30 and December 31 of each year, beginning on December 31, 1996. SECTION 6. PREPAYMENTS. The Notes shall be subject to prepayment only with respect to the optional prepayments permitted by Section 6.1. 6.1. Optional Prepayment. The Notes shall not be subject to prepayment prior to the third anniversary of the date of closing and thereafter shall be subject to prepayment, in whole at any time or from time to time in part (in multiples of $100,000), at the option of the Company, (x) from the third anniversary of the date of closing to but not including the fourth anniversary of 18 the date of closing at 101% of the principal amount so prepaid plus interest thereon to the prepayment date and (y) from and after the fourth anniversary of the date of closing at 100% of the principal amount so prepaid plus interest thereon to the prepayment date. If the final maturity of the Notes is accelerated pursuant to Section 9.1 hereof, the Company shall also pay a premium (i) from the date of closing to but not including the first anniversary of the date of closing at 104% of the principal amount of the Notes outstanding plus interest accrued thereon, (ii) from the first anniversary of the date of closing to but not including the second anniversary of the date of closing at 103% of the principal amount of the Notes outstanding plus interest accrued thereon, (iii) from the second anniversary of the date of closing to but not including the third anniversary of the date of closing at 102% of the principal amount of the Notes outstanding plus interest accrued thereon, (iv) from the third anniversary of the date of closing to but not including the fourth anniversary of the date of closing at 101% of the principal amount of the Notes outstanding plus interest accrued thereon and (iv) from and after the fourth anniversary of the date of closing at 100% of the principal amount of the Notes outstanding plus interest accrued thereon. 6.2. Notice of Optional Prepayment. The Company shall give the holder of each Note irrevocable written notice of any prepayment pursuant to Section 6.1 not less than 30 days nor more than 60 days prior to the prepayment date, (i) specifying such prepayment date, (ii) specifying the aggregate - -- principal amount of all outstanding Notes held by such holder that is to be prepaid on such date and (iii) stating that such prepayment is to be made --- pursuant to Section 6.1. Notice of prepayment having been given as aforesaid, the principal amount of the Notes specified in such notice, together with interest thereon to the prepayment date and together with the premium, if any, with respect thereto, shall become due and payable on such prepayment date. 6.3. Partial Payments Pro Rata. Upon any partial prepayment of the Notes pursuant to Section 6.1, the principal amount so prepaid shall be allocated to all Notes at the time outstanding (regardless of Series) and in proportion, as nearly as practicable, to the respective outstanding principal amounts thereof, with adjustments to the extent practicable, to equalize for any prior prepayments not in such proportion. 6.4. Retirement of Notes. The Company shall not, and shall not permit any of its Subsidiaries or Affiliates to, prepay or otherwise retire in whole or in part prior to their stated final maturity, or purchase or otherwise acquire (other than by prepayment pursuant to Section 6.1 or upon acceleration of such final maturity pursuant to Section 9.1), directly or indirectly, Notes held by any holder. Any Notes so prepaid or otherwise retired or purchased or otherwise acquired by the Company or any of its Subsidiaries or Affiliates shall not be deemed to be outstanding for any purpose under this Agreement. 19 6.5. Surrender of Notes on Prepayment. Subject to Section 11.1, upon any partial prepayment of a Note, at the option of the holder thereof, such Note may be (i) surrendered to the Company pursuant to Section 11.5 in exchange for a - new Note in a principal amount equal to the principal amount remaining unpaid on the surrendered Note or (ii) made available to the Company for notation thereon -- of the portion of the principal so prepaid. Any Note paid or prepaid in full shall be surrendered to the Company, if so requested by the Company, and shall be canceled and shall not be reissued, and no Note shall be issued in lieu of the prepaid principal amount of any Note. SECTION 7. COVENANTS. The Company covenants that from and after the date of this Agreement through the closing and thereafter for the benefit of the holders of the Notes so long as any Note remains outstanding: 7.1. Books of Record and Account. The Company will, and will cause each of its Subsidiaries and Joint Venture Vehicles to, keep true and proper books of record and account which are sufficient to allow the Company to prepare financial statements which fairly present the results of the operations and financial position of the Company on a consolidated basis, and will reflect in its financial statements adequate accruals and appropriations to reserves, all in accordance with generally accepted accounting principles consistently applied and with the applicable provisions of any regulatory authorities having jurisdiction over the Company and its Subsidiaries and Joint Venture Vehicles. 7.2. Financial Statements, Notices, Etc. The Company covenants that it will deliver to each holder of Notes in duplicate: (i) as soon as practicable and in any event within 20 days after the end of each month, a consolidated balance sheet of the Company and its Subsidiaries as at the end of such month, a consolidated statement of income of the Company and its Subsidiaries for such month, a report on the backlogs for such month and a hotel by hotel gross revenue analysis of the Company and its Subsidiaries for such month, all in form consistent with the Company's historical monthly statements as shown in Exhibit H hereto and in reasonable detail and reasonably satisfactory to the Required Holder(s) and the financial statements shall be certified by an authorized financial officer of the Company as fairly presenting the results of operations and financial position of the Company on a consolidated basis, subject to changes resulting from quarterly and year-end adjustments and the absence of footnotes; (ii) as soon as practicable and in any event within 45 days after the end of each quarterly period (other than the last quarterly period) in each fiscal year a consolidated balance sheet of the Company 20 and its Subsidiaries as at the end of such quarterly period and the related consolidated statements of income, retained earnings and cash flows of the Company and its Subsidiaries for such quarterly period and, in the case of the second and third quarterly periods, for the period from the beginning of the current fiscal year to the end of such quarterly period, setting forth in each case in comparative form figures for the corresponding period in the preceding fiscal year, all in reasonable detail and reasonably satisfactory in form to the Required Holder(s) and certified by an authorized financial officer of the Company as fairly presenting the results of operations and financial position of the company on a consolidated basis, subject to changes resulting from year-end adjustments and the absence of footnotes; (iii) as soon as practicable and in any event within 90 days after the end of each fiscal year, (A) consolidated statements of income and cash flows and a consolidated statement of retained earnings of the Company and its Subsidiaries for such year, and a consolidated balance sheet of the Company and its Subsidiaries as at the end of such year, setting forth for each consolidated report in comparative form corresponding figures from the preceding fiscal year, accompanied by the report of independent public accountants of recognized national standing selected by the Company in such accountants' standard form whose report shall be without limitation as to the scope of the audit and shall have been prepared in accordance with generally accepted accounting principles) and (B) consolidating statement of income and cash flows of the Company and its Subsidiaries and its Joint Venture Vehicles for such year and consolidating balance sheets of the Company and its Subsidiaries and its Joint Venture Vehicles as at the end of such fiscal year, setting forth in comparative form figures for the corresponding period in the preceding fiscal year and certified by an authorized financial officer of the Company as fairly presenting the results of operations and financial position of the Company and each Subsidiary and each Joint Venture Vehicle; (iv) together with each delivery of financial statements required by clauses (ii) and (iii) above, an Officers' Certificate (A) stating that the - signer has reviewed the terms hereof and of the Notes and has made, or caused to be made under his or her supervision, a review of the transactions and condition of the Company and its Subsidiaries and its Joint Venture Vehicles during the accounting period covered by such financial statements, (B) stating that such review has not disclosed the - existence during or at the end of such accounting period, and that the signer does not have knowledge of the existence as at the date of such Officers' Certificate, of any condition or event which constitutes a Default or Event of Default, or, if any such condition or event existed or exists, specifying the nature and period of existence thereof and what action the Company has taken or is taking or proposes to take with 21 respect thereto, (C) demonstrating compliance by the Company and its - Subsidiaries and its Joint Venture Vehicles with the provisions of Sections 8.1(j), 8.2(a), 8.3, 8.4, 8.5, 8.6, 8.8 and 8.9 and (D) stating Historical - EBITDA and the number of Cumulative Installed Rooms as of the date of such financial statements; (v) together with each delivery of financial statements required by clause (iii) above, a certificate of the independent accountants giving the report thereon (A) stating that their audit examination has included a - review of the financial covenants of this Agreement and that such review is sufficient to enable them to make the statement referred to in subclause (C) of this clause (v), (B) stating whether, in the course of their audit - examination, they obtained knowledge (and whether, as of the date of such written statement, they have knowledge) of the existence of any condition or event which constitutes a Default or Event of Default or any failure of the Company to keep, perform, observe or fulfill any of its covenants or agreements set forth in this Agreement and, if so, specifying the nature and period of existence thereof and (C) stating that they have examined the - Officers' Certificate delivered in connection with each fiscal year end pursuant to clause (iv) of this Section 7.2 and that the matters set forth in such Officers' Certificate pursuant to subclause (B) of such clause (iv) relating to financial covenants only have been properly stated in accordance with the terms of this Agreement; (vi) promptly upon their becoming available, (x) copies of each financial statement, proxy statement, notice or report sent by the Company or any of its Subsidiaries to its stockholders generally and copies of each report (whether regular, periodic or otherwise) and any registration statement (without exhibits), prospectus or written communication (other than transmittal letters) in respect thereof filed by the Company or any of its Subsidiaries with, or received by the Company or any of its Subsidiaries in connection therewith from, any securities exchange or the SEC or any governmental body or agency succeeding to the functions of the SEC) and (y) copies of any press releases relating to the Company or any Subsidiary thereof; (vii) promptly upon receipt thereof, a copy of each other report submitted to the Board of Directors of the Company or any Subsidiary or any Joint Venture Vehicles by independent accountants in connection with any annual, interim or special audit made by them of the books of the Company or any of its Subsidiaries or any of is Joint Venture Vehicles, together with the Company's and each such Subsidiary's responses to such reports; (viii) promptly upon a Responsible Officer obtaining knowledge of any condition or event which constitutes a Default or Event of De- 22 fault or Event of Default or that the holder of any Note has given any notice or taken any other action with respect to a claimed default hereunder or that any Person has given any notice to the Company or any Subsidiary or taken any other action with respect to a claimed default or event of default, an Officers' Certificate describing the same and the period of existence thereof and specifying what action the Company has taken or is taking or proposes to take with respect thereto; (ix) immediately upon becoming aware of the occurrence of (A) any - "reportable event" as defined in section 4043(c) of ERISA and the regulations issued thereunder, (B) any "prohibited transaction" as defined - in section 4975 of the Code or as described in section 406 of ERISA in connection with any Plan or any trust created thereunder or (C) any other - event or condition with respect to any Plan which could constitute grounds for, or result in, the (1) termination of, or the appointment of a trustee - to administer, any Plan, (2) imposition of a Lien on any property of the - Company, any Subsidiary or ERISA Affiliate or (3) the incurrence of any - liability by the Company, any of its Subsidiaries or any ERISA Affiliate pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the Code relating to employee benefit plans, an Officers' Certificate signed by the chief financial officer of the Company setting forth the details respecting such event or condition, the action, if any, that the Company or any Subsidiary or ERISA Affiliate proposes to take with respect thereto (including a copy of any notice, report or application filed with, given to or received from the PBGC, the Internal Revenue Service or the Department of Labor with respect to such event or condition), and any action, when known, taken or threatened by the PBGC, the Internal Revenue Service or the Department of Labor with respect to such event or condition; (x) promptly upon assuming an obligation to contribute to a "Multiemployer Plan" (within the meaning of section 4001(a)(3) of ERISA), written notice thereof and of the identity of such plan; (xi) promptly upon receipt thereof by a Responsible Officer of the Company or any of its Subsidiaries or any of its Joint Venture Vehicles, a copy of (A) any written inquiry, notice, claim or complaint to the effect - that the Company or any of its Subsidiaries or Joint Venture Vehicles is or may be liable to any Person as a result of the release by the Company, any of its Subsidiaries, any of its Joint Venture Vehicles or any other Person of any Hazardous Material into the environment and (B) any written inquiry - regarding or notice or complaint alleging any violation of or liability under any Environmental Law or any health and safety legislation by the Company or any of its Subsidiaries or any of its Joint Venture Vehicles, which release, violation or liability could 23 reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. (xii) prompt written notice of any action, suit or administrative proceeding to which the Company or any of its Subsidiaries or any of its Joint Venture Vehicles is a party which, if adversely determined, would materially impair the right of the Company or any of its Subsidiaries or any of is Joint Venture Vehicles to carry on its business substantially as now conducted, or could reasonably be expected to have a Material Adverse Effect; (xiii) promptly upon receipt or transmittal thereof, copies of all communications received by the Company from, or sent by the Company to, the Agent pursuant to the terms of the Security Documents; and (xiv) with reasonable promptness, such other data and information as such holder of a Note may reasonably request from time to time. 7.3. Inspection of Property. The Company covenants that it will permit any Person designated by the holder of any Note in writing, at such holder's expense (except that if a Default or Event of Default shall have occurred and be continuing at the time of such inspection or examination, the Company shall reimburse such holder for all such reasonable expenses), to visit and inspect any of the properties of the Company and its Subsidiaries, to examine the books of account, records, reports and other papers of the Company and its Subsidiaries and make copies thereof or extracts therefrom and to discuss the affairs, finances and accounts of any of such corporations with the principal officers of such corporations and their independent public accountants, all at such reasonable times and with reasonable notice and as often as such holder may reasonably request. 7.4. Covenant to Secure Notes Equally. The Company covenants that, if it or any Subsidiary or any Joint Venture Vehicle shall create or assume any Lien upon any of its property, whether now owned or hereafter acquired, other than any Lien permitted by the provisions of Section 8.1 (unless prior written consent to the creation or assumption thereof shall have been obtained pursuant to Section 11.3), it will make or cause to be made effective provision whereby the Notes will be secured by such Lien equally and ratably with any and all other Debt thereby secured (and upon the disposition thereof will be entitled, equally and ratably with such other Debt, to receive the proceeds of any property or assets subject to such Lien) and, in any case, the Notes shall have the benefit of an equitable Lien on such property to the full extent that, and with such priority as, the holders of the Notes may be entitled under applicable law. Compliance with this Section 7.4 shall not cure any Default or Event of Default arising under Section 8.1. 24 7.5. Maintenance of Corporate Existence. The Company will, and will cause its Subsidiaries and Joint Venture Vehicles to, do all things necessary to preserve and keep in full force and effect their respective existences, franchises and material rights except as specifically permitted hereunder; provided, however, that a Subsidiary may be liquidated or merged with or into another Subsidiary if the Board of Directors of the Company determines in good faith that such liquidation or merger is in the best business interest of the Company and such liquidation or merger is permitted under Sections 8.7(b) and 8.8. 7.6. Maintenance of Properties. The Company will maintain or cause to be maintained in good repair, working order and condition all properties used or useful in the business of the Company and its Subsidiaries and Joint Venture Vehicles and from time to time will make or cause to be made all necessary renewals, replacements, additions, betterments and improvements thereto. 7.7. Insurance. The Company will, and will cause its Subsidiaries and its Joint Venture Vehicles to, maintain with financially sound and reputable insurers having a rating by A.M. Best Company of "A-XII" or better or an equivalent rating in the local jurisdiction of any Subsidiary or any Joint Venture Vehicle organized under the laws of a country other than the United States, at the time of issuance or renewal of such policy, insurance with respect to its properties and business against such casualties and contingencies, of such types (including, without limitation, property damage, public liability, business interruption, larceny, embezzlement, or other criminal misappropriation insurance) and in such amounts as is customary in the case of corporations of established reputation engaged in the same or similar business and similarly situated. 7.8. Taxes. The Company will, and will cause its Subsidiaries to, pay all taxes, assessments and other governmental charges and levies imposed upon it or any of its properties or in respect of any of its franchises, business, income or profits when the same become due and payable as shown on the returns therefor as prepared in good faith by the Company or such Subsidiary or Joint Venture Vehicle and all claims (including, without limitation, claims or demands of materialmen, mechanics, carriers, warehousemen, landlords and other like Persons) for sums which have become due and payable and which by law have or might become a Lien upon any of its properties, provided that no such charge -------- or claim need be paid if being contested in good faith by appropriate proceedings promptly initiated and diligently conducted and if such reserves or other appropriate provision, if any, as shall be required by generally accepted accounting principles shall have been made therefor and if the Company's or any such Subsidiary's or Joint Venture Vehicle's title to and its right to use its property are not materially adversely affected thereby. The Company will not consent to or permit the filing of or be a party to any consolidated income tax return on behalf of itself or any of its Subsidiaries or 25 any of its Joint Venture Vehidles with any Person (other than a consolidated return of the Company and its Subsidiaries) except if the Company is acquired in compliance with Section 8.7. 7.9. Compliance with Laws, etc. The Company will, and will cause its Subsidiaries and Joint Venture Vehicles to, comply with the requirements of all applicable laws, rules, regulations and orders of any governmental authority, and maintain all licenses, permits, franchises and other governmental authorizations necessary to the ownership of its properties or the conduct of its business, the noncompliance with which, or the failure of which to maintain, could reasonably be expected to have a Material Adverse Effect. 7.10. Environmental Compliance. The Company will, and will cause its Subsidiaries and Joint Venture Vehicles to, keep any properties it owns or operates free of contamination from Hazardous Materials and free from other potentially harmful physical or chemical conditions, except where such Hazardous Materials are utilized in compliance with applicable law. The Company will, and will cause its Subsidiaries and Joint Venture Vehicles to, use and operate all of its facilities and properties in compliance with all Environmental Laws (including keeping all necessary permits, approvals, certificates and licenses in effect and remaining in compliance therewith) and handle all Hazardous Materials in compliance with all applicable Environmental Laws, in each case, the noncompliance with which could reasonably be expected, individually or in the aggregate, to have a Material Adverse Effect. Upon providing the holders of the Notes with copies of all materials described in clause (xi) of Section 7.2, as promptly as reasonably practicable the Company will, and will cause its Subsidiaries and Joint Venture Vehicles to, cure any violation (including the taking of all necessary and appropriate remedial action) or have dismissed with prejudice any actions or proceedings referred to therein, except where the failure to do so would not have, individually or in the aggregate, a Material Adverse Effect. 7.11. Pari Passu Ranking. The Company undertakes that its obligations under this Note Agreement and the Notes will rank at least pari passu (in right of payment) with all of its other present and future Debt. 7.12. Payment of Notes. The Company will punctually pay or cause to be paid the principal, premium, if any, and interest due and payable in respect of the Notes in accordance with the terms thereof. 7.13. Security Documents; Further Assurances. The Company agrees that it will not amend, terminate, modify, supplement or grant any waiver with respect to any Security Document without the written consent to each such amendment, termination, modification, supplement or waiver of the Required Holder(s). The Company agrees to perform its obligations under the Security Documents in accordance with the respective terms thereof. The Company agrees that it will not increase the fees of the Agent without the prior 26 written consent of the Required Holder(s). At the Company's expense, the Company agrees that it shall, or shall cause an agent on its behalf to, file any continuation statements which are required to be filed and take such other action as is necessary in any jurisdiction (including, for the avoidance of doubt, continuation statements under the Uniform Commercial Code of the State of California) in order to preserve and protect the security interests created pursuant to the Security Documents and to maintain the validity, effectiveness and enforceability of the Security Documents. The Company will, and will cause each of its Subsidiaries and its Joint Venture Vehicles to, at the expense of the Company and its Subsidiaries and its Joint Venture Vehicles, (i) make, - execute, endorse, acknowledge, file and/or deliver to the Agent from time to time such conveyances, transfer endorsements, powers of attorney, certificates, and other assurances or instruments as the Agent or the Required Holder(s) may reasonably require, (ii) maintain each of the Security Documents in full force -- and effect at all times (including the priority thereof), (iii) preserve and --- protect the Collateral and protect and enforce its rights and title and the rights and title of the Noteholders and the Agent to the Collateral, (iv) notify -- the Noteholders and the Agent of any consent, filing, recording or registration requirements in the respective jurisdictions of organization for each Subsidiary and Joint Venture Vehicle whose securities have been pledged pursuant to the Pledge Agreements and which are required to maintain the validity, effectiveness and enforceability of the Security Documents and (v) take such further steps - relating to the Collateral covered by any Security Document as the Agent or the Required Holder(s) may reasonably require. 7.14. Foreign Subsidiaries' Security. If following a change in the relevant sections of the Code or the regulations, rules, rulings, notices or other official pronouncements issued or promulgated thereunder, counsel for the Company acceptable to the Required Holder(s) does not within 30 days after a request from the Required Holder(s) deliver evidence reasonably satisfactory to the Required Holder(s) that, with respect to any Foreign Subsidiary or any Foreign Joint Venture Vehicle of the Company which has not already had all of its stock held by the Company pledged pursuant to a Pledge Agreement, a pledge of 66% or more of the total combined voting power of all classes of capital stock of such Foreign Subsidiary or Foreign Joint Venture Vehicle entitled to vote would cause the undistributed earnings of such Foreign Subsidiary or such Foreign Joint Venture Vehicle as determined for Federal income tax purposes to be treated as a deemed dividend to the Company as a result of the pledge of the capital stock of such Foreign Subsidiary or such Foreign Joint Venture Vehicle by the Company, then in the case of a failure to deliver the evidence described above (such event in such circumstances being referred as a "Change in Tax Law Event"), then that portion of such Foreign Subsidiary's or such Foreign Joint Venture Vehicle's outstanding capital stock or similar equity interest held by the Company not theretofore pledged pursuant to a Pledge Agreement shall be pledged by the Company to the Agent pursuant to a Pledge Agreement (or another pledge agreement in substantially similar 27 form, if needed). All documents delivered pursuant to this Section 7.14 shall be in form and substance reasonably satisfactory to the Required Holder(s). 7.15. Pledge of Shares of New Subsidiaries. If the Company organizes or acquires any new Subsidiaries or Joint Venture Vehicles, the Company will pledge all classes of capital stock held by it of such Subsidiaries or Joint Venture Vehicles to secure the obligations of the Company under the Notes and this Agreement pursuant to a pledge agreement in form and substance satisfactory to the Required Holders; provided, that until the occurrence of a Change in Tax Law Event, the Company shall not be obligated to pledge in excess of 66% of the total combined voting power of any such Subsidiary or Joint Venture Vehicles, and provided, further, that the capital shares of a newly acquired Subsidiary or Joint Venture Vehicle, other than any Subsidiary or Joint Venture Vehicle organized under the laws of South Africa, may be subject to existing Liens at the time of acquisition as may be permitted pursuant to the terms of this Agreement. 7.16. Notification of Registration. The Company agrees to notify the Agent and the Noteholders in the event that it registers as a foreign corporation in Australia. 7.17. Sub-licenses or Assignments and Consents. The Company agrees (x) to cause PPV to sub-license or assign the Technology License Agreement to each of the Company's Subsidiaries and Joint Venture Vehicles and (y) to obtain the consent of the Singapore Board of Film Censors in connection with the transfer and pledge of the shares of PPV Singapore PTE Ltd, in each case, by December 31, 1995. 7.18. Removal of Legends. The Company agrees that if either (i) it "shows profit" or (ii) it lists its securities on an approved exchange, in each case, as such terms are defined and interpreted by the Department of Corporations of the State of California pursuant to Section 260.141.12 of the Rules of the Commissioner of Corporations, the Company promptly shall notify the Securityholders of such event, and the Company shall, at its expense, file an application with the Commissioner requesting removal of the legend condition and upon approval of such application execute and deliver new Securities in exchange for the existing Securities held by such Securityholders, which new Securities shall not contain the legend regarding the restrictions on transfer imposed by the California Department of Corporations. SECTION 8. NEGATIVE COVENANTS. The Company covenants that from and after the date of this Agreement through the closing and thereafter for the benefit of the holders of the Notes so long as any Note remains outstanding: 8.1. Liens. Unless the obligations of the Company under the Note Agreement and the Notes are secured equally and ratably with such Liens 28 in form and substance satisfactory to the holders of the Notes, so long as any of the Notes are outstanding, the Company will not, and will not permit any Subsidiary or Joint Venture Vehicle to, create, incur, assume or suffer to exist any Lien upon or with respect to any of its properties, whether now owned or hereafter acquired, including without limitation, the Technology License Agreement, except: (a) Liens existing as of the date of issuance of the Notes and reflected in Schedule 8.1; provided that such Liens shall not at any time hereafter encumber any assets or secure Debt other than that which by the terms applicable thereto, at the date hereof, such Liens encumber, secure or are intended to secure or encumber; (b) any attachment or judgment Lien, unless the judgment it secures shall not, within 60 days after the entry thereof, have been bonded, discharged or execution thereof stayed pending appeal, or shall not have been discharged within 60 days after the expiration of any such stay and for which adequate reserves have been established in accordance with generally accepted accounting principles; (c) Liens incidental to the conduct of business or the ownership of properties and assets (including Liens in connection with worker's compensation, unemployment insurance and other like laws, warehousemen's and attorney's liens and statutory landlords' liens) and Liens to secure the performance of bids, tenders or trade contracts, or to secure statutory obligations, surety or appeal bonds or other Liens of like general nature incurred in the ordinary course of business and not in connection with the borrowing of money; provided that, aggregate obligations secured thereby in -------- excess of $500,000 shall not be more than 30 days overdue unless such obligations are being contested in good faith by appropriate actions or proceedings and appropriate book reserves with respect thereto have been established in accordance with generally accepted accounting principles; (d) Liens on real or personal property acquired (whether directly or through the acquisition of stock of a corporation owning such property) or constructed after the date of closing ("After-Acquired Property"), or Liens on improvements to property after the date of closing, which Liens are given to secure the payment of the purchase price or cost incurred in connection with such acquisition or construction of After-Acquired Property or such improvements including, without limitation, (x) a security interest granted to or title retention reserved by the seller of the After-Acquired Property to secure the purchase price owing to the seller or (y) a security interest the proceeds of which were used to pay for the purchase, construction or improvement of such property; provided that (i) such Liens -------- - shall only be permitted (pursuant to this clause (d)) to the extent to which they 29 shall attach to the assets acquired, constructed or improved, (ii) the -- Liens shall have been created or incurred not later than 270 days after the date of acquisition or the date of completion of the construction or improvements, as the case may be, and (iii) the amount secured by such --- Liens does not exceed the purchase price of the property so acquired or the cost of the construction or improvements; (e) any Lien existing on any property of any corporation at the time such corporation is merged or consolidated with or into the Company or becomes a Subsidiary or Joint Venture Vehicle of the Company, provided that -------- (i) no such Lien shall extend to or cover any property other than property - initially subject thereto and improvements thereto, (ii) the incurrence of -- the Debt secured by such Lien does not violate any other provisions herein, (iii) such Lien and the Debt it secures are not incurred in connection with --- or in contemplation of such merger, consolidation or sale and (iv) such -- Liens shall be permitted by this clause (e) only for the period ending 360 days after such event; (f) any Lien arising under the Security Documents; (g) Liens for taxes, assessments or other governmental charges or levies not yet due or payable or which are being contested in good faith by appropriate proceedings, provided that appropriate book reserves with -------- respect thereto have been established in accordance with generally accepted accounting principles; (h) the extension, renewal or replacement of any Lien permitted by paragraphs (a) through (e) in respect of the same property theretofore subject thereto, without increase of the principal amount of the Debt secured thereby, provided that no such extension, renewal or replacement of -------- any Lien permitted by paragraph (e) shall extend the time period set forth in clause (iv) therein; (i) sub-licenses or assignments of the rights of PPV under the Technology License Agreement to any Subsidiary or Joint Venture Vehicle; and (j) notwithstanding the restrictions provided herein, the Company and any one or more Subsidiaries may create, issue, incur or assume Liens otherwise prohibited by this Section 8.1, provided that neither (A) the aggregate amount of all Debt or other obligations secured by such Liens not otherwise permitted by this Section 8.1 nor (B) the total book value of the assets subject to such Liens NOTE AGREEMENT 30 shall exceed the greater of (i) 15% of Total Consolidated Assets and (ii) - -- (x) at any time on or before June 30, 1996, $12,500,000, and (y) at any time thereafter, $20,000,000. A Lien equally and ratably securing the obligations of the Company under the Note Agreement and the other Note Documents shall not be considered acceptable to the Required Holder(s) in accordance with this Section 8.1 unless either (x) the Company shall provide the holders of Notes with opinions of counsel (reasonably satisfactory to the Required Holder(s)) in all relevant jurisdictions, which opinions shall be in form and substance satisfactory to the Required Holder(s), as to such matters as the Required Holder(s) shall reasonably request, it being understood, that the opinions relating to the enforceability of any such Lien for the benefit of the holders of Notes shall not be subject to any exception relating to insolvency or bankruptcy which would not have been necessary to take had the obligations of the Company been similarly secured by such a Lien on the date on which the Notes were issued or (y) the holders of Notes are made parties to, or beneficiaries under, an intercreditor agreement with the new secured lenders pursuant to which the obligations of the Company under this Agreement and the other Note Documents are effectively secured by the security received by the new lenders in form and substance reasonably satisfactory to Required Holder(s). The Company shall not impose any Lien on any of the Collateral (other than as allowed pursuant to clause (f) of this Section 8.1) unless the holders of Notes are made parties to, or beneficiaries under, an intercreditor agreement with the Persons benefiting from such Lien (in form and substance reasonably satisfactory to Required Holder(s)), pursuant to which the obligations of the Company under this Agreement and the Notes shall in effect be secured equally and ratably with the Lien benefiting such other Persons. 8.2. Restricted Payments. The Company will not, and will not permit any Subsidiary or Joint Venture Vehicle to, make any Restricted Payment, except that, so long as no Default or Event of Default then exists or would result therefrom, (a) the Company may redeem or purchase shares of its capital stock (or options to purchase its capital stock) held by former employees of the Company or any of its Subsidiaries following the termination of their employment, provided that the aggregate amount of all such redemptions or -------- purchases does not exceed 5% of the total outstanding capital stock of the Company in any fiscal year; and (b) the Company or any Subsidiary shall be permitted to purchase shares of the capital stock of any other Subsidiary or joint venture partner, provided that the transaction is pursuant to the reasonable requirements or objectives of the Company's or such Subsidiary's business and is upon fair and reasonable terms on an arm's length basis. NOTE AGREEMENT 31 8.3. Adjusted Consolidated Net Worth. The Company will not permit Adjusted Consolidated Net Worth at any time to be less than the sum of (x) $10,000,000 and (y) 50% of the aggregate net proceeds, on a cumulative basis, of any equity offerings concluded by the Company or by any Subsidiary of the Company at any time after December 31, 1995. 8.4. Total Debt to Total Adjusted Capitalization. The Company will not permit Total Debt at any time to exceed 80% of Total Adjusted Capitalization. 8.5. Total Debt to Historical EBITDA. The Company will not permit the ratio of Total Debt to Historical EBITDA (x) at December 31, 1996, to exceed 5:1, (y) at March 31, June 30, September 30 and December 31, 1997, to exceed 4:1 and (z) at the end of any calendar quarter following December 31, 1997 to and until the maturity of the Notes, to exceed 3.5:1. 8.6. Historical EBITDA. (a) The Company will not permit Historical EBITDA as of the last day of each period set forth below to be less than 50% of the Projected EBITDA set forth opposite such period below:
Period Projected EBITDA ------ ---------------- ($000) September 30,1996 7,166 December 31, 1996 12,171 March 31, 1997 17,849 June 30, 1997 23,686 September 30,1997 29,357 December 31, 1997 34,948 March 31, 1998 40,676 June 30, 1998 46,252 September 30, 1998 51,664 December 31, 1998 56,889 March 31, 1999 60,665 June 30, 1999 64,193 September 30, 1999 67,474 December 31, 1999 70,444 March 31, 2000 73,013 June 30, 2000 75,399
32 (b) If at the time of any determination Historical EBITDA is less than 80% of Projected EBITDA relevant to the time of determination, then until Historical EBITDA is determined to be equal to or greater than 80% of Projected EBITDA relevant to the time of determination, the interest rate on the Notes shall increase to 11.5%, it being understood that such increase in the interest rate shall not cure any default arising under clause (a) of this Section 8.6 as a consequence of Historical EBITDA being less than an amount equal to 50% of Projected EBITDA. (c) For purposes of determining whether the Company is in compliance with its obligations under this Section 8.6, for the corresponding period set forth above, Historical EBITDA shall be determined (x) for the period ending on September 30, 1996, on an adjusted basis including only the three quarters ended March 31, June 30 and September 30, 1996 and (y) beginning with the period ending on December 31, 1996, on a quarterly basis each of March 31, June 30, September 30 and December 31 of each year with respect to the quarter then ended and the immediately preceding three consecutive fiscal quarters. 8.7. Merger, Consolidation, etc. (a) The Company covenants that it will not merge or consolidate with any other Person, or sell, lease or otherwise dispose of all or substantially all its assets to any other Person, unless (A) - no Default or Event of Default has occurred and is continuing or would exist immediately after such merger or consolidation or sale of assets and (B) in the - case of a merger or consolidation, the Company is the continuing or surviving corporation or, if the Company is not the continuing or surviving corporation or in the case of a transfer of assets, (i) the surviving corporation or transferee - is a corporation organized and existing under the laws of the United States of America or a state thereof or the District of Columbia, (ii) such corporation -- shall have executed and delivered to each holder of any Securities its assumption in writing (in form and substance reasonably satisfactory to the Required Securities Holder(s)) of the due and punctual payment of the principal, premium, if any, and interest payable with respect to the Notes and the performance and observance of every other covenant and condition of this Agreement and the other Note Documents, (iii) such corporation shall have caused --- to be delivered to each holder of any Securities an opinion of independent counsel, in form and substance reasonably satisfactory to the Required Securities Holder(s), to the effect that all agreements or instruments effecting such assumption have been duly authorized, executed and delivered by such surviving, continuing or resulting corporation or such transferee and constitute a legal, valid and binding obligation against such corporation enforceable in accordance with their terms and (iv) immediately after giving effect to such -- transaction (and such assumption) such corporation 33 could incur at least $1 of additional Total Debt without a Default or an Event of Default occurring hereunder. (b) Except as allowed pursuant to Section 8.8, the Company will not permit any Subsidiary or any Joint Venture Vehicle to, directly or indirectly, consolidate with or merge into any other Person or permit any other Person to consolidate with or merge into it, except that any Subsidiary or any Joint Venture Vehicle may consolidate with or merge into the Company or a Subsidiary if the Company or the Subsidiary or the Joint Venture Vehicle of which the Company owns the higher percentage interest, as the case may be, shall be the surviving corporation and if, immediately after giving effect to such transaction, no Default or Event of Default shall have occurred and be continuing. 8.8. Sale of Assets. The Company will not and will not permit any Subsidiary or Joint Venture Vehicle to (whether by a single transaction or a number of related or unrelated transactions and whether at one time or over a period of time) sell, transfer, lease out, lend or otherwise dispose of (whether outright, by a sale-and-repurchase or sale-and-leaseback arrangement, or otherwise and whether to another member of the Group or any other Person) (each a "Disposal") all or any part of its assets (other than a sale of substantially all of the assets of the Company permitted pursuant to Section 8.7) if the net book value of such assets, when aggregated with all other assets (other than inventory sold in the normal course of business) disposed of by any member of the Group or Joint Venture Vehicle (A) within the same fiscal year, would exceed - 10% of the value of the Total Consolidated Assets of the Group (as reported in the Company's most recent published quarterly consolidated financial statements) or (B) since the Notes have been outstanding, would exceed 25% of Total - Consolidated Assets of the Group (as reported in the Company's most recent published quarterly consolidated accounts), unless (i) both immediately before - and after giving effect thereto, no Default or Event of Default has occurred and is then continuing and (ii) such Disposal is made for cash and within 180 days -- of such a Disposal such cash proceeds are used either (x) to purchase another - asset or other assets of a similar value in one or more of the lines of business of the Company (as determined by the Board of Directors) or (y) to cause the - Company to repay an amount of indebtedness of the Company (other than indebtedness subordinated to the Notes) equal to the amount of such cash proceeds in excess of the foregoing 10% or 25% of the Total Consolidated Assets of the Group. The following Disposals shall not be taken into account under this Section: (i) Disposals in the ordinary course of business; (ii) Disposals of individual assets having a book value of less than $1,000,000; 34 (iii) a Disposal of assets by one Subsidiary or Joint Venture Vehicle of the Company to another Subsidiary of the Company or to the Company; (iv) the exchange of assets for other assets of a similar nature and value; (v) Disposals consisting of the assignment, licensing or sub- licensing of intellectual property rights by the Company, any Subsidiary or Joint Venture Vehicle to any Subsidiary or Joint Venture Vehicle; and (vi) any Disposal which the Required Holder(s) shall have agreed in writing shall not be taken into account. A merger or consolidation of a Subsidiary into any Person (other than a Subsidiary) shall be treated for purposes of this Section 8.8 as a Disposal of all the assets of such Subsidiary. A merger or consolidation of a Subsidiary into another Subsidiary, where the percentage shareholder interest of the Company in the surviving or resulting Subsidiary is less than the percentage interest of the Company in either of the merging or consolidating Subsidiaries, shall be treated for purposes of this Section 8.8 as a disposition of assets equal to the excess, if any, of (A) the sum of the separate percentage interests of the Company's ownership of each of the merging or consolidating Subsidiaries multiplied by the respective total assets of each Subsidiary over (B) the percentage interest of the Company's ownership of the surviving or resulting Subsidiary multiplied by the total assets of the surviving or resulting Subsidiary. 8.9. Cumulative Installed Rooms. (a) The Company will not permit Cumulative Installed Rooms as of the last day of each period set forth below to be less than 50% of Projected Cumulative Installed Rooms set forth opposite such period below: Period Cumulative Installed Rooms ------ -------------------------- September 30, 1995 37,970 December 31, 1995 51,284 March 31, 1996 67,284 June 30, 1996 84,284 September 30, 1996 102,284 December 31, 1996 121,284 March 31, 1997 138,284 June 30, 1997 154,284 September 30, 1997 169,284 December 31, 1997 183,284 March 31, 1998 197,284 June 30, 1998 210,284 September 30, 1998 222,284 December 31, 1998 234,284 March 31, 1999 245,284 June 30, 1999 255,284 September 30, 1999 264,284 December 31, 1999 272,284 March 31, 2000 280,284 June 30, 2000 288,284 35 (b) If at the time of any determination Cumulative Installed Rooms is less than 80% of Projected Cumulative Installed Rooms relevant to the time of determination, then until Cumulative Installed Rooms is determined to be equal to or greater than 80% of Projected Cumulative Installed Rooms relevant to the time of determination, the interest rate on the Notes shall increase to 11.5%, it being understood that such increase in the interest rate shall not cure any default arising under clause (a) of this Section 8.9 as a consequence of Cumulative Installed Rooms being less than an amount equal to 50% of Projected Cumulative Installed Rooms. (c) For purposes of determining whether the Company is in compliance with its obligations under this Section 8.9, for the corresponding period set forth above Cumulative Installed Rooms shall be determined on a quarterly basis for the period ended March 31, June 30, September 30 and December 31 of each year. 8.10. Offering of Adult Titles. The Company will not, at any time, have Adult Titles represent more than 30% of all video entertainment titles offered by the Group and its Joint Venture Vehicles; provided, that the Company will not, and will not permit any member of the Group or any Joint Venture Vehicle, at any time, to offer films which are illegal to exhibit in the United States. The Company covenants that it will, and will cause each of its Subsidiaries and Joint Venture Vehicles to, include Lock-out Functions in each video system it installs. 36 8.11. Amendments to the Technology License Agreement. So long as the Collateral Assignment Agreement remains in full force and effect, the Company will not amend, modify or supplement in any material respect or terminate the Technology License Agreement without the prior written consent of the Required Holder(s); provided, however, if Company delivers a written notice to the -------- Noteholders which states that (i) the Company desires to amend, modify or supplement the Technology License Agreement pursuant to this Section 8.11 and (ii) the Noteholders must respond to such notice within four Business Days from the date of receipt or will be deemed to have consented to the request, and the Required Holder(s) fail to respond to such notice within four Business Days, such failure to respond shall be deemed to be a consent to any such amendment, modification or supplement. 8.12. Transactions with Affiliates. The Company will not, and will not permit any Subsidiary or Joint Venture Vehicle to, directly or indirectly, enter into any transaction (including, without limitation, the purchase, sale or exchange of assets or the rendering of services) with any Affiliate (other than a Wholly Owned Subsidiary), except in the ordinary course of and pursuant to the reasonable requirements of the Company's or such Subsidiary's business and upon fair and reasonable terms that are no less favorable to the Company or such Subsidiary, as the case may be, than those which would be obtained in an arm's length transaction at the time with a Person not an Affiliate. 8.13. Additional Pledged Securities; Restrictions on PPV. (a) Until the following conditions in this Section 8.13(a) have been satisfied, the covenants in Section 8.13(b) shall be binding upon the Company: (i) the Company shall have provided evidence satisfactory to the Noteholders that the capital stock or similar equity interests of each of Pacific Pay Video (Thailand) Limited and Pacific Pay Video (Taiwan) Inc. have been transferred from PPV to the Company and that the Company is the registered holder thereof; (ii) the Company shall have duly authorized, executed and delivered one or more Pledge Agreements pursuant to which the Company shall have pledged the capital stock or similar equity interests of each of Pacific Pay Video (Thailand) Limited and Pacific Pay Video (Taiwan) Inc., together with all proceeds thereof to secure the obligations of the Company hereunder and under the Notes; (iii) each Noteholder shall have received a certified copy of such Pledge Agreement(s) and such Pledge Agreement(s) shall be in full force and effect and shall constitute valid, binding and enforceable obligations in accordance with their terms and each Noteholder shall have received an opinion (in form and substance satisfactory to Required 37 Holder(s)) from independent counsel reasonably acceptable to Required Holder(s) to such effect; and (iv) the Company shall cause to be delivered to the Agent all the certificated Pledged Securities, if any, referred to in any such Pledge Agreement, together with executed and undated stock powers. (b) Until the conditions in Section 8.13(a) have been satisfied in full, the Company will not permit PPV to (i) transact any business other than as incidental to the holding of the Technology License Agreement and the holding of the capital stock or similar equity interests of each of Pacific Pay Video (Thailand) Limited and Pacific Pay Video (Taiwan) Inc.; (ii) incur any Debt in an aggregate amount in excess of $100,000 other than Debt due to the Company or to a wholly-owned Subsidiary of the Company; (iii) create, incur, assume or suffer to exist any Lien (including Liens otherwise permitted by Section 8.1) upon or with respect to any of the capital stock or similar equity interests of either of Pacific Pay Video (Thailand) Limited or Pacific Pay Video (Taiwan) Inc.; (iv) transfer any of the capital stock or similar equity interests of either of Pacific Pay Video (Thailand) Limited or Pacific Pay Video (Taiwan) Inc. except to the Company in accordance with Section 8.13(a); (v) liquidate, wind-up or otherwise terminate its corporate existence; or (v) merge or consolidate with any Person (including any merger or consolidation which would otherwise be permitted in accordance with Section 8.7). SECTION 9. EVENTS OF DEFAULT AND ENFORCEMENT. 9.1. Events of Default; Acceleration. If any of the following events shall occur and be continuing for any reason whatsoever (and whether such occurrence shall be voluntary or involuntary or come about or be effected by operation of law or otherwise): (i) the Company defaults in the payment of any principal of or premium payable with respect to any Note when the same shall 38 become due, either by the terms thereof or otherwise as herein provided; or (ii) the Company defaults in the payment of any interest on any Note for more than ten days after the date due; or (iii) the Company or any Subsidiary or Joint Venture Vehicle shall fail to make any payment when due on any indebtedness for borrowed money, aggregating $5,000,000 (or the equivalent thereof in any other currency) or more in aggregate principal amount; or any event shall occur (other than the mere passage of time) or any condition shall exist in respect of any such indebtedness for borrowed money, or under any agreement securing or relating to such indebtedness for borrowed money, the effect of which is to require (or permit any holder of such indebtedness or a trustee to require) such indebtedness, or a portion thereof, to be paid prior to its stated maturity or prior to its regularly scheduled date of payment; or (iv) any representation, warranty or other statement made by the Company herein or by or on behalf of the Company in any instrument furnished in compliance with or in reference to this Agreement shall be false or misleading in any material respect or shall omit or fail to state information, which omission or failure makes such representation, warranty or other statement false or misleading in any material respect; or (v) the Company fails to perform or observe any agreement contained in Section 8.1, 8.3, 8.4, 8.5, 8.6, 8.9, 8.10 or 8.11 and such failure shall not be remedied within 15 days after any Responsible Officer obtains actual knowledge thereof; or (vi) the Company fails to perform or observe any agreement contained in Section 8.2, 8.7 or 8.8; or (vii) the Company fails to perform or observe any other agreement, term or condition contained herein or in any of the other Note Documents and such failure shall not be remedied within 60 days after any Responsible Officer obtains actual knowledge thereof; or (viii) the Company or any of its Subsidiaries shall (A) generally not - be paying its debts as they become due, (B) file, or consent by answer or - otherwise to the filing against it of, a petition for relief or reorganization or arrangement or any other petition in bankruptcy, for liquidation or to take advantage of any bankruptcy or insolvency law of any jurisdiction, (C) make an assignment for the benefit of its creditors, (D) - - consent to the appointment of a custodian, receiver, trustee or other officer with similar powers with respect to it 39 or with respect to any substantial part of its property, (E) be adjudicated - insolvent or (F) take corporate action for the purpose of any of the - foregoing, unless the Required Holders have consented to such event in writing prior to the occurrence thereof; or (ix) if a court or governmental authority of competent jurisdiction shall enter an order appointing, without consent by the Company or any of its Subsidiaries, a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to a substantial part of its property, assets or revenues, or if an order for relief shall be entered in any case or proceeding for liquidation or reorganization or otherwise to take advantage of any bankruptcy or insolvency law of any jurisdiction, or ordering the dissolution, winding-up or liquidation of the Company or any of its Subsidiaries, or if any petition for any such relief shall be filed against the Company or any of its Subsidiaries and such petition shall not be dismissed within 30 days, unless the Required Holders have consented to such event in writing prior to the occurrence thereof; or (x) a final judgment or judgments for the payment of money in an aggregate amount in excess of $5,000,000 (excluding portions covered by insurance, provided that the insurer has admitted in writing its responsibility for any such liability) is or are outstanding against one or more of the Company and its Subsidiaries and/or, within 60 days after entry thereof, any one of such judgments is not discharged, bonded or execution thereof stayed pending appeal, or within 60 days after the expiration of any such stay, such judgment is not discharged; or (xi) any Security Document or any provision thereof shall cease to be in full force and effect, or shall cease to give the Agent the Liens, rights, powers and privileges purported to be created thereby, or the Company or any Subsidiary or any Joint Venture Vehicle shall default in the due performance or observance of any term, covenant or agreement on its part to be performed or observed pursuant to the Security Documents and such default shall not be remedied within 15 days after a Responsible Officer obtains actual knowledge thereof; then (A) if such event is an Event of Default specified in clause (i) or (ii) of - this Section 9.1, the holder of any Note may at its option, by notice in writing to the Company, declare such Note to be, and such Note shall thereupon be and become, immediately due and payable at par together with interest accrued thereon and premium, if any, payable with respect thereto pursuant to Section 6.1, without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Company, (B) if such event is an Event of Default - specified in clause (viii) or (ix) of this Section 9.1 with respect to the Company, all of the Notes at the time outstanding shall automatically become immediately due and payable at par together with interest accrued thereon, and 40 premium, if any, payable with respect thereto pursuant to Section 6.1, without presentment, demand, protest or notice of any kind, all of which are hereby waived by the Company, and (C) if such event is not an Event of Default - specified in clause (viii) or (ix) of this Section 9.1 with respect to the Company, the Required Holder(s) of the Notes then outstanding may at its or their option, by notice in writing to the Company, declare all of the Notes to be, and all of the Notes shall thereupon be and become, immediately due and payable at par together with interest accrued thereon and together with any premium payable pursuant to Section 6.1 with respect to each Note, without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Company. 9.2. Rescission of Acceleration. At any time after any or all of the Notes shall have been declared immediately due and payable pursuant to Section 9.1, the Required Holder(s) may, by notice in writing to the Company, rescind and annul such declaration and its consequences if (i) the Company shall have - paid all overdue interest on the Notes, the principal of and premium, if any, payable with respect to any Notes which have become due otherwise than by reason of such declaration, and interest on such overdue interest to the extent permitted by law and overdue principal in an amount at the rate specified in the Notes, (ii) the Company shall not have paid any amounts which have become due -- solely by reason of such declaration, (iii) all Events of Default and Defaults, --- other than non-payment of amounts which have become due solely by reason of such declaration, shall have been cured or waived pursuant to Section 11.3 and (iv) -- no judgment or decree shall have been entered for the payment of any amounts due pursuant to the Notes or this Agreement. No such rescission or annulment shall extend to or affect any subsequent Event of Default or Default or impair any right arising therefrom. 9.3. Notice of Acceleration or Rescission. Whenever any Note shall be declared immediately due and payable pursuant to Section 9.1 or any such declaration shall be rescinded and annulled pursuant to Section 9.2, the Company shall forthwith give written notice thereof to the holder of each Note at the time outstanding. 9.4. Other Remedies. If any Event of Default shall occur and be continuing, the holder of any Note may proceed to protect and enforce its rights under this Agreement and such Note by exercising such remedies as are available to such holder in respect thereof under applicable law, either by suit in equity or by action at law, or both, whether for specific performance of any covenant or other agreement contained in this Agreement or any other Note Document or in aid of the exercise of any power granted in this Agreement or the other Note Documents; provided, that in the case of the Security Documents, no holder of -------- any Note may proceed to protect or enforce its rights under this Agreement and such Note by exercising remedies as are available to such holder in respect thereof under applicable law through the Agent without the consent of the Required Holder(s). No course of dealing and no delay on 41 the part of any holder of any Note in exercising any right, power or remedy shall operate as a waiver thereof or otherwise prejudice such holder's rights, powers or remedies. No remedy conferred in this Agreement or any Security Document upon the holder of any Securities or on the Agent, as the case may be, is intended to be exclusive of any other remedy, and each and every such remedy shall be cumulative and shall be in addition to every other remedy conferred herein or now or hereafter existing at law or in equity or by statute or otherwise. 10. DEFINITIONS AND INTERPRETATION, ETC. For the purpose of this Agreement, the terms defined in the introductory sentence and in Sections 1 and 2 shall have the respective meanings specified therein, and the following terms shall have the meanings specified with respect thereto below: 10.1. Defined Terms. "Adult Titles" shall mean any motion pictures not rated by the Motion Picture Association of America in the United States (or an equivalent rating accorded by a similar body in any other jurisdiction). "Adjusted Consolidated Net Worth" shall mean the sum of (i) minority interests, plus (ii) the par value (or value stated on the books of the Company) of the capital stock (but excluding treasury stock and capital stock subscribed and unissued) of the Company and its Subsidiaries, plus (iii) the amount of the additional paid-in capital, retained earnings and any cumulative translation adjustment of the Company and its Subsidiaries, in each case determined as of such date in accordance with generally accepted accounting principles with respect to the Company and its Subsidiaries on a consolidated basis. "Affiliate" shall mean, at any time, (a) with respect to any Person, any other Person that at such time directly or indirectly through one or more intermediaries Controls, or is Controlled by, or is under common Control with, such first Person, and (b) any Person (other than a Noteholder) beneficially owning or holding, directly or indirectly, 5% or more of any class of voting or equity interests of the Company or any Subsidiary or any corporation of which the Company and its Subsidiaries beneficially own or hold, in the aggregate, directly or indirectly, 5% or more of any class of voting or equity interests. As used in this definition, "Control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise. Unless the context otherwise clearly requires, any reference to an "Affiliate" is a reference to an Affiliate of the Company. 42 "Appointment Agreement" shall mean the agreement substantially in the form of Exhibit F hereto pursuant to which the Agent is appointed to act as security trustee for the benefit of the Noteholders. "Business Day" shall mean any day other than a Saturday, a Sunday or a day on which commercial banks in New York or California are required or authorized to be closed. "Change in Tax Law Event" shall have the meaning provided in Section 7.14. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time, and the regulations promulgated and rulings issued thereunder. Section references to the Code are to the Code, as in effect at the date of this Agreement and any subsequent provisions of the Code, amendatory thereof, supplemental thereto or substituted therefor. "Collateral" shall mean the Pledged Securities and the interests of PPV under the Technology License Agreement assigned in favor of the Agent on behalf of the Noteholders pursuant to the Collateral Assignment Agreement. "Collateral Assignment Agreement" shall have the meaning provided in Section 3.9. "Competitor" means any entity which derives or plans to derive a material portion of its revenues, directly or indirectly, from the provision to the hotel industry of television entertainment, information or transaction processing services. "Confidential Information" shall mean information delivered to the Purchasers by or on behalf of the Company or any Subsidiary in connection with the transactions contemplated by or otherwise pursuant to this Agreement that is proprietary in nature and that was clearly marked or labeled or otherwise adequately identified when received by such Purchasers as being confidential information of the Company or such Subsidiary, provided, that such term does not -------- include information that (a) was publicly known or otherwise known to such Purchasers prior to the time of such disclosure, (b) subsequently becomes publicly known through no act or omission by such Purchasers or any person acting on its behalf, (c) otherwise becomes known to such Purchasers other than through disclosure by the Company or any Subsidiary or (d) constitutes financial statements delivered to such Purchasers under Section 7.2 that are otherwise publicly available. "Cumulative Installed Rooms" shall mean the aggregate number of rooms the Company, its Subsidiaries and Joint Venture Vehicles have under contract to provide an in-room, on-demand, pay-per-view entertainment and NOTE AGREEMENT 43 information system in hotels and in which rooms such a system has been installed, is fully operational and is capable of generating income; provided, -------- however, that "Cumulative Installed Rooms" shall not include rooms installed - ------- with systems acquired as a result of a merger or consolidation with, or acquisition of, any single competitor of the Company if the number of rooms installed with systems so acquired in any such transaction exceeds 10,000. "Current Debt" shall mean, with respect to any Person, all liabilities for borrowed money and all liabilities secured by any Lien existing on property owned by such Person (whether or not those liabilities have been assumed) which, in either case, are payable on demand or within one year from the date of the creation thereof, plus the aggregate amount of Guarantees by such Person of all such liabilities of other Persons except (i) any liabilities which are renewable - or extendible at the option of the debtor to a date more than one year from the date of creation thereof and (ii) any liabilities which, although payable within -- one year, constitute principal payments on indebtedness expected to mature more than one year from the date of its creation. "Debt" shall mean Current Debt and Funded Debt. "Dollar or $" shall each mean the lawful currency of the United States of America. "Environmental Laws" shall mean any and all statutes, laws, regulations, ordinances, rules, judgments, orders, decrees, permits, concessions, grants, franchises, licenses, agreements or governmental restrictions relating to pollution and the protection of the environment or the release of any materials into the environment, including but not limited to those related to hazardous substances or wastes, air emissions and discharges to waste or public systems. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations promulgated and rulings issued thereunder. Section references to ERISA are to ERISA, as in effect at the date of this Agreement and any subsequent provisions of ERISA, amendatory thereof, supplemental thereto or substituted therefor. "ERISA Affiliate" shall mean each person (as defined in Section 3(9) of ERISA) which together with the Company or a Subsidiary of the Company would be deemed to be a "single employer" (i) within the meaning of Section 414(b),(c), (m) or (o) of the Code or (ii) as a result of the Company or a Subsidiary of the Company being or having been a general partner of such person. "Event of Default" shall mean any of the events specified in Section 9, provided that there has been satisfied any requirement therein in connection with such event for the giving of notice, or the lapse of time, or the NOTE AGREEMENT 44 happening of any further condition, event or act, and "Default" shall mean any of such events, whether or not any such requirement has been satisfied. "Exchange Act" shall mean the United States Securities Exchange Act of 1934, as amended. "Financial Institution" shall mean an institutional investor (other than an individual) which is an "accredited investor" as defined in Regulation D of the Securities Act. "Financing Lease" shall mean any lease which is shown or is required to be shown in accordance with generally accepted accounting principles as a liability on the balance sheet of the lessee thereunder. "First Closing Date" shall have the meaning specified in Section 2.1. "Foreign Pension Plan" shall mean any plan, fund (including without limitation, any superannuation fund) or other similar program established or maintained outside the United States of America by the Company or any one or more of its Subsidiaries or its Joint Venture Vehicles primarily for the benefit of employees of the Company or such Subsidiaries or such Joint Venture Vehicles residing outside the United States of America, which plan, fund or other similar program provides, or results in, retirement income, a deferral of income in contemplation of retirement or payments to be made upon termination of employment, and which plan is not subject to ERISA or the Code. "Foreign Joint Venture Vehicle" shall mean any Joint Venture Vehicle that is incorporated or organized outside of the United States or any State or territory thereof. "Foreign Subsidiary" shall mean any Subsidiary that is incorporated or organized outside of the United States or any State or territory thereof. "Funded Debt" shall mean (without duplication), with respect to any Person, (i) all liabilities for borrowed money other than Current Debt, (ii) all - -- liabilities secured by any Lien existing on property owned by such Person (whether or not those liabilities have been assumed) other than Current Debt, (iii) the aggregate amount of Guarantees by such Person other than Guarantees of - ---- Current Debt of other Persons and (iv) accrued royalty payments for programming, -- which are outstanding one year from their creation. "Group" shall be the Company and each of its Subsidiaries. NOTE AGREEMENT 45 "Guarantee" shall mean, with respect to any Person, any direct or indirect liability, contingent or otherwise, of such Person with respect to any indebtedness, lease (other than Operating Leases), dividend or other obligation of another, including, without limitation, any such obligation directly or indirectly guaranteed, endorsed (otherwise than for collection or deposit in the ordinary course of business) or discounted or sold with recourse by such Person, or in respect of which such Person is otherwise directly or indirectly liable, including, without limitation, any such obligation in effect guaranteed by such Person through any agreement (contingent or otherwise) to purchase, repurchase or otherwise acquire such obligation or any security therefor, or to provide funds for the payment or discharge of such obligation (whether in the form of loans, advances, stock purchases, capital contributions or otherwise), or to maintain the solvency or any balance sheet or other financial condition of the obligor of such obligation, in any such case if the purpose or intent of such agreement is to provide assurance that such obligation will be paid or discharged, or that any agreements relating thereto will be complied with, or that the holders of such obligation will be protected against loss in respect thereof. The amount of any Guarantee shall be equal to the outstanding principal amount of the obligation guaranteed or such lesser amount to which the maximum exposure of the guarantor shall have been specifically limited. "Hazardous Material" shall mean (i) any "hazardous substance", as - defined by the United States Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, (ii) any "hazardous waste", as defined by -- the United States Resource Conservation and Recovery Act of 1976, as amended, (iii) any petroleum product, or (iv) any pollutant or contaminant or hazardous, - ---- -- dangerous or toxic chemical, material or substance the handling, release or presence of which is regulated pursuant to or otherwise governed by any Environmental Law. "Historical EBITDA" shall mean as of the date of determination the sum of all earnings before interest, taxes, depreciation and amortization of the Company on a consolidated basis during the immediately preceding four consecutive fiscal quarters, as set forth in the books and financial records of the Company. "Hotel Contracts" shall mean contracts to provide services to hotels. "Joint Venture Agreements" shall mean the Amended and Restated Joint Venture Agreement between PPV, JAFTA Japan Co., Inc. and Izumi Kikaku Co. Ltd. dated November 11, 1993, the Joint Venture Agreement between PPV and Nag Yong Lee dated March 1, 1995, Shareholders Agreement between PPV and Mr. Arun Churdboonchart and AC Telecom Ltd, dated as of May 6, 1995, and the Pacific Pay Video (Taiwan), Inc Shareholder Agreement dated as of August 1, 1994. NOTE AGREEMENT 46 "Joint Venture Vehicle" shall mean any corporation, partnership, association, joint venture or other entity (other than a Subsidiary) at least 40% of the total combined voting power of all classes of Voting Shares or equity capital of which shall, at the time as of which any determination is being made, be owned by the Company either directly or through Subsidiaries. "Lien" shall mean any interest in property securing an obligation owed to, or a claim by, a person other than the owner of the property, whether such interest is based on the common law, statute or contract, and including but not limited to the security interest lien arising from a mortgage, encumbrance, pledge, conditional sale or trust receipt or a lease, consignment or bailment for security purposes. The term "Lien" shall not include reservations, exceptions, encroachments, easements, rights-of-way, covenants, conditions, restrictions, leases and other minor title exceptions and encumbrances affecting property, provided that they do not constitute security for monetary -------- obligations. For the purposes of this Agreement, the Company, a Subsidiary or a Joint Venture Vehicle shall be deemed to be the owner of any property which it has acquired or holds subject to a conditional sale agreement or other arrangement pursuant to which title to the property has been retained by or vested in some other Person for security purposes, and such retention or vesting shall be deemed to create a Lien on such property. "Lock-out Function" shall mean the function of video program entertainment systems installed in a hotel room, which enables the user to prevent or limit access to Adult Titles in such room. "Material Adverse Effect" shall mean, with respect to an action or event or group of actions or events, (i) a material adverse effect on the business, operations, affairs, condition (financial or other), properties or prospects of the Company or on the consolidated business, operations, affairs, condition (financial or other), properties or prospects of the Company and its Subsidiaries and Joint Venture Vehicles, taken as a whole or (2) a material adverse effect on the ability of the Company to perform and comply with its obligations under this Agreement, the Notes or any other Note Document. "Multiemployer Plan" shall mean any Plan which is a "multiemployer plan" (as such term is defined in section 4001(a)(3) of ERISA). "Note Documents" shall mean (i) the Note Agreement; (ii) any Security Document; (iii) the Notes; (iv) the Warrants; (v) the Shareholders Agreement and (vi) any other agreement, instrument, certificate or document executed and delivered in connection with any Note Document. "Noteholder" shall mean, at any time, a registered holder of Notes. NOTE AGREEMENT 47 "Officers' Certificate" shall mean a certificate signed in the name of the Company by at least two Responsible Officers of the Company. "Operating Lease" shall mean any lease of property under which the Company or a Subsidiary is liable as lessee, or is liable by Guarantee of the obligations of another Person as lessee, other than a Financing Lease. "PBGC" shall mean the Pension Benefit Guaranty Corporation or any governmental authority succeeding to any of its functions. "Person" shall mean and include an individual, a partnership, a joint venture, a corporation, a trust, an unincorporated organization or a government or any department or agency thereof. "Plan" shall mean any multiemployer or single-employer plan as defined in Section 4001 of ERISA, which is maintained or contributed to by (or to which there is an obligation to contribute of) the Company or a Subsidiary of the Company or an ERISA Affiliate, and each such plan for the five year period immediately following the latest date on which the Company, or a Subsidiary of the Company or an ERISA Affiliate maintained, contributed to or had an obligation to contribute to such plan. "Pledged Securities" shall have the meaning specified in Section 1.2. "PPV" shall mean Pacific Pay Video Limited. "Private Placement Memorandum" shall mean the confidential private placement memorandum of the Company prepared by the Company dated February 1995, together with any supplemental information provided in writing to the Purchasers subsequently, including, without limitation, the Long-Range Plan, dated as of July 21, 1995. "Projected EBITDA" shall mean, at any time during a period set forth in Section 8.6, that amount set forth opposite such period in Section 8.6. "Projected Cumulative Installed Rooms" shall mean, at any time during a period set forth in Section 8.9, that amount set forth opposite such period in Section 8.9. "Required Holder(s)" shall mean the holder or holders of at least 70% of the aggregate principal amount of the Notes from time to time outstanding. "Required Securities Holder(s)" shall mean both (i) Required Holder(s) and (ii) the holder or holders of Warrants exercisable into shares of NOTE AGREEMENT 48 Common Stock which in the aggregate amount to at least 70% of the aggregate number of shares of Common Stock into which all the Warrants are exercisable. "Responsible Officer" shall mean the president, the treasurer, the chief executive officer, the chief operating officer, the chief financial officer or the chief accounting officer of the Company. "Restricted Payment" shall mean (i) dividends or other distributions - in respect of capital stock of the Company (except distributions in such stock) and (ii) the redemption or acquisition of such stock or of warrants, rights or -- other options to purchase such stock (except when solely in exchange for such stock) or the redemption or acquisition by a Subsidiary of the Company of shares not directly or indirectly held by the Company unless made, contemporaneously, from the net proceeds of a sale of such stock; in either case, valued at the fair market value of the property being dividended, distributed or otherwise transferred as a distribution. "Second Closing Date" shall have the meaning specified in Section 2.2. "securities" and "security" shall have the meaning specified for the term "security" in section 2(1) of the Securities Act. "Securities Act" shall mean the United States Securities Act of 1933, as amended. "Security Documents" shall mean the Pledge Agreement(s), the Collateral Assignment Agreement, the Appointment Agreement, any other documents executed in connection therewith and any other security documents entered into after the closing date. "Shareholders' Agreement" shall mean the Shareholders' Agreement dated as of September 29, 1994, as amended by the First Amendment dated May 16, 1995, by and between PPV and the existing rights holders listed therein. "Subsidiary" shall mean any corporation, partnership, association, joint venture or other entity at least 50% of the total combined voting power of all classes of Voting Shares or equity capital of which shall, at the time as of which any determination is being made, be owned by the Company either directly or through Subsidiaries, or in respect of which the Company has the power to control the financial and operating policies. "Technology License Agreement" shall mean the Technology License Agreement dated April 15, 1992 between PPV and On Command Video Corporation, as amended from time to time. 48 "Total Adjusted Capitalization" shall mean the sum of Total Debt and Adjusted Consolidated Net Worth. "Total Consolidated Assets" shall mean the total assets of the Company and its Subsidiaries, on a consolidated basis, determined in accordance with generally accepted accounting principles. "Total Debt" shall mean (without duplication), as of any date of determination, the total of all Debt of the Company, its Subsidiaries and Joint Venture Vehicles. "Transferee" shall mean any direct or indirect transferee of all or any part of any Note purchased by the Purchaser under this Agreement. "United States" or "U.S." shall mean the United States of America. "Voting Shares" shall mean, with respect to any incorporated company, any shares of such company whose holders are entitled under ordinary circumstances to vote for the election of directors of such company (irrespective of whether at the time stock of any other class or classes shall have or might have voting power by reason of the happening of any contingency) and with respect to any company which is not incorporated, any interest in such company which entitles the holder thereof to participate either in the management or the profits of such company. "Wholly Owned Subsidiary" shall mean, as applied to any Subsidiary, a Subsidiary all the outstanding shares (other than directors' qualifying shares, if required by law) of every class of stock of which are at the time owned by the Company or by one or more Wholly Owned Subsidiaries or by the Company and one or more Wholly Owned Subsidiaries. 10.2. Accounting Principles, Terms and Determinations. All references in this Agreement to generally accepted accounting principles shall, unless otherwise specified, be deemed to refer to generally accepted accounting principles as practiced in the relevant jurisdiction, in effect at the time of application thereof. SECTION 11. MISCELLANEOUS. 11.1. Payments. The Company agrees that, so long as any Purchaser shall hold any Note, it will make payments of principal of, interest on and any premium payable with respect to such Note, by wire transfer of immediately available funds for credit (not later than 12:00 noon, New York City time, on the date due) to such Purchaser's account or accounts as specified in the Purchaser Schedule attached hereto, or such other account or accounts in 50 the United States as such Purchaser may designate in writing without presentment of or notation on the Notes, notwithstanding any contrary provision herein or in any Note with respect to the place of payment. Each holder of a Note by its purchase thereof agrees that, before disposing of such Note, such holder will make a notation thereon (or on a schedule attached thereto) of all principal payments previously made thereon and of the date to which interest thereon has been paid. The Company agrees to afford the benefits of this Section 11.1 to any Transferee which shall have agreed to be bound by the provisions of this Section 11.1. 11.2. Expenses. The Company agrees, whether or not the transactions contemplated hereby shall be consummated, to pay, and save each Purchaser and any Transferee harmless against liability for the payment of, all out-of-pocket expenses arising in connection with such transactions, including (i) all - reasonable document production and duplication charges, (ii) the reasonable -- fees, charges and disbursements of any special counsel engaged by such Purchaser or such Transferee in connection with the Note Documents and the transactions contemplated thereby, (iii) the reasonable costs and expenses associated with --- obtaining private placement numbers for the Notes, (iv) the reasonable out-of- -- pocket costs and expenses each Purchaser incurred in connection with the purchase of the Securities, (v) the cost and expenses (including fees) of the - Agent under any Security Document, including without limitation the costs and expenses described in each of the Pledge Agreements, (vi) the reasonable costs -- and expenses of delivering to each Purchaser, insured to its satisfaction, the Securities purchased by such Purchaser hereunder, (vii) the reasonable cost of --- delivering to the Company (insured to the satisfaction of the holder of such Note) any Note surrendered to the Company pursuant to this Agreement and the cost of delivering to any Purchaser or Transferee any Note issued in substitution or replacement therefor, (viii) the costs and expenses, including ---- attorneys' fees (including the allocated costs and expenses of in-house counsel), incurred by such Purchaser or such Transferee relating to (A) the - exchange of Notes, (B) the consideration by such Purchaser or Transferee of any - proposed amendments, waivers or consents (regardless of whether or not consented to or actually executed) pursuant to the provisions of this Agreement or the Notes, (C) the enforcement of (or determining whether or how to enforce) any - rights under this Agreement or any other Note Document or the collection of any amounts due such Purchaser or Transferee under the Note Documents including, without limitation, costs and expenses incurred in any bankruptcy case, insolvency, restructuring or workout, (D) the preparation for, negotiations - regarding, consultations concerning or the defense of legal proceedings involving any claim or claims made or threatened against such Purchaser or Transferee arising out of the Note Documents or (E) responding to any subpoena - or other legal process or informal investigative demand issued in connection with this Agreement or the transactions contemplated hereby or by reason of such Purchaser's or such Transferee's having acquired any Security. Notwithstanding the foregoing, the Company shall not be obligated to reimburse any Purchaser or Transferee for any 51 expenses, costs, outlays or fees incurred in connection with any action or proceeding to enforce any of the provisions of the Note Documents which a court of competent jurisdiction determines was not undertaken in good faith. The Company also agrees to pay the costs and expenses or other taxes, fees and charges incurred with respect to the recording, registering or filing of any instrument to secure the Notes pursuant to Section 7.4 and compliance with all statutes and regulations as may be necessary or desirable in order to establish, protect, perfect and preserve any Lien created or maintained pursuant to Section 7.4. The Company also will pay, and will save each Purchaser harmless from all claims in respect of the fees, if any, of brokers and finders (other than those retained by such Purchaser) and any and all liabilities with respect to any taxes (including interest and penalties) which may be payable in respect of the execution and delivery of this Agreement or any other Note Documents, any instrument required to secure the Notes pursuant to Section 7.4, the issue of the Notes hereunder and any amendment or waiver under or in respect of this Agreement, the Notes or any other Note Document. In furtherance of the foregoing, on the date of closing, the Company will pay or cause to be paid the reasonable fees and disbursements of your special counsel provided that such fees and disbursements are reflected in a statement of such special counsel submitted to the Company at least three days prior to the date of closing and, in addition, the Company will also pay or cause to be paid, promptly upon receipt of supplemental statements therefor, additional fees, if any, and disbursements of such special counsel in connection with the transactions hereby contemplated. The obligations of the Company under this Section 11.2 shall survive the transfer of any Note or portion thereof or interest therein by any Purchaser or any Transferee, the payment of any Note, the acceptance of any Warrant or the termination of this Agreement or any other Note Document. 11.3. Consent to Amendments. This Agreement may be amended and the Company may take any action herein prohibited, or omit to perform any act herein required to be performed by it, if the Company shall obtain the written consent to such amendment, action or omission to act, of the Required Holder(s) except that, without the written consent of the holder or holders of all Notes at the time outstanding, no amendment to this Agreement shall change the maturity of any Note, or change the principal of, or the rate or time of payment of interest on or any premium payable with respect to any Note, or affect the time, amount or allocation of any prepayments, or change the proportion of the principal amount of the Notes required with respect to any consent, amendment, waiver or declaration. Each holder of any Note at the time or thereafter outstanding and the Company shall be bound by any consent authorized by this Section 11.3, whether or not such Note shall have been marked to indicate such consent, but any Notes issued thereafter may bear a notation referring to any such consent. No course of dealing between the 52 Company and the holder of any Note nor any delay in exercising any rights hereunder or under any Note shall operate as a waiver of any rights of any holder of such Note. As used herein and in the Notes, the term "this Agreement" and references thereto shall mean this Agreement as it may from time to time be amended or supplemented. 11.4. Solicitation of Holders of Notes. Neither the Company nor any Affiliate will solicit, request or negotiate for or with respect to any proposed waiver or amendment of any of the provisions of this Agreement or the Notes unless each holder of the Notes (irrespective of the amount of Notes then owned by it) shall be informed thereof by the Company and shall be afforded the opportunity of considering the same and shall be supplied by the Company with sufficient information to enable it to make an informed decision with respect thereto. Executed or true and correct copies of any waiver sent or effected pursuant to the provisions of Section 11.3 shall be delivered by the Company to each holder of outstanding Notes forthwith following the date on which the same shall have been executed and delivered by the holder or holders of the requisite percentage of outstanding Notes. Neither the Company nor any Affiliate will, directly or indirectly, pay or cause to be paid any remuneration, whether by way of supplemental or additional interest, fee or otherwise, to any holder of a Note for any consent by such Person to any waiver or amendment of any of the terms and provisions of this Agreement or the Notes unless such remuneration is concurrently paid, on the same terms, ratably to the holders of all of the Notes then outstanding. 11.5. Form, Registration, Transfer and Exchange of Notes; Lost Notes. The Notes are issuable as registered notes without coupons in denominations of at least $100,000, except as may be necessary to reflect any principal amount not evenly divisible by $100,000. The Company shall keep at its principal office a register in which the Company shall provide for the registration of Notes and of transfers of Notes. Any holder of any of the Notes may sell, assign or otherwise transfer any of such Notes to (x) any Financial Institution or (y) subject to the immediately succeeding sentence, any other Person other than a Person which is at the time of such sale, assignment or transfer a Competitor. Unless such Noteholder is transferring such Notes to a Financial Institution, the transferring Noteholder shall notify the Company in writing as to the identity of such proposed transferee, and such Noteholder shall not transfer such Note to such Person if the Company, within 5 Business Days of receipt of such notice, notifies such Noteholder (with supporting details) that the proposed transferee is a Competitor and that the Company objects to such transfer, it being understood that if the Noteholder does not receive such a notice from the Company within such 5 Business Days, the proposed transferee shall not be considered a Competitor for purposes hereof and the transfer shall not be prohibited hereby. Any Transferee shall have acceded to the Appointment Agreement in accordance with the terms thereof by executing an Instrument of Accession in the form of Annex I to the Appointment Agreement. Upon surrender for registration of transfer of any Note at the principal office 53 of the Company, the Company shall, at its expense, execute and deliver one or more new Notes of like tenor and of a like aggregate principal amount, registered in the name of such transferee or transferees. At the option of the holder of any Note, such Note may be exchanged for other Notes of like tenor and of any authorized denominations, of a like aggregate principal amount, upon surrender of the Note to be exchanged at the principal office of the Company. Whenever any Notes are so surrendered for exchange, the Company shall, at its expense, execute and deliver the Notes which the holder making the exchange is entitled to receive. Every Note surrendered for registration of transfer or exchange shall be duly endorsed, or be accompanied by a written instrument of transfer duly executed, by the holder of such Note or such holder's attorney duly authorized in writing. Any Note or Notes issued in exchange for any Note or upon transfer thereof shall carry the rights to unpaid interest and interest to accrue which were carried by the Note so exchanged or transferred, so that neither gain nor loss of interest shall result from any such transfer or exchange. Upon receipt of written notice from the holder of any Note of the loss, theft, destruction or mutilation of such Note and, in the case of any such loss, theft or destruction, upon receipt of such holder's unsecured indemnity agreement, or in the case of any such mutilation upon surrender and cancellation of such Note, the Company will make and deliver a new Note, of like tenor, in lieu of the lost, stolen, destroyed or mutilated Note. 11.6. Persons Deemed Owners. Prior to due presentment for registration of transfer, the Company may treat the Person in whose name any Note is registered as the owner and holder of such Note for the purpose of receiving payment of principal of, interest on and any premium payable with respect to such Note and for all other purposes whatsoever, whether or not such Note shall be overdue, and the Company shall not be affected by notice to the contrary. Subject to the preceding sentence, any holder of any of the Notes may grant participations in such Note to (x) any Financial Institution or (y) subject to the immediately succeeding sentence, any other Person other than a Person which is at the time of the granting of such participation a Competitor. Unless such Noteholder is granting a participation in the Notes to a Financial Institution, the granting Noteholder shall notify the Company in writing as to the identity of such proposed grantee, and such Noteholder shall not grant such participation to such Person if the Company, within 5 Business Days of receipt of such notice, notifies such Noteholder (with supporting details) that the proposed grantee is a Competitor and that the Company objects to such transfer, it being understood that if the transferring Noteholder does not receive such a notice from the Company within such 5 Business Days, the proposed grantee shall not be considered a Competitor for purposes hereof and the granting of the participation shall not be prohibited hereby. 11.7. Survival of Representations and Warranties. All representations and warranties contained herein or made by or on behalf of the Company in connection herewith shall survive the execution and delivery of this Agreement and the Securities, the transfer by the Purchaser of any Note, 54 together with the Warrants or portion thereof or interest therein and the payment of any Note, and may be relied upon by any Transferee, regardless of any investigation made at any time by or on behalf of the Purchaser or any Transferee. All statements contained in any certificate or other instrument delivered by or on behalf of the Company pursuant hereto or in connection with the transactions contemplated hereby shall be deemed representations and warranties of the Company hereunder. 11.8. Successors and Assigns. All covenants and other agreements in this Agreement contained by or on behalf of any of the parties hereto shall bind and inure to the benefit of the respective successors and assigns of the parties hereto (including, without limitation, any Transferee) whether so expressed or not. 11.9. Disclosure to Other Persons. Each holder of Notes agrees to use its best efforts to hold in confidence all Confidential Information; provided that nothing herein shall prevent the holder of any Note from - -------- delivering copies of any financial statements and other documents (whether or not constituting Confidential Information) delivered to such holder, and disclosing any other information (whether or not constituting Confidential Information) disclosed to such holder, by or on behalf of the Company or any Subsidiary or Joint Venture Vehicle thereof in connection with or pursuant to this Agreement to (i) such holder's directors, officers, employees, agents and - professional consultants, (ii) any other holder of any Note, (iii) any Person to -- --- which such holder offers to sell such Note or any part thereof (if such Person has agreed in writing prior to its receipt of such Confidential Information to be bound by the provisions of this Section 11.9), (iv) any Person to which such -- holder sells or offers to sell a participation in all or any part of such Note (if such Person has agreed in writing prior to its receipt of such Confidential Information to be bound by the provisions of this Section 11.9), (v) any Person - from which such holder offers to purchase any security of the Company, (vi) any -- federal or state regulatory authority having jurisdiction over such holder, (vii) the National Association of Insurance Commissioners or any similar --- organization, (viii) any Person holding any debt instrument issued by the ---- Company, (ix) any Person responsible for rating the Notes or any other debt -- instrument issued by the Company or (x) any other Person to which such delivery - or disclosure may be necessary or appropriate (A) in compliance with any law, - rule, regulation or order applicable to such holder, (B) in response to any - subpoena or other legal process or informal investigative demand or (C) in - connection with any litigation to which such holder is a party. Each holder of a Note, by its acceptance of such Note, will be deemed to have agreed to be bound by and to be entitled to the benefits of this Section 11.9 as though it were a party to this Agreement. 11.10. Notices. All written communications provided for hereunder shall be delivered by hand, by internationally recognized overnight delivery service (with charges prepaid) or by telecopy (if immediately followed 55 by a duplicate delivery by hand or prepaid internationally recognized overnight delivery service) and (i) if to the Purchaser, addressed to the Purchaser at the - address specified for such communications in the Purchaser Schedule attached hereto, or at such other address as the Purchaser shall have specified to the Company in writing, (ii) if to any other holder of any Note, addressed to such -- other holder at such address as such other holder shall have specified to the Company in writing or, if any such other holder shall not have so specified an address to the Company, then addressed to such other holder in care of the last holder of such Note which shall have so specified an address to the Company and (iii) if to the Company, addressed to it at its address shown at the beginning --- of this Agreement, Attention: Chief Financial Officer, or at such other address as the Company shall have specified to the holder of each Note in writing. Any notice so addressed shall be deemed given (A) when delivered if by hand, (B) - - when telecopied (if followed with a delivery the following day by hand or overnight delivery service) or (C) one Business Day after delivery prepaid to - any internationally recognized overnight delivery service. 11.11. Payments Due on Non-Business Days. Anything in this Agreement or the Notes to the contrary notwithstanding, any payment of principal of or interest on any Note, or any premium payable with respect thereto, that is due on a date other than a Business Day shall be made on the next succeeding Business Day. If the date for any payment is extended to the next succeeding Business Day by reason of the preceding sentence, the period of such extension shall be included in the computation of the interest payable on such Business Day. 11.12. Satisfaction Requirement. If any agreement, certificate or other writing, or any action taken or to be taken, is by the terms of this Agreement required to be satisfactory to any Purchaser or to the Required Holder(s), the determination of such satisfaction shall be made by such Purchaser or the Required Holder(s), as the case may be, in the sole and exclusive judgment of the Person or Persons making such determination. 11.13. Entire Agreement. Subject to the last sentence of Section 11.3, this Agreement and the Notes embody the entire agreement and understanding between the Purchasers and the Company and supersede all prior agreements and understandings relating to the subject matter hereof. 11.14. Governing Law. This Agreement shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the law of the State of New York. 11.15. Severability. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or 56 unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 11.16. Descriptive Headings. The descriptive headings of the several Sections of this Agreement are inserted for convenience only and do not constitute a part of this Agreement. 11.17. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original but all of which together shall constitute one instrument. 11.18. Severalty of Obligations. The sales of Notes to the Purchasers are to be several sales, and the obligations of the Purchasers under this Agreement are several obligations. Except as provided in Section 3.18, no failure by any Purchaser to perform its obligations under this Agreement shall relieve any other Purchaser or the Company of any of its obligations hereunder, and no Purchaser shall be responsible for the obligations of, or any action taken or omitted by, any other Purchaser hereunder. 11.19. Consent to Jurisdiction; Service of Process. For the purposes of assuring that the holders of the Notes may enforce their rights under this Agreement, the Company for itself and its successors and assigns, hereby irrevocably (i) agrees that any legal or equitable action, suit or proceeding - against the Company arising out of or relating to this Agreement or the Notes or any transaction contemplated hereby or the subject matter of any of the foregoing may be instituted in any state or Federal court in the State of New York, (ii) waives any objection which it may now or hereafter have to the venue -- of any action, suit or proceeding in the State of New York or any claim of forum ----- non conveniens in the State of New York, and (iii) irrevocably submits itself to - -------------- --- the non-exclusive jurisdiction of any state or Federal court of competent jurisdiction in the State of New York for purposes of any such action, suit or proceeding. Without limiting the foregoing, the Company hereby appoints, in the case of any such action or proceeding brought in the courts of or in the state of New York, CT Corporation System, with offices on the date hereof at 1633 Broadway, New York, New York 10019, to receive, for it and on its behalf, service of process in the State of New York with respect thereto, provided the Company may appoint any other person, reasonably acceptable to the Required Holder(s), with offices in the State of New York to replace such agent for service of process upon delivery to the Noteholders of a reasonably acceptable agreement of such new agent agreeing so to act. The Company agrees that service of process by means of notice (as provided in Section 11.10) of any such action, suit or proceeding with respect to any matter as to which it has submitted to jurisdiction as set forth in this Section 11.19 shall be taken and held to be valid personal service upon it. 57 11.20. WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO IRREVOCABLY AND UNCONDITIONALLY WAIVES THE RIGHT TO TRIAL BY JURY IN ANY LEGAL OR EQUITABLE ACTION, SUIT OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE NOTES OR ANY TRANSACTION CONTEMPLATED HEREBY OR THEREBY OR THE SUBJECT MATTER OF ANY OF THE FOREGOING. 58 If you are in agreement with the foregoing, please sign the form of acceptance on the enclosed counterpart of this letter and return the same to the Company, whereupon this letter shall become a binding agreement among the Company and the Purchasers. Very truly yours, MAGINET CORPORATION By: /s/ James A. Barth ------------------------------- Name: James A. Barth Title: Chief Financial Officer The foregoing Agreement is hereby accepted as of the date first above written. NEW YORK LIFE INSURANCE COMPANY By: /s/ Himi Kittner ------------------------------ Name: Himi Kittner Title: Vice President THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK By: /s/ Peter W. Oliver ----------------------------- Name: Peter W. Oliver Title: Managing Director WASLIC COMPANY II By: /s/ Daniel F. Lindley ----------------------------- Name: Daniel F. Lindley Title: President & Secretary NAMTOR BVC LP By: /s/ Noel Rotham ----------------------------- Name: Noel Rotham Title: Partner Purchaser Schedule ------------------ PURCHASER SCHEDULE (SERIES A NOTES)
Note Denominations Principal and Registered Purchaser Amount Numbers - -------------------------------------------- -------------- ------------------ NEW YORK LIFE INSURANCE COMPANY $13,000,000 $13,000,000 (R-1) All payments of either principal or interest on account of the above Note numbered R-1 (and any replacement or substitute Notes therefor) shall be made by wire transfer of immediately available funds to: Morgan Guaranty Trust Company of New York New York, New York ABA No. 021-000-238 For credit to the account of: New York Life Insurance Company General Account No. 810-00-000 Each such wire transfer shall set forth payment with respect to MagiNet Corporation 10.5% Senior Series A Secured Notes Due 2000 referencing "PPN 55917 @ AA2" and the due date and application (as among principal, premium or interest) of the payment being made and a notice setting forth the above details shall be contemporaneously delivered to: New York Life Insurance Company 51 Madison Avenue New York, NY 10010 Attention: Treasury Department Securities Income Section Room 209 Fax: 001-212-447-4160
64-1 .
Note Denominations Principal and Registered Purchaser Amount Numbers - --------------------------------------------- ------------- ------------------ Address for all other communications and notices: New York Life Insurance Company 51 Madison Avenue New York, NY 10010 Attention: Investment Department Private Finance Group Room 206 Fax No. 001-212-447-4122 With a copy (excluding financial statements) to: New York Life Insurance Company 51 Madison Avenue New York, NY 10010 Attention: Investment Section Office of the General Counsel Room 10SB Fax: 001-212-576-8340 White & Case 7-11 Moorgate London EC2R 6HH England Attn: Senior Partner Tel: 171-726-6361 Fax: 171-726-4314
Name of Nominee in which Notes are to be issued: None. Taxpayer I.D. Number: 13-5582869 [WARRANTS]
Number of Number of Shares Represented Shares Represented by Warrants (original) by Warrants (if adjusted) - ------------------------------------------------- --------------------------- New York Life Insurance Company 742,857 1,733,333
64-2 . PURCHASER SCHEDULE (SERIES A NOTES)
Note Denominations Principal and Registered Purchaser Amount Numbers - --------------------------------------------- -------------- ----------------- THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK $10,000,000 $10,000,000 (R-2) All payments on account of the above Note numbered R-2 (and any replacement or substitute Notes therefor) shall be made by wire transfer of immediately available funds for credit to: Security Remittance Account NO. 321-023803 Chemical Bank New York, New York for credit of The Mutual Life Insurance Company of New York ABA No. 021000128 Each such wire transfer shall set forth payment with respect to MagiNet Corporation 10.5% Senior Series A Secured Notes due 2000 referencing "PPN 55917 @ AA2" and the due date and application (as among principal, premium or interest) of the payment being made and a notice setting forth the above details shall be contemporaneously delivered to:
64-3 .
Note Denominations Principal and Registered Purchaser Amount Numbers - --------------------------------------------- -------------- ----------------- Glenpointe Marketing & Operations Center - MONY Glenpointe Center West 500 Frank W. Burr Boulevard Teaneck, NJ 07666-6888 U.S.A. Telecopy: 201-907-6797 Attention: Securities Custody Address for all other communications and notices: The Mutual Life Insurance Company of New York 1740 Broadway New York, New York 10019 U.S.A. Attention: MONY Capital Management Unit Name of Nominee in which Notes are to be issued: None Taxpayer I.D. Number: 12-1632487 with a copy (excluding financial statements) to: White & Case 7-11 Moorgate London EC2R England Attn: Senior Partner Tel: 171-726-6361 Fax: 171-726-4314
[WARRANTS]
Number of Number of Shares Represented Shares Represented by Warrants (original) by Warrants (if adjusted) - ----------------------------------------------------- -------------------------- The Mutual Insurance Company of New York 571,429 1,333,333
64-4 . PURCHASER SCHEDULE (SERIES A NOTES)
Note Denominations Principal and Registered Purchaser Amount Numbers - --------------------------------------------- -------------- ----------------- WASLIC COMPANY II $1,500,000 $1,500,000 (R-3) All payments on account of the above Note numbered R-3 (and any replacement or substitute Notes therefor) shall be made by wire transfer of immediately available funds for credit to: Morgan Guaranty Trust Company of New York New York, New York ABA No. 021-000-238 For credit to the account of: Trust and Investment Journal A/C# 999-99-951 Attn: Tony Capizzi Ref: MagiNet Corporation Each such wire transfer shall set forth payment with respect to MagiNet Corporation 10.5% Senior Series A Secured Notes due 2000 referencing "PPN 55917 @ AA2" and the due date and application (as among principal, premium or interest) of the payment being made and a notice setting forth the above details shall be contemporaneously delivered to: J.P. Morgan Delaware 902 N. Market Street 9th Floor Wilmington, Delaware 19801 Facsimile: 302-651-9637 with a copy to: Ft. Washington Investment Advisors 400 Broadway Cincinnati, OH 45202 Facsimile: 513-629-1695 Address for all other communications and notices as above.
64-5 . Name of Nominee in which Notes are to be issued: None Taxpayer I.D. Number: 52-1549279 with a copy (excluding financial statements) to: White & Case 7-11 Moorgate London EC2R England Attn: Senior Partner Tel: 171-726-6361 Fax: 171-726-4314 [WARRANTS]
Number of Number of Shares Represented Shares Represented by Warrants (original) by Warrants (if adjusted) --------------------------- --------------------------- Waslic Company II 85,714 200,000
64-6 . PURCHASER SCHEDULE (SERIES A NOTES)
Note Denominations Principal and Registered Purchaser Amount Numbers - -------------------------------------------- ---------------- ------------------ NAMTOR BVC LP $400,000 $400,000 (R-4) All payments on account of the above Note numbered R-4 (and any replacement or substitute Notes therefor) shall be made by wire transfer of immediately available funds for credit to: Bankers Trust Company NYC/PCG 280 Park Avenue New York, NY 10017 ABA: 021001033 For credit to the account of: Account no: 99-401-380 For further credit to: account no: 277574 account name: NAMTOR BVC/Pac Pay Each such wire transfer shall set forth payment with respect to MagiNet Corporation 10.5% Senior Series A Secured Notes due 2000 referencing "PPN 55917 @ AA2: and the due date and application (as among principal, premium or interest) of the payment being made and a notice setting forth the above details shall be contemporaneously delivered to: Namtor Inc. 311 South Wacker Drive Chicago, Illinois 60606 Attn: Mr. Edward P. Langefeld Address for all other communications and notices as above.
64-7 . Name of Nominee in which Notes are to be issued: None Taxpayer I.D. Number: 36-3568488 with a copy (excluding financial statements) to: White & Case 7-11 Moorgate London EC2R England Attn: Senior Partner Tel: 171-726-6361 Fax: 171-726-4314 [WARRANTS]
Number of Number of Shares Represented Shares Represented by Warrants (original) by Warrants (if adjusted) --------------------------- --------------------------- Namtor BVC LP 22,857 53,333
64-8 NOTE AGREEMENT SCHEDULE 1.2 Schedule 1.2 PLEDGED SECURITY ----------------
Name of Subsidiary Jurisdiction of Number of Shares or Joint Venture Incorporation Pledged as Security ---------------- --------------- ------------------- Pay Per View Japan, Inc. Japan 264 Pacific Pay Video (HK) Limited Hong Kong 6,600 PPV Singapore Pte Ltd Singapore 66,000 Pacific Pay Video (Thailand) Co., Thailand Limited+ 0 Pacific Pay Video (Taiwan) Inc.+ Taiwan 0 Pacific Pay Video Pty. Limited Australia 66 Pacific Pay Video New Zealand New Zealand Limited 66 Pacific Pay Video (Korea) Ltd. Korea 176,000 Pacific Pay Video International, United States Inc. (California) 1,000 Pacific Pay Video Limited United States (California) 100
- ----------------------- + Subsidiaries of Pacific Pay Video Limited Schedule 3.11 DESCRIPTION OF REORGANIZATION See the attached. Pacific Pay Video Limited ------------------------- Outline for Establishing Holding Company Structure -------------------------------------------------- Objectives - ---------- 1.) Establish a holding company to facilitate a more appropriate corporate structure for operating, marketing and managing the Company's products and services internationally. 2.) Minimize any impact on current financing efforts, taxes, or ability to use pooling of interest accounting in future acquisitions. Basis Structure and Implementation - ---------------------------------- 1.) Incorporate two new California corporations: Newholdings (parent) and NewSub (100% owned subsidiary of NewHoldings). 2.) Merge NewSub into PPV in reverse triangular merger such that all current PPV shareholders thereafter hold exactly the same interest in NewHoldings as they did in PPV and NewHoldings holds 100% of the stock of PPV. 3.) All contracts would remain in PPV, except to the extent that contracts need to be assigned to NewHoldings for it to carry out its administrative and other responsibilities, and except for contracts related to equity or debt or similar instruments which would be assumed by NewHoldings (e.g., shareholders agreements; SVB arrangements). 4.) The stock in PPV's current in-country subsidiaries would be distributed to NewHoldings and thereafter such subsidiaries would be operated as NewHoldings subsidiaries. 5.) NewHoldings may be requested to guarantee certain contracts or that such contracts be assigned from PPV to NewHoldings, particularly those involving payment obligations. 6.) All stock plans, options, and warrants would be assumed by NewHoldings. Stock plans would be available to employees of all NewHoldings subsidiaries. Approval - -------- 1.) Only board approval is required to establish the holding company structure and to distribute shares of existing PPV subsidiaries to NewHoldings. 2.) No dissenters' rights are triggered by the merger. 3.) No federal or state securities law registration should be required. Effect on Financing - ------------------- 1.) NY Life understands that the debt financing will be made to the NewHoldings, New structure should not affect the ability of NY Life to be secured since collateral is stock of all subsidiaries. NY Life will take shares of PPV as collateral in addition to the shares of other subsidiaries. 2.) NewHoldings will allocate cash to PPV and other subsidiaries as needed to operate each company Reorganization - -------------- 1.) PPV would continue to hold all existing license rights including the OCV license. PPV would contract with other subsidiaries of NewHoldings (e.g., country operating subsidiaries) for services or technology connected with the sale and installation of OCV systems. 2.) Employees would be reallocated as appropriate to their function. Administration would be in the parent along with possibly marketing and/or sales. Current country operating subsidiaries would not change, except the equity in such subsidiaries would be held by the parent holding company and not PPV. Tax and Accounting - ------------------ 1.) The establishment of the holding company through the reverse triangular merger will be tax free to each shareholder and each shareholder will carry over the tax basis in his PPV shares to his NewHoldings shares. 2.) The distribution of the stock of the PPV subsidiaries to NewHoldings will not result in recognition of gain or loss on a consolidated basis. 3.) Because there is no change in the equity interests of any security holder in the overall organization, neither the establishment of the holding company nor the distribution of the stock of the PPV subsidiaries to NewHoldings should preclude a later pooling of interests acquisition. 4.) Tax counsel and the Company's accountants will provide written opinions to verify the above conclusions before proceeding with the reorganization. Contracts - --------- 1.) Because the reorganization is structured as a reverse triangular merger and because there is no change of control of the overall entity, contracts with PPV should be unaffected by the reorganization. To the extent it is desirable to move a contract to NewHoldings such contract will need to either permit such assignment to a commonly controlled (i.e., affiliate) corporation or a consent to such transfer will need to be obtained. 2.) Section 10.3 of the Shareholders Agreement entered into as part of the September 1994 financing provides that the shares of NewHoldings issued in the reorganization will be automatically subject to the terms of that agreement. Timetable - --------- 1.) Assuming June 15 board approval of the reorganization, the merger would occur during the week of June 19, after tax, accounting, and contract issues are finalized. 2.) The intent is to complete the reorganization prior to any funding from NY life. Schedule 4.1 SUBSIDIARIES ------------
Name of Subsidiary Jurisdiction of Percent of Voting Shares or Joint Venture Incorporation Owned by the Company Pay Per View Japan, Inc. Japan 90 Pacific PayVideo (HK) Limited Hong Kong 100 PPV Singapore Pte Ltd Singapore 100 Pacific Pay Video (Thailand) Co., Thailand Limited + 49 Pacific Pay Video (Taiwan) Inc.t Taiwan 55 Pacific Pay Video Pty, Limited Australia 100 Pacific Pay Video New Zealand New Zealand Limited 100 Pacific Pay Video (Korea) Ltd. Korea 85 Pacific Pay Video International, United States Inc. (California) 100 Pacific Pay Video Limited United States (California) 100
+ Subsidiaries of Pacific Pay Video Limited Schedule 4.7 OUTSTANDING DEBT ---------------- Pacific Pay Video limited has indebtedness to Silicon Valley Bank in the amount of six million dollars ($6,000,000), which will be repaid in full at closing. Pay Per View Japan, Inc. has indebtedness to Jafta Japan Co. in the amount of approximately three hundred thousand dollars ($300,000) pursuant to the Amended and Restated Joint Venture Agreement by and between Pacific Pay Video Limited, Jafta Japan Co. and Izumi Kikaku Co. Ltd., dated November 11, 1993. Schedule 4.9 RELATED INTERESTS IN INTELLECTUAL PROPERTY ------------------------------------------ None. Schedule 4.12 RESTRICTIVE COVENANTS --------------------- That certain Loan and Security Agreement by and between the Company and Silicon Valley Bank contains restrictions regarding the incurrence of debt. However, the Loan and Security Agreement will be terminated upon the closing. Schedule 4.15 ERISA ----- None. Schedule 4.16 Post-Closing Governmental Consents Or Filings A. Korean. ------ 1. Approval, notification or confirmation for the change of the foreign investment or remittance of foreign currency out of Korea as required by the Foreign Exchange Management Law of Korea and the regulations thereunder and the Foreign Capital inducement Law of Korea, B. Japan. ----- 1. Approval of the Fair Trade Commission under the Japanese Anti-monopoly Law if any of the assignees is engaged in a "financial business" as defined in the Japanese Antimonopoly Law, and such Assignee becomes the owner of more than five percent (ten percent in the case of such assignee being an insurance company) of the total outstanding shares of stock of the Japanese subsidiary via enforcement of the Security interest, and such assignee holds such shares beyond one year. C. Singapore: --------- 1. Stamping of the instruments of transfer for the Pledged Securities in PPV-Singapore and the Pledge Agreement. 2. Evidence of the holding by either PPV-Singapore or each of The Marina Mandarin Hotel, The Orchard Hotel Singapore, the Shangri-La Hotel (Singapore) and the Hotel Inter-Continental Singapore of the requisite license under the Singapore Broadcasting Authority Act in connection with PPV-Singapore's business of in-room shopping and guest services to such hotels. 3. Approval of the Board of Film Censors Singapore to a change in share ownership for licenses in connection with the Pledge Agreement. D. New Zealand: ----------- None E. Australia: --------- 1. Stamping of share transfer forms and Pledge Agreement relating to the pledging of the PPV-Australia Pledged Securities, enforcement of the Pledge Agreement, or sale to a third party upon enforcement. 2. Stamping of any pledge agreement or the Pledge Agreement, and the filing of an Australian Securities Commission filing if MagiNet Corporation is at the relevant time registered as a foreign corporation in Australia, it Additional Securities are acquired and pledged to the Agent. F. Hong Kong: --------- 1. Stamping of the share transfer forms relating to (a) the transfer from PPVL to MagiNet Corporation, (b) the pledge of the PPV-Hong Kong Pledged Securities, or (c) the transfer of the shares upon enforcement of the Pledge Agreement. G. Other: ----- 1. Filing of Form D pursuant to Regulation D promulgated under the Securities Act of 1933, as amended, with Federal and any appropriate state authorities. Schedule 8.1 LIENS ----- To secure its obligations to Comsat Video Enterprises, Inc. under the Programming Services Agreement the Company granted to Comsat Video Enterprises, Inc. a security interest in the Company's territorial rights to the continent of africa under the Technology license Agreement. The Programming Services Agreement has been terminated by the Company; the only remaining obligation is an obligation to pay approximately $700,000 or programing services previously rendered. This amount will be paid immediately after closing. Silicon Valley Bank has a security interest in substantially all of the assets of the Company (other than the capital stock of the subsidiaries of the Company). This security interest will be released substantially contemporaneously with the closing. EXHIBIT A-1 ----------- [FORM OF SERIES A NOTE] MAGINET CORPORATION SENIOR SERIES A SECURED NOTE DUE AUGUST 15, 2000 (IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS NOTE, OR ANY INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES.) No. R-__ __________ __, 19__ $________ New York, New York PPN 55917@ AA2 FOR VALUE RECEIVED, the undersigned, MAGINET CORPORATION (herein called the "Company"), a corporation organized under the laws of the State of California, hereby promises to pay to _______________________________, or registered assigns, the principal sum of ____________, _________________________ DOLLARS on August 15, 2000, with interest (computed on the basis of a 360-day year of twelve 30-day months) (i) on the unpaid balance thereof at the rate of 10.5% per annum from the date hereof, payable semiannually on the 15th day of August and February in each year, commencing with the February 15th next succeeding the date hereof, until the principal hereof shall have become due and payable, and (ii) on any overdue payment (including any overdue prepayment) of principal, any overdue payment of interest and any overdue payment of any premium payable on demand at a rate per annum from time to time equal to the greater of (A) 2% plus the interest rate applicable to this Note on the date such payment became due and (B) 2.0% over the rate of interest publicly announced by Morgan Guaranty Trust Company of New York from time to time in New York City as its Prime Rate. In accordance with the terms of Section 8.6 of the Agreement referred to below, if at the time of any determination Historical EBITDA is less than 80% of Projected EBITDA, then until Historical EBITDA is determined to be equal to or greater than 80% of Projected EBITDA, the interest rate on this Note shall increase to 11.5%. In accordance with the terms of Section 8.9 of the Agreement, if at the time of any determination Cumulative Installed Rooms is less than 80% of Projected Cumulative Installed Rooms, then until Cumulative Installed Rooms is determined to be equal to or greater than 80% of Cumulative Installed Rooms, the interest rate on this Note shall increase to 11.5%. (All capitalized terms in the preceding sentence have the meaning given to them in the Agreement referred to below.) Payments of principal of, interest on and premium, if any, payable with respect to this Note are to be made at the main office of Morgan Guaranty Trust Company of New York in The City of New York or at such other place as the holder hereof shall designate to the Company in writing, in lawful money of the United States of America. This Note is one of the Senior Series A Secured Notes due 2000 (herein called the "Notes") issued pursuant to a Note Agreement, dated August 15, 1995 (herein called the "Agreement"), among the Company and the original purchasers of the Notes named in the Purchaser Schedule attached thereto and is entitled to the benefits thereof. This Note is a registered Note and, as provided in the Agreement, upon surrender of this Note for registration of transfer, duly endorsed, or accompanied by a written instrument of transfer duly executed, by the registered holder hereof or such holder's attorney duly authorized in writing, a new Note for a like principal amount will be issued to, and registered in the name of, the transferee. Prior to due presentment for registration of transfer, the Company may treat the person in whose name this Note is registered as the owner hereof for the purpose of receiving payment and for all other purposes, and the Company shall not be affected by any notice to the contrary. This Note is subject to optional prepayment, in whole or from time to time in part, on the terms specified in the Agreement. This Note is secured by the pledge and assignment of certain Collateral (as defined in the Agreement). In case an Event of Default, as defined in the Agreement, shall occur and be continuing, the principal of this Note may be declared or otherwise become due and payable in the manner and with the effect provided in the Agreement. This Note is intended to be performed in the State of New York and shall be construed and enforced in accordance with the internal law of such State. MAGINET CORPORATION By: ------------------------- Name: Title: EXHIBIT A-2 ----------- [FORM OF SERIES B NOTE] MAGINET CORPORATION SENIOR SERIES B SECURED NOTE DUE AUGUST 15, 2000 (IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS NOTE, OR ANY INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES.) No. R-__ __________ __, 19__ $________ New York, New York PPN ________ FOR VALUE RECEIVED, the undersigned, MAGINET CORPORATION (herein called the "Company"), a corporation organized under the laws of the State of California, hereby promises to pay to _______________________________, or registered assigns, the principal sum of ____________, _________________________ DOLLARS on August 15, 2000 with interest (computed on the basis of a 360-day year of twelve 30-day months) (i) on the unpaid balance thereof at the rate of 10.5% per annum from the date hereof, payable semiannually on the 15th day of August and February in each year, commencing with the ________ __ next succeeding the date hereof, until the principal hereof shall have become due and payable, and (ii) on any overdue payment (including any overdue prepayment) of principal, any overdue payment of interest and any overdue payment of any premium payable on demand at a rate per annum from time to time equal to the greater of (A) 2% plus the interest rate applicable to this Note on the date such payment became due and (B) 2.0% over the rate of interest publicly announced by Morgan Guaranty Trust Company of New York from time to time in New York City as its Prime Rate. In accordance with the terms of Section 8.6 of the Agreement referred to below, if at the time of any determination Historical EBITDA is less than 80% of Projected EBITDA, then until Historical EBITDA is determined to be equal to or greater than 80% of Projected EBITDA, the interest rate on this Note shall increase to 11.5%. In accordance with the terms of Section 8.9 of the Agreement, if at the time of any determination Cumulative Installed Rooms is less than 80% of Projected Cumulative Installed Rooms, then until Cumulative Installed Rooms is determined to be equal to or greater than 80% of Cumulative Installed Rooms, the interest rate on this Note shall increase to 11.5%. (All capitalized terms in the preceding sentence have the meaning given to them in the Agreement referred to below.) Payments of principal of, interest on and premium, if any, payable with respect to this Note are to be made at the main office of Morgan Guaranty Trust Company of New York in The City of New York or at such other place as the holder hereof shall designate to the Company in writing, in lawful money of the United States of America. This Note is one of the Senior Series B Secured Notes due 2000 (herein called the "Notes") issued pursuant to a Note Agreement, dated August 15, 1995 (herein called the "Agreement"), among the Company and the original purchasers of the Notes named in the Purchaser Schedule attached thereto and is entitled to the benefits thereof. This Note is a registered Note and, as provided in the Agreement, upon surrender of this Note for registration of transfer, duly endorsed, or accompanied by a written instrument of transfer duly executed, by the registered holder hereof or such holder's attorney duly authorized in writing, a new Note for a like principal amount will be issued to, and registered in the name of, the transferee. Prior to due presentment for registration of transfer, the Company may treat the person in whose name this Note is registered as the owner hereof for the purpose of receiving payment and for all other purposes, and the Company shall not be affected by any notice to the contrary. This Note is subject to optional prepayment, in whole or from time to time in part, on the terms specified in the Agreement. This Note is secured by the pledge and assignment of certain Collateral (as defined in the Agreement). In case an Event of Default, as defined in the Agreement, shall occur and be continuing, the principal of this Note may be declared or otherwise become due and payable in the manner and with the effect provided in the Agreement. This Note is intended to be performed in the State of New York and shall be construed and enforced in accordance with the internal law of such State. MAGINET CORPORATION By: ------------------------- Name: Title: The Pledge Agreement also appears as Exhibit 10.16 to this Registration Statement. EXHIBIT B-1 PLEDGE AGREEMENT between MAGINET CORPORATION, as Pledgor and THE CHASE MANHATTAN BANK, N.A., as Pledgee Dated as of August 15, 1995 TABLE OF CONTENTS -----------------
Section Page - ------- ----- SECTION 2. DEFINITIONS AND PRINCIPLES OF CONSTRUCTION..................2 SECTION 3. PLEDGE OF SECURITIES........................................3 SECTION 4. APPOINTMENT OF AGENTS; ENDORSEMENTS.........................6 SECTION 5. VOTING AND OTHER RIGHTS WHILE NO EVENT OF DEFAULT...........6 SECTION 6. DIVIDENDS AND OTHER DISTRIBUTIONS ..........................7 SECTION 7. REMEDIES IN CASE OF EVENT OF DEFAULT........................7 SECTION 8. APPLICATION OF PROCEEDS....................................10 SECTION 9. PURCHASERS OF PLEDGE COLLATERAL............................11 SECTION 10. FURTHER ASSURANCES.........................................11 SECTION 12. TRANSFER BY THE PLEDGOR....................................12 SECTION 13. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE PLEDGOR...................................13 SECTION 14. PLEDGOR'S OBLIGATIONS ABSOLUTE.............................13 SECTION 15. REGISTRATION...............................................13 SECTION 16. INDEMNITY..................................................14 SECTION 17. TERMINATION; RELEASE.......................................15 SECTION 18. NOTICES....................................................15 SECTION 19. MISCELLANEOUS..............................................16
*This Table of Contents is provided for convenience only and is not a part of the attached Pledge Agreement. EXECUTION COPY PLEDGE AGREEMENT ---------------- PLEDGE AGREEMENT, dated as of August 15, 1995, between MAGINET CORPORATION, a corporation organized under the laws of the State of California, as pledgor (the "Pledgor"), and The Chase Manhattan Bank, N.A., a national banking -------- association, as collateral agent ("the Pledgee")for the benefit of the ------- Noteholders pursuant to the Appointment Agreement. Capitalized terms used herein shall have the meanings provided in Section 2. W I T N E S S E T H: - - - - - - - - - - WHEREAS, the Pledgor and the Purchasers have entered into the Note Agreement providing for the issuance and sale of the Notes and the issuance of the Warrants as contemplated therein; WHEREAS, The Chase Manhattan Bank, N.A., the Pledgor and the Purchasers have entered into the Appointment Agreement providing for the appointment of The Chase Manhattan Bank, N.A. to act as collateral agent for the benefit of the Noteholders under the Security Documents (including this Agreement); WHEREAS, it is a condition precedent under the Note Agreement to each Purchaser's obligation, to purchase and pay for the Notes and to accept the Warrants to be issued under the Note Agreement that the Pledgor shall have executed and delivered to the Pledgee this Agreement; WHEREAS, the Pledgor desires to execute this Agreement to satisfy the conditions described in the preceding paragraphs and to induce the Purchasers to enter into the Note Agreement and to purchase and pay for the Notes and to accept the Warrants (and to induce any future Noteholders so to do); NOW, THEREFORE, in consideration of the benefits accruing to the Pledgor, the receipt and sufficiency of which are hereby acknowledged, the Pledgor hereby makes the following representations and warranties to the Pledgee and hereby covenants and agrees with the Pledgee as follows: SECTION 1. SECURITY. (a) This Agreement is for the benefit of the -------- Pledgee as collateral agent for he Noteholders pursuant to the Appointment Agreement (and, 1 to the extent provided in Section 16 of this Agreement, for the benefit of the Pledgee in its individual capacity) to secure: (i) the payment due of the principal of and interest in respect of the Notes and payment of all other obligations and liabilities (including without limitation indemnities, premium, if any, fees and interest thereon) of the Pledgor, now existing or hereafter incurred under, arising out of or in connection with the Note Agreement, each Note or any other Note Document (other than the Warrants); and (ii) the due performance and compliance with the terms of the Note Documents by the Pledgor (all such principal, interest, obligations and liabilities, collectively, the "Secured Obligations"). - --------------------- SECTION 2. DEFINITIONS AND PRINCIPLES OF CONSTRUCTION. For all ------------------------------------------ purposes of this Agreement: (i) capitalized terms not otherwise defined herein shall have the meanings set forth in the Note Agreement; (ii) the principles of construction set forth in the Note Agreement shall apply; and (iii) as used herein, references to "this Agreement", "hereunder" and words of like meaning shall refer to this pledge agreement. As used in this Agreement: "Agreement" and "this Agreement" shall mean this pledge agreement, --------- -------------- dated as of August 15, 1995, as the same may be modified, amended or supplemented from time to time. "Foreign Joint Venture Vehicle" shall mean a Joint Venture Vehicle ----------------------------- that is incorporated or organized outside of the United States or any State or territory thereof. "Legal Mortgage Subsidiaries" shall mean each of Pacific Pay Video --------------------------- (HK) Limited, PPV Singapore Pte Ltd, Pacific Pay Video Pty. Limited, Pacific Pay Video New Zealand Limited and any other Subsidiary or Joint Venture Vehicle incorporated or established under the laws of a jurisdiction which utilizes the common law concepts of legal and equitable mortgages over shares of capital stock or similar equity interests. "Liquidating Dividend" shall have the meaning set forth in Section 6. -------------------- "Maximum Foreign Pledge" shall mean, in respect of any Foreign ---------------------- Subsidiary or Foreign Joint Venture Vehicle: (i) prior to the occurrence of a Change in Tax Law Event, the number of Securities representing 66% (or such other threshold amount as may become relevant after the date hereof in determining whether a pledge under a pledge agreement would result in the undistributed earnings of such Foreign Subsidiary or Foreign Joint Venture Vehicle, as relevant, as determined for Federal income tax purposes being treated as a deemed dividend to the Pledgor) of the total combined voting power of all classes of Securities of such Foreign Subsidiary or Foreign Joint Venture Vehicle entitled to vote; and (ii) on and following the occurrence of a Change in Tax Law Event, the number of Securities representing the maximum total combined voting power of all classes of Securities of such Foreign Subsidiary or Foreign Joint Venture Vehicle entitled to vote that may be pledged without creating a deemed dividend to the Pledgor. 2 "Pledge Documents" shall mean: (i) this Agreement (and any other ---------------- pledge agreement in form and substance satisfactory to the Pledgee entered into as contemplated by this Agreement); (ii) the Note Agreement; and (iii) any other Note Document to which the Pledgee is or will be a party. "Secured Obligations" shall have the meaning set forth in Section 1. ------------------- "Securities" shall mean, with respect to each Subsidiary or Joint ---------- Venture Vehicle, as relevant, all the issued and outstanding shares of capital stock or similar equity interests of such Subsidiary or Joint Venture Vehicle (and any options, warrants or other rights to purchase such capital stock or similar equity interests at any time prior to the date on which the Secured Obligations are discharged in full) owned by the Pledgor, including without limitation all such shares of capital stock, similar equity interests, options, warrants or other rights owned by the Pledgor on the date hereof and all such capital stock, options, warrants or other rights acquired by the Pledgor in the future. The Pledgor hereby represents and warrants that on the date hereof (i) the information set forth in Annex A concerning the Securities and Pledged Securities of each of its Subsidiaries and Joint Venture Vehicles set forth in Annex A is true and correct and (ii) there are no options, warrants, or other rights to purchase any such Securities outstanding. All Securities described as "Pledged Securities" in Annex A and all other Securities from time to time pledged, mortgaged or charged hereunder or under another Pledge Document are hereinafter referred to as the "Pledged ------- Securities," and the Pledged Securities, together the time held by the Pledgee - ---------- hereunder, is hereinafter referred to as the "Pledge Collateral". ----------------- SECTION 3. PLEDGE OF SECURITIES --------------------- 3.1 Pledge. To secure the Secured Obligations and for the ------ purposes set forth in Section 1, the Pledgor: (i) hereby grants to the Pledgee a continuing security interest of first priority in all of the Pledge Collateral; (ii) hereby pledges and deposits as security with the Pledgee (except as otherwise permitted in this Section 3) the Pledged Securities owned by the Pledgor on the date hereof and delivers to the Pledgee certificates therefor (to the extent such Pledged Securities are certificated) accompanied by stock powers for all such Pledged Securities duly executed in blank by the Pledgor (or such other instruments of transfer as are acceptable to the Pledgee); and (iii) hereby assigns, transfers, hypothecates, mortgages, charges and sets over to the Pledgee (including by way of legal mortgage to the extent such Pledged Securities are issued by a Legal Mortgage Subsidiary) all of the Pledgor's right, title and interest in and to such Pledged Securities (and in and to the certificates or instruments (if any) evidencing such Pledged Securities), to be held by the Pledgee upon the terms and conditions set forth in this Agreement and the other Pledge Documents. 3.2 Subsequently Acquired Securities. If the Pledgor shall acquire -------------------------------- (by purchase, stock dividend or otherwise), at any time or from time to time after the date hereof, any additional Securities: 3 (i) issued by a Subsidiary or Joint Venture Vehicle, as relevant, other than a Foreign Subsidiary or Foreign Joint Venture Vehicle, then the Pledgor will forthwith pledge and deposit such Securities as security with the Pledgee; or (ii) issued by a Foreign Subsidiary or Foreign Joint Venture Vehicle, as relevant, and, as a result of such acquisition, the Pledged Securities in respect of such Foreign Subsidiary or Foreign Joint Venture Vehicle are less than such Foreign Subsidiary's or Foreign Joint Venture Vehicle's then existing Maximum Foreign Pledge, then the Pledgor will forthwith pledge, mortgage or charge hereunder (or under another pledge agreement in form and substance satisfactory to the Pledgee, if necessary under any applicable law or if otherwise desirable to carry into effect the purposes of this Agreement) and deposit (subject to the proviso below) as security with the Pledgee such additional Securities as are necessary so that the Pledged Securities in respect of such Foreign Subsidiary or Foreign Joint Venture Vehicle, as relevant, are equal to such Foreign Subsidiary's or Foreign Joint Venture Vehicle's then existing Maximum Foreign Pledge; provided, however, that the Pledgor shall not ----------------- be required pursuant to this Section 3.2(ii) to deposit as security with the Pledgee Securities issued by a Foreign Subsidiary or Foreign Joint Venture Vehicle, as relevant, organized and established after the date hereof (other than a Subsidiary or Joint Venture Vehicle organized under the laws of South Africa, the Securities of which shall be pledged to and deposited with the Pledgee under this Agreement (or under another pledge agreement in form and substance satisfactory to the Pledgee if necessary or otherwise desirable to carry into effect the purposes of this Agreement) so as to create a first priority Lien in favor of the Pledgee on such Securities) so long as such Securities are subject to Liens permitted under Section 8.1(e) of the Note Agreement and the Lien created by this Agreement (or any other pledge agreement entered into as contemplated by this Agreement), which Lien under this Agreement may be junior to the Lien permitted by Section 8.1(e) of the Note Agreement,, and such Securities when pledged, mortgaged or charged hereunder shall thereafter constitute Pledged Securities, and the Pledgor will promptly deliver to the Pledgee a certificate executed by a Responsible Officer describing such Pledged Securities and certifying that the same have been duly pledged, mortgaged or charged with the Pledgee hereunder- (or under such other pledge agreement, as the case may be); provided, further, ----------------- that the Pledgor will deposit such Securities with the Pledgee free and clear of any Lien other than the Lien created by this Agreement (or any other pledge agreement entered into as contemplated by this Agreement), which Lien shall then be a first priority Lien, promptly upon such Securities' no longer being subject to Liens permitted under Section 8.1(e) of the Note Agreement (whether because of release or otherwise); and in each case (except as provided in the first proviso to Section 3.2(ii) and as provided in Section 3.5) deliver to the Pledgee certificates therefor accompanied by stock powers duly executed in blank by the Pledgor (or such other instruments of transfer as are acceptable to the Pledgee), Thereafter such Securities will constitute Pledged Securities, and the Pledgor will promptly deliver to the Pledgee a certificate executed by a Responsible Officer describing such Pledged Securities and certifying that the same have been duly pledged, mortgaged or charged with the Pledgee hereunder (or under such other pledge agreement, as the case may be). 3.3 Uncertificated Securities. Notwithstanding anything to the contrary contained in Sections 3.1 and 3.2, if any Pledged Securities (whether now owned or hereafter 4 acquired) are evidenced by an uncertificated security, the Pledgor shall promptly: (i) notify the Pledgee of such uncertificated security; (ii) take all actions required to perfect the security interest of the Pledgee therein under applicable law; and (iii) notify the Pledgee of such actions taken. The Pledgor further agrees: (i) to take such actions as the Pledgee deems necessary or reasonably desirable to effect the foregoing and to permit the Pledgee to exercise any of its rights and remedies hereunder; and (ii) to provide an opinion of counsel satisfactory to the Pledgee with respect to any such pledge of uncertificated Pledged Securities upon the pledge thereof and at any other time promptly upon request of the Pledgee, 3.4 Change in Tax Law Event. If a Change in Tax Law Event occurs, ----------------------- then the Pledgor shall forthwith pledge, mortgage or charge hereunder (or under another pledge agreement in form and substance satisfactory to the Pledgee, if required by applicable law or if otherwise desirable to carry into effect the purposes of this Agreement), that portion of the Securities of each Foreign Subsidiary or Foreign Joint Venture Vehicle, as relevant, held by the Pledgor and not heretofore pledged, mortgaged or charged pursuant to this Agreement (or another pledge agreement). Thereafter such Securities will constitute Pledged Securities, and the Pledgor will promptly deliver to the Pledgee a certificate executed by a Responsible Officer describing such Pledged Securities and certifying that the same have been duly pledged, mortgaged or charged with the Pledgee hereunder (or under such other pledge agreement, as the case may be). 3.5 Certain Pledged Securities.Notwithstanding anything to the --------------------------- contrary contained in this Section 3, for the purpose of enabling the Pledgee to exercise its rights under this Agreement, the Pledgor undertakes forthwith upon the execution of this Agreement, if it has not already done so, at the cost of the Pledgor, to procure the registration of the Pledged Securities issued by any Legal Mortgage Subsidiary in the name of the Pledgee or its nominee and to deposit or procure to be deposited with the Pledgee the certificates in respect of such Pledged Securities together with signed and undated letters of resignation in the form of Annex C from each director of each Legal Mortgage Subsidiary appointed by the Pledgor. If the Pledgor shall acquire any additional Securities issued by any Legal Mortgage Subsidiary, which Securities are required to be pledged, mortgaged or charged hereunder pursuant to Sections 3.2 (ii) or 3.4, the Pledgor shall promptly upon receipt of such Securities (and at its own expense) pledge, mortgage or charge such Securities hereunder (or under another pledge agreement in form and substance satisfactory to the Pledgee, if necessary under any applicable law or if otherwise desirable to carry into effect the purposes of this Agreement) and register such Securities in the name of the Pledgee or its nominee and deposit the certificates in respect of such Securities with the Pledgee; provided, however, that so long as such ----------------- Securities are not required to be deposited with the Pledgee pursuant to the provisos to Section 3.2(ii), the Pledgor shall not be required to either register such Securities in be name of the Pledgee or in nominee nor deposit such Securities with the Pledgee. Thereafter such Securities will constitute Pledged Securities, and the Pledgor will promptly deliver to the Pledgee a certificate executed by a Responsible Officer describing such Pledged Securities and certifying that the same have been duly pledged, mortgaged or charged with the Pledgee hereunder (or under such other pledge agreement, as the case may be). 5 SECTION 4. APPOINTMENT OF AGENTS; ENDORSEMENTS. The Pledgee shall ----------------------------------- have the right to appoint one or More agents for the purpose of retaining physical possession of the Pledged Securities and other Pledge Collateral, which may be held (in the discretion of the Pledgee) in the name of the Pledgor, endorsed or assigned in blankor in favor of the Pledgee or any nominee or nominees of the Pledgee or an agent appointed by the Pledgee. SECTION 5. VOTING AND OTHER RIGHTS WHILE NO EVENT OF DEFAULT. ------------------------------------------------- Unless and until an Event of Default shall have occurred and be continuing: (a) the Pledgor shall be entitled to vote any and all Pledged Securities other than those issued by Legal Mortgage Subsidiaries and to give consents, waivers or ratifications in respect thereof; (b) the Pledgee shall be entitled to vote any and all Pledged Securities issued by Legal Mortgage Subsidiaries and to give consents, waivers or ratifications in respect thereof and to otherwise exercise any and all rights and powers attaching to such Pledged Securities, in each case as the Pledgor may direct from time to time by notice in writing to the Pledgee; provided, however, ----------------- that the Pledgee shall be under no obligation to so vote or give such consents, waivers or modifications or otherwise act unless it shall have first received from the Pledgor the amount of any payments required to be made in order for such rights or powers to be validly exercised; and provided, further, that in ------------------ the absence of any such direction or receipt of such amounts from the Pledgor the Pledgee shall abstain from exercising such voting or other rights or powers; and (c) The Pledgee shall not utilize any director's resignation letter delivered in connection with Section 3.5 of this Agreement; provided, that in no event shall the Pledgor cast any vote, or give any consent, - -------- waiver or ratification or take any action or direct the Pledgee pursuant to clause (b) above to take any such action which would violate or be inconsistent with any of the terms of this Agreement, any other Note Document or any other instrument or agreement referred to herein or therein or which would have the effect of impairing the position or interests of the Pledgee or any Noteholder, All such rights of the Pledgor to vote and to give consents, waivers and ratifications or to direct the Pledgee pursuant to clause (b) above shall cease upon the earlier to occur of: (i) delivery to the Pledgor of written notice from any Noteholder pursuant to Section 9.1 of the Note Agreement or the Pledgee stating that an Event of Default has occurred and is continuing; or (ii) a Responsible Officer obtaining knowledge of any condition or event which constitutes an Event of Default, when Section 7 shall become applicable; provided, that the Pledgee shall be under no duty to deliver the written notice - --------- described in clause (i) of the foregoing unless and until it has received a notice from any Noteholder stating that an Event of Default has occurred and is continuing. SECTION 6. DIVIDENDS AND OTHER DISTRIBUTIONS. Unless and until an --------------------------------- Event of Default shall have occurred and be continuing: 6 (a) all cash dividends payable in respect of the Pledged Securities other than Pledged Securities issued by Legal Mortgage Subsidiaries shall be paid directly to the Pledgor; and (b) all cash dividends payable in respect of Pledged Securities issued by Legal Mortgage Subsidiaries shall be paid directly to the Pledgee, which will pay the amount of such dividends received by it (after taking into account deductions for withholding or any similar tax) to the Pledgor as soon as practicable after receipt; provided, that, notwithstanding any of the foregoing, all cash dividends payable - -------- in respect of the Pledged Securities which are determined by the Pledgee to represent in whole or in part an extraordinary, liquidating or other distribution in return of capital (each, a "Liquidating Dividend") shall be paid directly to the Pledgee and retained by it as part of the Pledge Collateral unless the event creating such Liquidating Dividend was permitted by, and did not otherwise result in an Event of Default occurring under, the Note Agreement. The Pledgee shall aho be entitled to receive directly, and to retain as part of the Pledge Collateral: (i) all other or additional stock or securities of a Subsidiary or Joint Venture Vehicle, as relevant, paid or distributed by way of dividend in respect of the Pledged Securities; (ii) all other or additional stock or other securities or property (including cash) paid or distributed in respect of the Pledged Securities by way of stock-split, spin-off, split-up, reclassification, combination of shares or similar rearrangement; and (iii) all her or additional stock or other securities or property which may be paid in respect of the Pledge Collateral by reason of any consolidation, merger, exchange of stock, conveyance of assets, liquidation or similar corporate reorganization or otherwise; except, in each case, prior to the occurrence and continuance of an Event of - ------ Default, to the extent the receipt of such stock dividends and other securities distributions would cause the Pledged Securities in respect of any Foreign Subsidiary or Foreign Joint Venture Vehicle, as relevant, to exceed such Foreign Subsidiary's or Foreign Joint Venture Vehicle's Maximum Foreign Pledge, in which case the Pledgee shall be entitled to receive directly and retain as part of the Pledge Collateral such amount of stock dividends and securities distributions as is equal, together with the Pledged Securities previously pledged, to such Foreign Subsidiary's or Foreign Joint Venture Vehicle's then existing Maximum Foreign Pledge. SECTION 7. REMEDIES IN CASE OF EVENT Of DEFAULT. In case an Event of ------------------------------------ Default shall have occurred and be continuing, the Pledgee shall be entitled to exercise all the rights, powers and remedies vested in it (whether vested in it by this Agreement, by any other Note Document or by law) for the protection and enforcement of its rights in respect of the Pledge Collateral, and the Pledgee shall be entitled without limi- 7 tation to exercise the following rights, which the Pledgor hereby agrees to be commercially reasonable: (a) to receive all amounts payable in respect of the Pledge Collateral otherwise payable under Section 6 to the Pledgor; (b) to the extent permitted by law and to the extent not previously transferred, to transfer all or any part of the Pledged Securities into the Pledgee's name or the name of its nominee or nominees; (c) to vote all or any part of the Pledged Securities (whether or not transferred into the name of the Pledgee) and give all consents, waivers and ratifications in respect of the Pledge Collateral and otherwise act with respect thereto as though it were the outright owner thereof (the Pledgor hereby irrevocably constituting and appointing the Pledgee the proxy and attorney-in- fact of the Pledgor, with full power of substitution to do so, as further provided in paragraph (e) below); (d) at any time or from time to time to sell, assign and deliver, or grant options to purchase, all or any part of the Pledge Collateral, or any interest therein, at any public or private sale, without demand of performance, advertisement or notice of intention to sell or of the time or place of sale or adjournment thereof or to redeem or otherwise (all of which are hereby waived by the Pledgor), for cash, on credit or for other property, for immediate or future delivery without any assumption of credit risk, and for such price or prices and on such terms as the Pledgee may determine, provided that at least 10 days' notice of the time and place of any such sale shall be given to the Pledgor. The Pledgor hereby waives and releases to the fullest extent permitted by law any right or equity of redemption with respect to the Pledge Collateral, whether before or after sale hereunder, and all rights, if any, of marshalling the Pledge Collateral and any other security for the Secured Obligations or otherwise. At any such sale, unless prohibited by applicable law, the Pledgee on behalf of the Noteholders may bid for and purchase all or any part of the Pledge Collateral so sold free from any such right or equity of redemption. None of the Pledgee or the Noteholders shall be liable for failure to collect or realize upon any or all of the Pledge Collateral or for any delay in so doing nor shall any of them be under any obligation to take any action whatsoever with regard thereto; and (e) (i) The Pledgor hereby irrevocably appoints the Pledgee as its attorney-infact with right of substitution, so that the Pledgee or any other Person empowered by the Pledgee shall be authorized, without need of further authorization from the Pledgor, upon the occurrence and continuance of an Event of Default and in preservation of the rights of the Pledgee and the Noteholders hereunder: (A) to effect the sale of any of the Pledge Collateral in one or more transactions to the extent permitted by law and in such other manner as may be determined by the attorney-in-fact, including the direct sale without public auction of any such Pledge Collateral at such price, and upon such terms as may be determined by such attorney- in-fact; 8 (B) to enter upon any premises where the Pledge Collateral or any part thereof may be located Without the need for a court order or other form of authority otherwise than upon the authority granted herein; (C) to take and retain actual possession and control of any such Pledge Collateral as receivers without bond or otherwise, and transport any such Pledge Collateral to any location as determined by such attorney-in- fact; (D) to administer, manage and use any of the Pledge Collateral; (E) to conclude any agreement and collect any moneys thereunder or otherwise due to the Pledgor in respect of, or generated through the usage of, any of the Pledge Collateral; (F) to exercise any of the rights of the Pledgor arising under or in connection with the Pledge Collateral or to delegate to another Person, in substitution of such attorney-in-fact, the exercise of such rights of the Pledgor, under such terms as such attomey-in-fact shall deem proper or necessary; (G) to collect, claim and receive all moneys and avail itself of all benefits that accrue and that may become due and payable to the Pledgor with respect to the Pledge Collateral and to hold the same as security for the timely payment and discharge by the Pledgor of the Secured Obligations; (H) to send written notice to any Subsidiary or Joint Venture Vehicle of the Pledgor instructing such Subsidiary or Joint Venture Vehicle to pay all moneys due and owing to the Pledgor from time to time (whether payable in U.S. dollars, in another convertible foreign currency or otherwise), with respect to the Pledge Collateral to such bank accounts as shall be designated in the notice; (I) to institute and maintain such suits and proceedings as such attorney-in-fact shall deem expedient to prevent any impairment of the Pledge Collateral or to preserve and protect such attorney-in-fact's interest therein; (J) to execute and deliver such deeds of conveyance or sale as may be necessary or proper for the purpose of conveying full title and ownership, free from any claims and rights of the Pledgor, to any of the Pledge Collateral, after foreclosure thereof; and (K) in general, to sign such agreements and documents and perform such acts and things required, necessary or, in the opinion of such attorney-in-fact, advisable, to fully accomplish the purpose hereof. (ii) This special power of attorney shall be deemed coupled with an interest, and cannot be revoked by the Pledgor until the discharge in full of the Secured Obligations. Upon the earlier to occur of: (A) delivery to the Pledgor of written notice from any Noteholder pursuant to a notice delivered under Section 9.1 of the Note Agreement or 9 the Pledgee stating that an Event of Default has occurred and is continuing; or (B) a Responsible Officer obtaining knowledge of any condition or event which constitutes an Event of Default, the Pledgor shall abstain from exercising any rights with respect to the Pledge Collateral which shall be inconsistent with the exercise of the rights and functions herein granted to the Pledgee as attorney-in-fact, including abstaining from collecting, claiming and receiving any moneys with respect to the Pledge Collateral; provided, that in the Pledgee -------- shall be under no duty to deliver the written notice described in clause (A) of the foregoing unless and until it has received a notice from any Noteholder stating that an Event of Default has occurred and is continuing. To the extent that the Pledgor shall receive any moneys in respect thereof notwithstanding the provisions of this paragraph (ii), it shall be deemed to have received such funds for the account of the Pledgee and shall hold the same in trust and promptly pay the same to the Pledgee or as it may direct from time to time. SECTION 8. APPLICATION OF PROCEEDS. All moneys collected by the ----------------------- Pledgee upon any sale or other disposition of the Pledge Collateral, together with all other moneys received by the Pledgee hereunder, shall be applied in the following order of priority: (a) FIRST, to the payment of such amounts as are due and payable to the Pledgee or any of its agents (or any prior collateral agent) pursuant to this Agreement or the Appointment Agreement, including the payment of all costs and expenses incurred by the Pledgee in connection with such sale, the delivery of the Pledge Collateral or the collection of any such moneys (including, without limitation, attorneys' fees and expenses); (b) SECOND, to the payment of the Secured Obligations in the following order of priority to the extent such amounts are not sufficient to repay the Secured Obligations in full and within each category on a pro rata basis among the Noteholders: (i) to the payment of charges, fees, indemnity obligations, costs and expenses due under the Note Agreement or the other Note Documents to the Noteholders; (ii) to the payment of interest on interest which became overdue, if any, with respect to the Notes; (iii) to the payment of interest on principal with respect to the Notes which became overdue; (iv) to the payment of interest accrued with respect to the Notes; (v) to the payment of principal with respect to the Notes; and (vi) to the payment of premium, if any, with respect to the Notes. (c) THIRD, any balance of such money as directed in writing by the Pledgor. 10 SECTION 9. PURCHASERS OF PLEDGE COLLATERAL. Upon any sale of the ------------------------------- Pledge Collateral by the Pledgee hereunder (whether by virtue of the power of sale herein granted, pursuant to judicial process or otherwise), the receipt of the Pledgee or the officer making the sale shall be a sufficient discharge to the purchaser or purchasers of the Pledge Collateral so sold; and such purchaser or purchasers shall not be obligated to see to the application of any part of the purchase money paid over to the Pledgee or such officer or be answerable in any way for the misapplication or nonapplication thereof. SECTION 10. FURTHER ASSURANCES. Without limitation to the provisions ------------------ of Section 7, the Pledgor agrees that it will (in each case at its own expense): (a) prepare, execute, file and refile such financing statements, continuation statements and other documents in such offices as may be necessary or reasonably desirable and wherever required or permitted by law in order to perfect and preserve the Pledgee's security interest in the Pledge Collateral, and the Pledgee agrees to execute such financing statements and other documents prepared by the Pledgor, and the Pledgor hereby irrevocably authorizes the Pledgee following am Event of Default, as its attorney-in-fact, to file or cause to be filed such financing statements and amendments thereto and other documents relative to all or any part of the Pledge Collateral without the signature of the Pledgor where permitted by law; (b) comply with the requirements of Section 7.13 of the Note Agreement (which provision is incorporated in full herein by reference); (c) do such further acts and things (including, without limitation, paying all required documentary and other stamp tax) and execute and deliver to the Pledgee such additional conveyances, assignments, agreements and instruments (including without limitation one or more pledge agreements in form and substance satisfactory to the Pledgee) as may be reasonably required or deemed advisable to carry into effect the purposes of this Agreement or to further assure and confirm unto the Pledgee its rights, powers and remedies hereunder; and (d) cause its Legal Mortgage Subsidiaries and each director thereof appointed at any time by the Pledgor or any Subsidiary of the Pledgor: (i) to register immediately in the register of members or similar document of the Legal Mortgage Subsidiary any transfer of Pledged Securities which the Pledgee may request according to the terms of this Agreement; and (ii) to deliver to the Pledgee a signed and undated letter of resignation from such director, in the form of Annex C. SECTION 11. THE PLEDGEE. (a) The Pledgee will hold in accordance with ------------ the terms and provisions of the Appointment Agreement (which terms and provisions are incorporated in full herein by reference) all Pledge Collateral at any time received by it under this Agreement. It is expressly understood and agreed that the obligations of the Pledgee as holder of the Pledge Collateral and interests therein and with respect to the disposition thereof, and otherwise under this Agreement, are only those expressly set forth 11 in this Agreement and in the Appointment Agreement, and no implied covenants or obligations shall be read into this Agreement against the Pledgee. (b) In case of any litigation under this Agreement, or in case of any enforcement of remedies or exercise of rights upon the occurrence of an Event of Default, or in case the Pledgee deems that, by reason of any present or future law of any jurisdiction, it may not or may not effectively exercise any of the powers, rights or remedies herein granted to it or hold title to the properties, in trust, as herein granted, or take any other action which may be desirable or necessary in connection therewith, the Pledgee shall be entitled to appoint, to the extent consistent with applicable law, one or more separate or additional co-agents. In the event that the Pledgee appoints an individual or institution as a separate or additional co-agent: (i) any appointment of any such co-agent by the Pledgee shall be made only with the prior written consent of the Pledgor and the Required Holder(s) (except that, if the Pledgee shall have received written notice from any Holder of Secured Obligations that a Default or an Event of Default has occurred and is continuing, such consent shall be required only of the Required Holder(s)), which consent shall not be unreasonably withheld or delayed; and (ii) each and every remedy, power, right, title, interest, trust, duty and obligation expressed or intended by this Agreement to be exercised by or vested in, conveyed to or imposed upon, the Pledgee with respect thereto shall be exercisable by and vest in such separate or additional co-agent but only to the extent necessary, appropriate or desirable to enable such separate or additional co-agent to exercise or have vested in it such powers, rights, trusts, titles, interests, duties and obligations and remedies, and every covenant and obligation necessary, appropriate or desirable to the exercise thereof by such separate or additional co-agent shall run to and be enforceable by either or any of them. The Pledgee shall have the right to terminate the appointment of any such co-agent hereunder with the prior written consent of the Pledgor and the Required Holder(s) (except that, if the Pledgee shall have received written notice from any Holder that a Default or an Event of Default has occurred and is continuing, such consent shall be required only of the Required Holder(s)), which consent shall not be unreasonably withheld or delayed. Should any instrument in writing from the Pledgor be required by the separate or additional co-agent so appointed by the Pledgee to more fully and certainly vest in and confirm to it such remedies, rights, powers, titles, interests, trusts, duties and obligations, any and all such instruments in writing shall, on request, be executed, acknowledged and delivered by the Pledgor. In case any separate or additional co-agent, or a successor to either, shall become incapable of acting, resign or be removed, all the remedies, rights, powers, titles, interests, trusts, duties and obligations of such separate or additional co-agent; so far as permitted by law, shall vest in and be exercised by the Pledgee until the appointment of a new agent or successor to such separate or additional co-agent. SECTION 12. TRANSFER BY THE PLEDGOR. The Pledgor will not assign, ------------------------ sell or otherwise dispose of grant any option with respect to, or create, incur, assume or suffer to exist any Lien on any portion of the Pledge Collateral or any other Securities, except: (i) liens in favor of Persons other than the Noteholders permitted under 12 Section 8.1 of the Note Agreement; and (ii) Liens created by this Agreement and by any other Pledge Document. SECTION 13. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE PLEDGOR. --------------------------------------------------------- The Pledgor represents and warrants that: (i) it is the legal, record and beneficial owner of, and has good and marketable title to, the Securities described as owned by it on Annex A hereto in existence on the date hereof, subject to no Lien (except the Lien created by this Agreement); (ii) it has full power, authority and legal right to pledge all such Securities pursuant to this Agreement; (iii) all the shares of such Securities have been duly and validly issued, are fully paid and nonassessable; (iv) this Agreement (and any other pledge agreement entered into as contemplated by this Agreement) creates, as security for the Secured Obligations, a valid and enforceable first priority perfected Lien on all of the Pledge Collateral in existence on the date hereof, in favor of the Pledgee for the benefit of the Noteholders, subject to no Lien in favor of any other Person; (v) other than registrations and filings described on Annex B hereto (all of which have been made prior to the date hereof or will be made within the relevant statutory period) no consent, filing, recording or registration is required to perfect the Lien purported to be created by this Agreement; and (vi) the stock powers are duly executed and delivered and give the Pledgee the rights and authority they purport to give. The Pledgor covenants and agrees that: (i) it will defend the Pledgee's right, tide and lien in and to the Pledge Collateral against the claims and demands of all Persons; and (ii) it will take all actions within its powers to ensure that it will have like title to and right to pledge any other property at any time hereafter pledged to the Pledgee as Pledge Collateral hereunder. SECTION 14. PLEDGOR'S OBLIGATIONS ABSOLUTE. The obligations of the ------------------------------ Pledgor under this Agreement shall be absolute and unconditional and shall remain in full force and effect without regard to, and shall not be released, suspended, discharged, terminated or otherwise affected by, any circumstance or occurrence whatsoever, including, without limitation: (i) any renewal, extension, amendment or modification of, or addition or supplement to or deletion from, the Note Agreement, any Note or any other instrument or agreement referred to therein or any assignment or transfer of any thereof; (ii) any waiver, consent, extension, indulgence or other action or inaction under or in respect of the Note Agreement, any Note or any other such instrument or agreement or any exercise or nonexercise of any right, remedy, power or privilege under or in respect of the Note Agreement, any Note or any other such instrument or agreement; (iii) any furnishing of any additional security to the Pledgee or any acceptance thereof or any sale, exchange, release, surrender or realization of or upon any security by the Pledgee; or (iv) any invalidity, irregularity or unenforceability of all or part of the Secured Obligations or of any security therefor or the termination or release of any security therefor. SECTION 15. REGISTRATION. (a) If an Event of Default shall have ------------- occurred and be continuing and the Pledgor shall have received from the Pledgee a written request or requests that the Pledgor cause any registration, qualification or compliance under any securities law or laws, or listing requirements, to be effected with respect to all or any part of the Pledged Securities, the Pledgor as soon as practicable and at its expense will use 13 its best efforts to cause such registration to be effected (and be kept effective) and will use its best efforts to cause such qualification and compliance to be effected (and be kept effective) as may be so requested and as would permit or facilitate the sale and distribution of such Pledged Securities, including without limitation, registration under any applicable securities laws (including the Securities Act) and appropriate compliance with any other governmental and listing requirements, provided that the Pledgee shall furnish to the Pledgor such information regarding the Pledgee as the Pledgor may request in writing and as shall be required in connection with any such registration, qualification or compliance. The Pledgor will cause the Pledgee to be kept reasonably advised in writing as to the progress of each such registration, qualification or compliance and as to the completion thereof, will furnish to the Pledgee such number of prospectuses, offering circulars or other documents incident thereto as the Pledgee from time to time may reasonably request, and agrees to indemnify and hold harmless the Pledgee and all others participating in such registration, qualification or compliance (or the distribution of such Pledged Securities) against all losses, liabilities, claims or damages caused by any untrue statement (or alleged untrue statement) of a material fact contained therein (or in any related registration statement, notification or the like) or by any omission (or alleged omission) to state therein (or in any related registration statement, notification or the like) a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as the same may have been caused by an untrue statement or omission based upon information furnished in writing to the Pledgor by the Pledgee expressly for use therein. (b) If at any time when the Pledgee shall determine to exercise its right to sell all or any part of the Pledged Securities pursuant to Section 7 such Pledged Securities or the part thereof to be sold shall not, for any reason whatsoever, be effectively registered under any applicable securities law or laws (including the Securities Act), the Pledgee may sell such Pledged Securities or part thereof by private sale in such manner and under such circumstances as the Pledgee may deem necessary or advisable in order that such sale may legally be effected without such registration, provided that at least 10 days' notice of the time and place of any such sale shall be given to the Pledgor. Without limiting the generality of the foregoing, in any such event the Pledgee: (i) may proceed to make such private sale notwithstanding that a registration statement for the purpose of registering such Pledged Securities or part thereof shall have been filed under such securities laws; (ii) may approach and negotiate with a single possible purchaser to effect such sale; and (iii) may restrict such sale to a purchaser who will represent and agree that such purchaser is purchasing for its own account, for investment, and not with a view to the distribution or sale of such Pledged Securities or any part thereof. In the event of any such sale, the Pledgee shall incur no responsibility or liability for selling all or any part of the Pledged Securities at a price which the Pledgee (acting in accordance with instructions from the Required Holder(s)) may in good faith deem reasonable under the circumstances, notwithstanding the possibility that a substantially higher price might be realized if the sale were deferred until after registration as aforesaid. SECTION 16. INDEMNITY. (a) The Pledgor covenants and agrees to pay to ---------- the Pledgee from time to time, and the Pledgee shall be entitled to, reasonable compensation for all services rendered by it, and the Pledgor will pay or reimburse the Pledgee upon its request for all reasonable expenses, disbursements and advances incurred 14 or made by the Pledgee in accordance with any of the provisions of this Agreement or any other Pledge Document (including the compensation and the expenses and disbursements of its agents and counsel and of all Persons not regularly in its employ). (b) The Pledgor also covenants to indemnify the Pledgee (which, for purposes of this Section 16, shall include in directors, officers, employees and agents) for, and to hold it harmless from and against, any and all loss, liability or expense reasonably incurred without gross negligence, wilful misconduct or bad faith on the part of the Pledgee, arising out of or in connection with the acceptance or administration of this trust, the exercise of any rights and remedies arising out of this Agreement or any other Pledge Document, or the performance of any of its duties, including the reasonable costs and expenses of defending itself against any claim of liability and in enforcing any provision of this Agreement or any other Pledge Document (except any liability incurred with gross negligence, wilful misconduct or bad faith on the part of the Pledgee), with interest thereon at a rate equal to that in the Pledgee's customary banking practice with respect to overdrafts (including the imposition of interest, fund, wage and administrative fees) from the date the same shall have been paid until actually reimbursed. (c) The obligations of the Pledgor under this Section 16 to compensate and indemnify the Pledgee and to pay or reimburse the Pledgee for reasonable expenses, disbursements and advances shall constitute additional indebtedness hereunder and shall survive the satisfaction, discharge or other termination of this Agreement and any other Pledge Document and the resignation or removal of the Pledgee hereunder (d) To secure payment of such compensation, reimbursement and indemnification, the Pledgee shall have a claim and Lien prior to that of any party, which claim and Lien shall constitute Secured Obligations secured by this Agreement. SECTION 17. TERMINATION: RELEASE, Upon: -------------------- (a) the receipt by the Pledgee of a certificate executed by each Purchaser certifying that the conditions set forth in Section 5.3 of the Note Agreement to the release of the Pledge Collateral have been satisfied; or (b) the date on which the Secured Obligations have been discharged in full; this Agreement shall terminate, and the Pledgee, at the written request and expense of the Pledgor, will promptly execute and deliver to the Pledgor a proper instrument or instruments acknowledging the satisfaction and termination of this Agreement, and will duly assign, transfer and deliver to the Pledgor, without recourse and without any representation or warranty, such of the Pledge Collateral as may be in the possession of the Pledgee and has not theretofore been sold or otherwise applied or released pursuant to this Agreement, together with any moneys at the time held by the Pledgee hereunder, SECTION 18. NOTICES. All notices and other communications hereunder ------- shall be in the English language, in writing and made at the addresses, in the manner and 15 with the effect provided in Section 11.10 of the Note Agreement, provided that, for this purpose, the address of the Pledgee shall be as follows: The Chase Manhattan Bank, N.A. Corporate Trust Administration 4 Chase MetroTech Center, 3rd Floor, Brooklyn, New York 11245 Facsimile: (718) 242-5885 or (718) 242-3529 or sent to the Pledgee at such other address as it may designate for itself by notice given in accordance with this Section 18. SECTION 19. MISCELLANEOUS. ------------- 19.1 Benefit of Agreement. -------------------- This Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective successors and permitted assigns of the parties hereto and shall inure to the benefit of the Noteholders; provided, however, ----------------- that the Pledgor may not, without the prior written consent of the Pledgee (acting on the instructions of all the Noteholders), assign or transfer any of its rights or obligations hereunder. The Pledgee may transfer, assign or grant its rights hereunder in connection with an assignment or transfer of all or any part of its interest in and rights under this Agreement pursuant to the provisions of Sections 10 and 11 of the Appointment Agreement, 19.2 Amendment, Waiver. ----------------- This Agreement may be changed, waived, discharged or terminated only with the written consent of the Required Holder(s), the Pledgor and the Pledgee. 19.3 Governing Law. ------------- This Agreement is a contract made under the laws of the State of New York of the United States and shall for all purposes be construed and enforced in accordance with, and the rights of parties shall be governed by, the laws of such State. 19.4 Section Headings, Counterparts. ------------------------------ The headings of the several sections and subsections in this Agreement and the title of this Agreement are inserted for convenience only and shall not any way affect the meaning or construction of any provision of this Agreement. This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original, but all of which together shall constitute one and the same instrument. 19.5 Severability. ------------ Any prov Any provision of this Agreement which is prohibited orunenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition orunenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 16 19.6 Consent to Jurisdiction: Service of-Process. ------------------------------------------- For the purposes of assuring that the Pledgee and the Noteholders may enforce their respective rights under this Agreement, the Pledgor for itself and its successors and assigns, hereby irrevocably: (i) agrees that any legal or equitable action, suit or proceeding against the, Pledgor arising out of or relating to this Agreement or the other Note Documents (including, without limitation, the Agreement of Assignment as Collateral, dated as of the date hereof, among the Pledgor, the Pledgee and the Purchasers), or any transaction contemplated hereby or the subject matter of any of the foregoing may be instituted in any state or Federal court in the Borough of Manhattan in the State of New York; (ii) waives any objection which it may now or hereafter have to the venue of any action, suit or proceeding in the State of New York or any claim of forum non conveniens in the State of New York; and (iii) irrevocably -------------------- submits itself to the non-exclusive jurisdiction of any state or Federal court of competent jurisdiction in the Borough of Manhattan in the State of New York for purposes of any such action, suit or proceeding. Without limiting the foregoing, the Pledgor hereby appoints, in the case of any such action or proceeding brought in the courts of or in the State of New York, CT Corporation System, with offices on the date hereof at 1633 Broadway, New York, New York 10019, to receive, for it and on its behalf, service of process in the State of New York with respect thereto, provided the Pledgor may appoint any other person, reasonably acceptable to the Pledgee (acting on the instructions of the Required Holder(s)), with offices in the State of New York to replace such agent for service of process upon delivery to the Noteholders of a reasonably acceptable agreement of such new agent agreeing so to act. The Pledgor agrees that service of process by means of notice (as provided in Section 11.10 of the Note Agreement) of any such action, suit or proceeding with respect to any matter as to which it has submitted to jurisdiction as set forth in this Section 19.6 shall be taken and held to be valid personal service upon it. 19.7 No Waiver: Remedies Cumulative. ------------------------------ No failure or delay on the part of the Pledgee or any Noteholder in exercising any right, power or privilege hereunder or under any other Pledge Document, as the case may be, and no course of dealing between the' Pledgor and the Pledgee or any Noteholder shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder or under any other Pledge Document preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder or thereunder. The rights, powers and remedies herein or in any other Pledge Document expressly provided are cumulative and not exclusive of any rights, powers or remedies which the Pledgee or any Noteholder, as the case may be, would otherwise have. No notice to or demand on the Pledgor in any case shall entitle the Pledgor to any other or further notice or demand in similar or other circumstances or constitute a waiver of the rights of the Pledgee or any Noteholder to any other or further action in any circumstances without notice or demand. 19.8 New Secured Lenders. ------------------- The parties acknowledge that Section 8.1 of the Note Agreement contemplates that the Noteholders may enter into an intercreditor agreement for the purpose of sharing the Pledge Collateral with the other parties to such agreement in accordance with the terms thereof. It is understood that at the time of such event, the Pledgor, the Pledgee and the Noteholders will investigate whether and how this Agreement may be amended to accommodate and give effect to such an intercreditor agreement. 17 IN WITNESS WHEREOF, The Pledgor and the Pledgee have caused this Agreement to be executed by their duly elected officers duly authorized as of the date first above written. MAGINET CORPORATION By : /s/ James A. Barth Name : James A. Barth Title : Chief Financial Officer THE CHASE MANHATTAN BANK, N.A., as Collateral Agent By: /s/ Name : Title : IN WITNESS WHEREOF, the Pledgor and the Pledgee have caused this Agreement to be executed by their duly elected officers duly authorized as of the date first above written. MAGINET CORPORATION, THE CHASE MANHATTAN BANK, N.A. By: /s/ Rosama E. Abueva Name: ROSANNA E. ABUEVA Title: SECOND VICE PRESIDENT ANNEX A to PLEDGE AGREEMENT LIST OF SECURITIES AND PLEDGED SECURITIES -----------------------------------------
Number of Number of Name of Subsidiary or Securities Pledged Securities Percentage of Outstanding Joint Venture Vehicle (ordinary shares) (ordinary shares) Shares of Capital Stock Owned by Pledged by Pledgor Pledgor Pledgor Pacific Pay Video (HK) Limited 10,000 6,600 100% 66% PPV Signapore Pte Ltd. 100,000 66,000 100% 66% PPV Signapore Pte Limited (ACN) 100 66 100% 66% 059 748 588) Pacific Pay Video New Zealand 100 66 100% 66% Limited Pacific Pay Video (Korea) Ltd. 266,667 176,000 85% 66% Pacific Pay Video International 1,000 1,000 100% 100P% Pacific Pay Video Limited 100 100 100% 100%
ANNEX B to PLEDGE AGREEMENT Registrations and Filings ------------------------- 1. Hong Kong --------- Registration of the name of the Pledgee in the register of members or shareholders of the Subsidiary. 2. Singapore --------- Registration of the name of the Pledgee in the register of members or shareholders of the Subsidiary. 3. Australia --------- Registration of the name of the Pledgee in the register of members or shareholders of the Subsidiary. 4. New Zealand ----------- Registration of the name of the Pledgee in the register of members or shareholders of the Subsidiary. 5. Korea ----- None. 6. California ---------- UCC-1 Financing Statement filed with the California Secretary of State. 7. Japan ----- None. ANNEX C to PLEDGE AGREEMENT Form of Director's Resignation Letter -------------------------------------- To: The Board of Directors of [name of Subsidiary/Joint Venture Vehicle] (the "Company") I, [name], hereby resign my position as a director of the Company with effect from the date set forth below and waive all claims to fees or compensation in connection with my resignation. Dated this____ date of____.[signature] [name] Pledge Agreement (Japanese law) also appears as Exhibit 10.29 to this Registration Statement EXHIBIT B-2 (Pledge Agreement (Japanese law)) AGREEMENT OF ASSIGNMENT AS COLLATERAL This AGREEMENT OF ASSIGNMENT AS COLLATERAL, dated as of August 15, 1995 among MAGINET CORPORATION, a corporation organized under the laws of the State of California, as assignor (the "Assignor"), and The Chase Manhattan Bank, N.A., a national banking association, as collateral agent for the benefit of the Noteholders (the "Agent") and the banks and financial institutions named in Schedule A attached hereto (collectively the "Purchasers"). Capitalized terms used herein shall have the meanings provided in Section W I T N E S S E T H : - - - - - - - - - - - WHEREAS, the Assignor and the Purchasers have entered into the Note Agreement providing for the issuance and sale of the Notes and the issuance of the Warrants an contemplated therein; WHEREAS, the Purchasers, the Assignor and the Agent have entered into the Appointment Agreement providing for the appointment of the Agent to act as collateral agent for the benefit of the Noteholders under the Security Documents (including this Agreement); WHEREAS, it is at condition precedent under the Note Agreement to each Purchaser's obligation to purchase and pay for the Notes and to accept the Warrants to be issued under the Note Agreement that the Assignor shall have executed and delivered to the Purchasers this Agreement; WHEREAS, the Assignor acknowledges and confirms that this is one of the Pledge Agreements (as such term is defined in the Note Agreement); WHEREAS, the Assignor desires to execute this Agreement to satisfy the conditions described in the preceding paragraphs and to induce the Purchasers to enter into the Note Agreement and to purchase and pay for the Notes and to accept the Warrants (and to induce any future Noteholders so to do); NOW, THEREFORE, the Assignor hereby makes the following representations and warranties to the Assignees and hereby covenants and agrees with the Assignees as follows: SECTION 1. DEFINITIONS AND PRINCIPLES OF CONSTRUCTION. For all purposes of ------------------------------------------ this Agreement, (i) capitalized terms not otherwise defined herein shall have the meanings set forth in the Note Agreement and (ii) as used herein, references to "this Agreement", "hereunder" and words of like meaning shall refer to this Agreement of Assignment as Collateral. As used in this Agreement: "Agreement" and "this Agreement" shall mean this Agreement of Assignment as --------- -------- Collateral dated as of August 15, 1995, as the same may be modified, amended or supplemented from time to time. "Assignee" or "Assignees" shall mean at any time all or each of the Agent -------- --------- and the then Noteholders, which are initially the Purchasers. "Liquidating Dividend" shall have the meaning set forth in Section 5. -------------------- "Maximum Foreign Pledge" shall mean, in respect of PPV Japan, (i) prior to ----------------------- the occurrence of a Change in Tax Law Event, the number of securities representing 66% (or such other threshold amount as may become relevant after the date hereof in determining whether a security interest under this Agreement would result in the undistributed earnings of PPV Japan as determined for Federal income tax purposes being treated as a deemed dividend to the Assignor) of the total combined voting power of all classes of securities of PPV Japan entitled to vote and (ii) on and following the occurrence of a Change in Tax Law Event, the number of securities representing the maximum total combined voting power of all classes of securities of PPV Japan entitled to vote that may be pledged or assigned as collateral without creating a deemed dividend to the Assignor. "Noteholder" shall mean from time to time a registered holder of the Notes. ---------- "Pledge Documents" shall mean (i) this Agreement (and any other pledge or ---------------- assignment as collateral agreement in form and substance satisfactory to the Assignee entered into as contemplated by this Agreement), (ii) the Note Agreement and (iii) any other Note Document to which any Assignee is or will be a party. "PPV Japan" shall mean PPV Japan, Inc, a Japanese corporation. --------- "Secured ObligAtions" shall mean (i) the payment due of the principal of ------------------ and interest in respect of the Notes and payment of all other obligations and liabilities (including without limitation indemnities premium, if any, fees and interest thereon) of the Assignor owed to the Assignees (including the Agent in its individual capacity), now existing or hereafter incurred under the Note Agreement, each Note, the Appointment Agreement, any Pledge Document and this Agreement and (ii) the due performance and compliance with the terms of the Note Documents by the Assignor. "Securities" shall mean all the issued and outstanding shares of capital ---------- stock of PPV Japan (and any options, warrants or other rights to purchase such capital stock at any time prior to the date on which the Secured Obligations are discharged in full) owned by the Assignor, including without limitation all such shares of capital stock, options, warrants or other rights owned by the Assignor on the date hereof and all such capital stock, options, warrants or other rights acquired by the Assignor in the future. The Assignor hereby represents and warrants that on the date hereof (i) the Assignor owns 360 - 2 - shares of common stock of PPV Japan, which constitutes 90% of the issued and outstanding shares of capital stock of PPV Japan and (ii) there are no options, warrants, or other rights to purchase any Securities outstanding. "Subject Securities" shall mean 264 shares of capital stock of PPV Japan ------------------ owned by the Assignor and all other Securities from time to time assigned as collateral hereunder. The Subject Securities, together with all proceeds thereof (including any securities, property and moneys) received and at the time held by any of the Assignees hereunder, is hereinafter referred to as the "Subject Collateral." SECTION 2. ASSIGNMENT OF SECURITIES AS COLLATERAL. -------------------------------------- 2.1 Assignment. To secure the Secured Obligations, the Assignor hereby (i) ---------- assigns the Subject Securities to the Assignees as collateral (Jototanpo) and --------- delivers to the Agent the share certificates representing the Subject Securities to be held by the Agent on behalf of all the Assignees upon the terms and conditions set forth in this Agreement and (ii) assigns the Subject Collateral to the Assignees as collateral (Jototano). Each Assignee shall have an undivided -------- interest in the Subject Collateral so assigned, each such interest determined pro rata in accordance with the amount of the Secured Obligations from time to time owed to such Assignee. 2.2 Subsequently Acquired Securities. If the Assignor shall acquire (by -------------------------------- purchase stock dividend or otherwise), at any time or from time to time after the date hereof, any additional shares or other securities in the capital stock of PPV Japan and, as a result of such acquisition, the number of the Subject Securities in respect of PPV Japan is less than PPV Japan's then existing Maximum Foreign Pledge, then the Assignor will forthwith assign as collateral hereunder (or under another agreement of assignment as collateral in form and substance satisfactory to the Agent, if necessary under applicable law or if otherwise desirable to carry into effect the purposes of this Agreement), and deliver to the Agent the share certificates representing, such additional Securities as is necessary so that the number of the Subject Securities is equal to PPV Japan's then existing Maximum Foreign Pledge. Thereafter such Securities shall constitute Subject Securities, and the Assignor shall promptly deliver to the Agent a certificate executed by a Responsible officer describing such Subject Securities and certifying that the same have been duly assigned as collateral to the Assignees hereunder or under such other agreement of assignment as collateral, as the case may be. 2.3 Change In Tax Law Event. If a Change in Tax Law Event occurs, then ------------------------ the Assignor shall forthwith assign as collateral hereunder (or under another agreement of assignment as collateral in form and substance satisfactory to the Agent, if necessary under applicable law or if otherwise desirable to carry into effect the purposes of this Agreement) that portion of the securities of PPV Japan hold by the Assignor and not heretofore assigned as collateral pursuant to this Agreement (or - 3 - another agreement of assignment as collateral) and deliver the share certificates representing such Securities to the Agent. Thereafter such Securities shall constitute Subject Securities, and the Assignor shall promptly deliver to the Agent a certificate executed by a Responsible Officer describing such Subject Securities and certifying that the same have been duly assigned as collateral to the Assignee hereunder (or under another agreement of assignment as collateral, as the case may be). 2.4 Non-registration of Subject Securities in Shareholders' Register. The ---------------------------------------------------------------- Assignees shall not have the Subject Securities registered in the shareholders' register of PPV Japan in any names other than that of the Assignor unless and until the Subject Securities have been acquired by the Assignee or any other Person through the enforcement of the security interest in the Subject Securities created herein or until an Event of Default shall have occurred and be continuing. SECTION 3. APPOINTMENT OF AGENTS. The Agent shall receive and continue to --------------------- retain possession of the Subject Collateral on behalf of the Assignees pursuant to the terms and conditions of this Agreement and the Appointment Agreement. The Agent shall have the right to appoint one or more agents (other than the Assignor) for the purpose of retaining physical possession of the share certificates representing the Subject Securities and other Subject Collateral on behalf of the Agent. SECTION 4. VOTING AND OTHER RIGHTS WHILE NO EVENT OF DEFAULT. Unless and ------------------------------------------------- until an Event of Default shall have occurred and be continuing, the Assignor shall be entitled to vote any and all Subject Securities and to give consents, waivers or ratification in respect thereof; provided, that the Assignor shall cast no vote, or give any consent, waiver or ratification or take any action which would violate or be inconsistent with any of the terms of this Agreement, any other Note Document or any other instrument or agreement referred to herein or therein or which would have the effect of impairing the position or interests of the Assignees. All such rights of the Assignor to vote and to give consents, waivers and ratifications shall cease upon the earlier to occur of (i) delivery to the Assignor of written notice from any Noteholder or pursuant to a notice delivered under Section 9.1 of the Note Agreement or the Agent stating that an Event of Default has occurred and is continuing or (ii) a Responsible Officer obtaining knowledge of any condition or event which constitutes an Event of Default, when Sections 2.4 and 6 shall become applicable; provided, that the Agent shall be under no duty to deliver the written notice described in clause (i) of the foregoing unless and until it has received a notice from any Noteholder stating that an Event of Default has occurred and is continuing. SECTION 5. DIVIDENDS AND OTHER DISTRIBUTIONS. Unless and until an Event of --------------------------------- Default shall have occurred and be continuing, all cash dividends payable in respect of the Subject Securities shall be paid directly to the Assignor; provided, that the - 4 - Assignor shall cause to be paid to the Agent, and the Agent shall have the right to receive and retain as part of the Subject Collateral, all cash dividends payable in respect of the Subject Securities which are determined by the Agent to represent in whole or in part an extraordinary, liquidating or other distribution in return of capital (each a "Liquidating Dividend"), unless the event creating such Liquidating Dividend was permitted by, and did not otherwise result in an Event of Default occurring under, the Note Agreement. In case an Event of Default shall have occurred and be continuing, the Assignor shall cause to be paid to the Agent, and the Agent shall have the right to receive and retain as part of the Subject Collateral, all cash dividends payable in respect of the Subject Securities. The Assignor shall also cause to be delivered or paid, as relevant, to the Agent, and the Agent shall have the right to receive and retain as part of the Subject Collateral: (a) all other or additional stock or securities of PPV Japan paid or distributed by way of dividend in respect of the Subject Securities; (b) all other or additional stock or other securities or property (including cash) paid or distributed in respect of the Subject Securities by way of stock-split, spin-off, split-up, reclassification, combination of shares or similar rearrangement; and (c) all other or additional stock or other securities or property (including cash) which may be paid in respect of the Subject Securities by reason of any consolidation, merger, exchange of stock, conveyance of assets, liquidation or similar corporate reorganization or otherwise; except, in each case, prior to the occurrence and continuance of an Event of - ------ Default, to the extent the receipt of such stock dividends and other securities distributions would cause the Subject securities of PPV Japan to exceed PPV Japan's Maximum Foreign Pledge, in which case the Assignor shall cause to be delivered to the Agent, and the Agent shall have the right to receive and retain as part of the Subject Collateral, such amount of stock dividends and securities distributions as is equal, together with the Subject Securities previously assigned as collateral, to PPV Japan's then existing Maximum Foreign Pledge. SECTION 6. REMEDIES IN CASE OF EVENT OF DEFAULT. In case an Event of ------------------------------------ Default shall have occurred and be continuing, the Noteholders (as Assignees) directly or through the Agent shall be entitled to exercise all the rights, powers and remedies vested in them or it as relevant (whether vested in them or it by this Agreement, by any other Note Document or by law) for the protection and enforcement of their or its rights, as relevant in respect of the Subject Collateral, and the Noteholders (as Assignees) directly or through the Agent shall be entitled without limitation to exercise the following rights, which the Assignor hereby agrees to be commercially reasonable: - 5 - (a) to, upon giving written notice to the Assignor, dispose of the Subject Collateral by such method, at such time and for such price as are generally considered reasonable by the Agent (acting in accordance with the instructions from the Required Holder(s)), and apply the proceeds toward the payment of the Secured obligations in accordance with Section 7 below; and (b) to, upon giving written notice to the Assignor, acquire the Subject Collateral as payment of the whole or a part of the Secured Obligations, as relevant, in the order set forth in Section 7 below at such time and for such price as are generally (considered reasonable by the Agent (acting in accordance with the instructions from the Required Holder(s)). None of the Agent or the other Assignees shall be liable for failure to collect or realize upon any or all of the Subject Collateral or for any delay in so doing nor shall any of them be under any obligation to take any action whatsoever with regard thereto. SECTION 7. APPLICATION OF PROCEEDS. All moneys collected by the Agent or ----------------------- the other Assignees upon any sale or other disposition of the Subject Collateral (including, without limitation, the amount of the price at which the Noteholders (as Assignees) may acquire the Subject Securities in accordance with Section 6(b), together with all other moneys received by the Agent or the other Assignees hereunder, shall be applied in the following order of priority: (a) FIRST, to the payment of such amounts an are due and payable to the Agent (including in respect of its agents) or to any prior Agent hereunder pursuant to the Appointment Agreement and this Agreement, including the payment of all costs and expenses incurred by the Agent in connection with such sale, the delivery of the Subject Collateral or the collection of any such moneys (including without limitation reasonable attorneys' fees and expenses); and (b) SECOND, to the payment of the other Secured Obligations in the following order of priority to the extent such amounts are not sufficient to repay such other Secured Obligations in full and within each category on a pro rata basis among the Noteholders: (i) to the payment of charges, fees, indemnity obligations, costs and expenses due under the Note Agreement, each Note, the Appointment Agreement, this Agreement or the other Pledge Documents to the Noteholders; (ii) to the payment of interest on interest which became overdue, if any, with respect to the Notes; (iii) to the payment of interest on principal with respect to the Notes which became overdue; (iv) to the payment of interest accrued with respect - 6 - to the Notes; (v) to the payment of principal with respect to the Notes; (vi) to the payment of premium, if any, with respect to the Notes; and (vii) to the payment of the remaining Secured Obligations, if any. Following the foregoing applications, any balance of such moneys shall be returned to the Assignor or otherwise disposed of as directed in writing by the Assignor. SECTION 8. PURCHASERS OF COLLATERAL. Upon any sale of the Subject ------------------------ Collateral by the Noteholders (as Assignees) or the Agent hereunder, the receipt of the Noteholders (as Assignees), the Agent or the officer making the sale shall be a sufficient discharge to the purchaser or purchasers of the Subject Collateral so sold, and such purchaser or purchasers shall not be obligated to see to the application of any part of the purchase money paid over to the Noteholders (as Assignees), the Agent or such officer or be answerable in any way for the misapplication or non-application thereof. SECTION 9. FURTHER ASSURANCES. Without limitation to the provisions of ------------------ Section 6 the Assignor agrees that it shall at its own expense: (a) do such further acts and things and execute and deliver to the Agent and the other Assignees such additional conveyances, assignments agreements and instruments (including, without limitation, one or more pledge or assignment as collateral agreements in form and substance satisfactory to the Agent) as may be reasonably required or deemed advisable to carry into effect the purposes of this Agreement or to further assure and confirm unto the Agent and the other Assignees its and their rights, powers and remedies hereunder; and (b) comply with the requirements of Section 7.13 of the Note Agreement (which provision is incorporated in full herein by reference). SECTION 10. TRANSFER BY THE ASSIGNOR. The Assignor shall not assign, sell ------------------------ or otherwise dispose of, grant any option with respect to, or create, incur, assume or suffer to exist any Lien on any portion of the Subject Collateral or any other Securities, except (i) Liens in favor of Persons other than the Noteholders permitted under Section 8.1 of the Note Agreement and (ii) Liens created by this Agreement and by any other Pledge Document. SECTION 11. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE ASSIGNOR. The --------------------------------------------------------- Assignor represents and warrants that: (i) it is the owner of, and has good and marketable title to, 360 shares of the capital stock of PPV Japan in existence on the - 7 - date hereof, subject to no Lien (except the Lien created by this Agreement); (ii) it has full corporate power, authority and legal right to assign as collateral all such Securities pursuant to this Agreement; (iii) all such Securities have been duly and validly issued, are fully paid and nonassessable; (iv) this Agreement creates, as security for the Secured Obligations, a valid and enforceable first priority security interest on all of the Subject Securities in existence on the date hereof, in favor of the Noteholders (as Assignees) and the Agent acting on behalf of such Assignees, subject to no Lien in favor of any other Person; and (v) no consent, filing, recording or registration is required to perfect the security interest in the Subject Securities purported to be created by this Agreement. The Assignor covenants and agrees that: (i) it shall not cause the article on the share transfer restrictions to be incorporated in the Articles of Incorporation of PPV Japan; (ii) it will defend the Assignees' right, title and Lien in and to the Subject Collateral against the claims and demands of all Persons; and (iii) it will take all actions within its powers to ensure that it will have like title to and right to assign an collateral any other securities or property at any time hereafter assigned as collateral to the Assignees as Subject Collateral hereunder. SECTION 12. THE AGENT. (a) The Agent will hold in accordance with the --------- terms and provisions of the Appointment Agreement and this Agreement all Subject Collateral at any time received by it under this Agreement. It is expressly understood and agreed that the obligations of the Agent as holder of the Subject Collateral and with respect to the disposition thereof are only those expressly set forth in this Agreement and in the Appointment Agreement, and no implied covenants or obligations shall be read into this Agreement against the Agent. (b) In case of any litigation under this Agreement, or in case of any enforcement of remedies or exercise of rights upon the occurrence of an Event of Default, or in case the Agent deems that, by reason of any present or future law of any jurisdiction, it may not or may not effectively exercise any of the powers, rights or remedies herein granted to it or hold title to the properties as herein granted, or take any other action which may be desirable or necessary in connection therewith, the Agent shall be entitled to appoint, to the extent consistent with any applicable law, one or more separate or additional co-agents. In the event that the Agent appoints an individual or institution as a separate or additional co-agent (i) any appointment of any such co-agent by the Agent shall be made only with the prior written consent of the Assignor and the Required Holder(s) (except that, if the Agent shall have received written notice from any Holder of Secured Obligations that a Default or an Event of Default has occurred and is continuing, such consent shall be required only of the Required Holder(s)), which consent shall not be unreasonably withheld or delayed and (ii) each and every remedy, power, right, title, interest, duty and obligation expressed or intended by this Agreement to be exercised by or vested in, conveyed to or imposed upon, the Agent with respect - 8 - thereto shall be exercisable by and vest in such separate or additional co-agent but only to the extent necessary, appropriate or desirable to enable such separate or additional co-agent to exercise or have vested in it such powers, rights, trusts, titles, interests, duties and obligations and remedies, and every covenant and obligation necessary, appropriate or desirable to the exercise thereof by such separate or additional co-agent shall run to and be enforceable by either or any of them. The Agent shall have the right to terminate the appointment of any such co-agent hereunder with the prior written consent of the Assignor and the Required Holder(s) (except that, if the Agent shall have received written notice from any Holder that a Default or an Event of Default has occurred and is continuing, such consent shall be required only of the Required Holder(s)), which consent shall not be unreasonably withheld or delayed. Should any instrument in writing from the Assignor be required by the separate or additional co-agent so appointed by the Agent to more fully and certainly vest in and confirm to it such remedies, rights, powers, titles, interest, duties and obligations, any and all such instruments in writing shall, on request, be executed, acknowledged and delivered by the Assignor. In case any separate or additional co-agent, or a successor to either, shall become incapable of acting, resign or be removed all the remedies, rights, powers, titles, interests, trusts, duties and obligations of such separate or additional coagent, so far as permitted by law, shall vest in and be exercised by the Agent until the appointment of a new agent or successor to such separate or additional co-agent. SECTION 13. ASSIGNOR'S OBLIGATIONS. The obligations of the Assignor under ---------------------- this Agreement shall be absolute and unconditional and shall remain in full force and effect without regard to, and shall not be released, suspended, discharged or terminated or otherwise affected by, any circumstance or occurrence whatsoever, including without limitation; (i) any renewal, extension, amendment or modification of, or addition or supplement to or deletion from, the Note Agreement, any Note or any other instrument or agreement referred to therein or any assignment or transfer of any thereof; (ii) any waiver, consent, extension, indulgence or other action or inaction under or in respect of the Note Agreement, any Note or any other such instrument or agreement or any exercise or non-exercise of any right, remedy, power or privilege under or in respect of the Note Agreement, any Note or any other such instrument or agreement; (iii) any furnishing of any additional security to the Assignees or any acceptance thereof or any sale, exchange, release, surrender or realization of or upon any security by the Assignees; or (iv) any invalidity, irregularity or unenforceability of all or part of the Secured Obligations or of any security therefor or the termination or release of any security therefor. SECTION 14. REGISTRATION. If an Event of Default shall have occurred and ------------ be continuing and any registration, qualification or compliance under any securities law or laws is - 9 - required to be effected by any applicable law with respect to the enforcement of the security interest in all or any part of the Subject Securities; the Assignor, at the Agent's written request, as soon as practicable and at its expense will use its best efforts to cause such registration to be effected (and be kept effective) and will use its best efforts to cause such qualification and compliance to be effected (and be kept effective) as may be so requested and as would permit the enforcement of the security interest in such Subject Securities, including without limitation, registration under any applicable securities laws (including the Securities Act) and appropriate compliance with any other governmental requirements, provided that the Agent shall furnish to the Assignor such information regarding the Assignees as the Assignor may request in writing and as shall be required in connection with any such registration, qualification or compliance. The Assignor will cause the Agent to be kept reasonably advised in writing as to the progress of each such registration, qualification or compliance and as to the completion thereof, will furnish to the Assignees such number of prospectuses, offering circulars or other documents incident thereto as the Agent from time to time may reasonably request, and agrees to indemnify the Agent and the other Assignees against all losses, liabilities, claims or damages caused by any untrue statement (or alleged untrue statement) of a material fact contained therein (or in any related registration statement, notification or the like) or by any omission (or alleged omission) to state therein (or in any related registration statement, notification or the like) a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as the same may have been caused by an untrue statement or omission based upon information furnished in writing to the Assignor by the Agent expressly for use therein. SECTION 15. INDEMNITY. (a) The Assignor will pay or reimburse the Agent --------- upon its request for all reasonable expenses, disbursements and advances incurred or made by the Agent in accordance with any of the provisions of this Agreement or any other Pledge Document (including the compensation and the expenses and disbursements of its agents and counsel and of all Persons not regularly in its employ). (b) The Assignor also covenants to indemnify the Agent and the other Assignees for any and all loss liability or expense reasonably incurred without gross negligence, wilful misconduct or bad faith on the part of the Agent or the other Assignees, arising out of or in connection with the acceptance or administration of the Subject Collateral, the exercise of any rights and remedies arising out of this Agreement, or the performance of any of its duties, including the reasonable costs and expenses of defending itself against any claim of liability and in enforcing any provision of this Agreement or any other Pledge Document (except any liability incurred with gross negligence, wilful misconduct or bad faith on the part of the Agent or the other Assignees), with interest thereon (i) at the rate of 10.5% per annum with respect to amounts owing to the Noteholders (as Assignees) and (ii) at a rate equal to the - 10 - Agent's customary banking practices with respect to overdrafts (including the imposition of interest, funds, wage charges and administrative fees), with respect to amounts owing to the Agent, in each case from the date the same shall have been paid until actually reimbursed. (c) The obligations of the Assignor under this Section 15 to indemnify the Agent and the other Assignees and to pay or reimburse the Agent and the other Assignees for reasonable expenses, disbursements and advances shall for avoidance of doubt be a Secured Obligation secured by this Agreement and shall survive the satisfaction, discharge or other termination of this Agreement and the resignation or removal of the Agent hereunder. SECTION 16. TERMINATION; RELEASE. Upon: -------------------- (a) the receipt by the Agent of a certificate executed by each Noteholder certifying that the conditions set forth in Section 5.3 of the Note Agreement to the release of the Subject Collateral have been satisfied; or (b) the date on which the Secured Obligations have been discharged in full; this Agreement shall terminate, and the Agent, at the written request and expense of the Assignor, shall promptly execute and deliver to the Assignor a proper instrument or instruments acknowledging the satisfaction and termination of this Agreement, and shall release, reassign and deliver to the Assignor, without any representation or warranty, such of the Subject Collateral as maybe in the possession of the Agent and has not theretofore been sold or otherwise applied, released or reassigned pursuant to this Agreement, together with any moneys at the time held by the Agent hereunder. SECTION 17. NOTICES. All notices and other communications hereunder shall be in the English language in writing and made at the addresses, in the manner and with the effect provided in Section 11.10 of the Note Agreement, provided that, for this purpose, the address of the Agent shall be as follows: The Chase Manhattan Bank, N.A. Corporate Trust Administration 4 Chase MetroTech Center 3rd Floor Brooklyn, New York 11245 Facsimile: (718) 242-5885 or (718) 242-3529 or such other address as the Agent may designate for itself by notice given in accordance with this Section 17. SECTION 18. Change of the Assignees. Each of the Assignor, the Agent and ----------------------- each of the other Assignees hereby (a) acknowledges that the Noteholders (and, accordingly, the Assignees) may be changed and/or new Noteholders (and accordingly, new Assignees) may be added from time to time in accordance with the Note Agreement and the other Note Documents and agrees that, without taking any action, the security interest created or to be created hereunder shall automatically be effective for the benefit of the Agent and the then current Noteholders who shall automatically be deemed to be Assignees hereunder. The Agent further agrees that the Agent shall maintain possession of the Subject Collateral in accordance with the terms of this Agreement on behalf of the Assignees who may be changed or added to from time to time. The Assignor further agrees that upon the Agent's request the Assignor shall execute and deliver to the Agent a letter of confirmation in substantially the form attached hereto as Appendix A, which letter shall be deemed upon delivery to the Agent to have become an integral part of this Agreement,. SECTION 19. MISCELLANEOUS. ------------- 19.1 Benefit of Agreement. This Agreement shall be binding upon and inure -------------------- to the benefit of and be enforceable by the Assignor, the Agent and the other Assignees and their respective successors and permitted assigns; provided, however, that the Assignor may not, without the prior written consent of the Agent (acting on the instructions of all the other Assignees), assign or transfer any of its rights or obligations hereunder. Each of the Assignees (other than the Agent) may assign or transfer its rights hereunder in connection with an assignment or transfer of all or any part of its interest in and rights under its Notes and the Note Agreement pursuant to the provisions of the Note Agreement. The Agent may be replaced by another entity pursuant to the provisions of Sections 10 and 11 of the Appointment Agreement, in which case the Subject Collateral shall be transferred, delivered and possessed by the substituting agent in accordance with the Appointment Agreement and this Agreement. 19.2 Amendment, Waiver. This Agreement may be changed, waived, discharged ----------------- or terminated only with the written consent of the Required Holder(s), the Agent and the Assignor. 19.3 Governing Law. This Agreement is a contract made under the laws of ------------- Japan and shall for all purposes be construed and enforced in accordance with, and the rights of parties shall be governed by the laws of Japan; provided, however, that with respect to the Agent under Section 12 of this Agreement, the laws of the State of New York shall apply. 19.4 Section Heading, Counterparts. The headings of the several sections ----------------------------- and subsections in this Agreement are inserted for convenience only and shall not in any way affect the meaning or construction of any provision of this Agreement This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original, but all of which together shall constitute one and the same instrument. 19.5 Remedies Cumulative. The rights, powers and remedies herein or in ------------------- any other Pledge Document expressly - 12 - provided are cumulative and not exclusive of any rights, powers or remedies which the Assignees would otherwise have. 19.6 Severability. Any provision of this Agreement which is prohibited or ------------ unenforceable in Japan shall be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof. 19.7 Consent to Jurisdiction; Service of Process. The Assignor for itself ------------------------------------------- and its successors, hereby irrevocably; (i) agrees that any action, suit or proceeding against the Assignor arising out of or relating to this Agreement or the other Note Documents or any transaction contemplated hereby or the subject matter of any of the foregoing may be instituted in the Tokyo District Court; (ii) waives any objection which it may now or hereafter have to the venue of any action, suit or proceeding in Tokyo or any claim of forum non conveniens in Tokyo; and (iii) submits itself to the non-exclusive jurisdiction of the Tokyo District Court or any court competent to hear any appeal from a decision of the Tokyo District Court for purposes of any such action, suit or proceeding. 19.8 No Waiver. No failure or delay on the part of the Agent or any other --------- Assignee in exercising any right, power of privilege hereunder and no course of dealing between the Assignor and the Agent or any other Assignee shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder. 19.9 New Secured Lenders. The parties acknowledge that Section 8(i) of ------------------- the Note Agreement contemplates that the Noteholders may enter into an intercreditor agreement for the purpose of sharing the Subject Collateral with the other parties to such agreement in accordance with the terms thereof. It is understood that at the time of such event, the Assignor, the Agent and the other Assignees will investigate whether and how this Agreement may be amended to accommodate and give affect to such an intercreditor agreement. - 13 - IN WITNESS WHEREOF, the Assignor, the Agent and the Purchasers have cause this Agreement to be executed by their duly elected officers duly authorized as of the date first above written. MAGINET CORPORATION, as Assignor By /s/ J.A. Barth Name: James A. Barth Title: Chief Financial Officer The Chase Manhattan Bank, N.A., as Agent and an Assignee By /s/ R.E. Abueva Name: Rossana E. Abueva Title: Second Vice President New York Life Insurance Company, as an Assignee By /s/ Himi L. Kitner Name: Himi L. Kittner Title: Vice President The Mutual Life Insurance Company of New York, as an Assignee By /s/ Diane Hom Name: Diane Hom Title: Managing Director Namtor BVC LP, as an Assignee By /s/ Michael Rothman Name: Michael C. Rothman Title: Partner Waslic Company II, as an Assignee By /s/ Daniel F. Lindley Name: Daniel F. Lindley Title: President & Secretary - - 14 - Schedule A to Agreement of Assignment as Collateral New York Life Insurance Company 51 Madison Avenue New York, NY 10010 The Mutual Life Insurance Company of New York 1740 Broadway, 11th Floor New York, NY 10019 Namtor BVC LP 311 South Wacker Drive, Suite 4190 Chicago, IL 60606 Waslic Company II c/o Ft. Washington Investment Advisors 400 Broadway Cincinnati, OH 45202 - 15 - APPENDIX A to Agreement of Assignment as Collateral Form of a Letter of Confirmation under Section 18 -------------------------------------------------- Date: , 19__ The Chase Manhattan Bank, N.A. as the Agent for the Noteholders (as Assignees) Re: Noteholders of the Notes issued by MagiNet Corporation pursuant to the Note Agreement dated August 15, 1995 and Assignees of the Agreement of Assignment as Collateral referred to below Dear Sirs: We refer to the Agreement of Assignment as Collateral dated August 15, 1995 (as amended to date, "Assignment as Collateral") made between you as the Agent and an Assignee, the Purchasers and us. All capitalized terms defined or used herein and not otherwise defined herein shall have the same meanings specified in the Assignment as Collateral. We understand that the current Noteholders, and accordingly the current Assignees (excluding you), are those listed below and confirm that all security interests created or to be created under the Assignment as Collateral are effective for the benefit of you and such other Assignees as if they all were Assignees on the date the Assignment as Collateral was first executed. Very truly yours, MagiNet Corporation (Authorized Signatory) (List of Assignees): Exhibit C THIS WARRANT AND ANY SHARES OF CAPITAL STOCK TO BE ACQUIRED UPON THE EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CON NECTION WITH, THE DISTRIBUTION THEREOF. THESE SECURITIES MAY NOT BE OFFERED, SOLD, PLEDGED, OR TRANSFERRED UNLESS (I) A REGISTRATION STATEMENT UNDER THE ACT IS IN EFFECT AS TO THESE SECURITIES OR (II) THERE IS AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO THE COMPANY, THAT AN EXEMPTION THEREFROM IS AVAILABLE. IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES. MAGINET CORPORATION COMMON STOCK PURCHASE WARRANT AUGUST 15, 1995 VOID AFTER AUGUST 15, 2000 1. Number and Price of Shares Subject to Warrant. --------------------------------------------- a. Subject to the terms and conditions set forth herein, ____________________________________________________, or its registered assigns, is entitled to acquire from MAGINET CORPORATION, a California corporation (the "Company"), at any time after the date hereof and on or before the date of termination of this Warrant provided for in Section 3 hereof, up to ____________________ shares (as may be adjusted pursuant to clause 1(b) below) of duly authorized, validly issued, fully paid, and non-assessable Common Stock of the Company (the "Warrant Stock"), for a per share Warrant Price (as defined below in Section 2). This Warrant is one of a series of warrants (collectively, the "Warrants", as such term to include all Warrants issued in substitution therefor) having substantially similar terms and issued in connection with the sale of the Company's notes (the "Notes") in a senior secured note financing transaction, which issuance and sale were made pursuant to the Note Agreement dated August 15, 1995 (the "Note Agreement"). b. Notwithstanding clause 1(a) above, if either (x) the conditions set forth in Section 8.13(a) of the Note Agreement have not been satisfied prior to January 1, 1996 or (y) the Company has not received additional investments in the Company in the aggregate amount of at least $5,100,000 in cash prior to January 1, 1996 in the form of (A) debt investments or equity investments other than common equity or Preferred Equity (as hereinafter defined) on terms and conditions satisfactory to the Required Holders (as hereinafter defined), or (B) common or Preferred Equity, then the number of shares of Warrant Stock represented by this Warrant shall automatically be increased to ____________ shares. For the avoidance of doubt, the terms and conditions of any debt investment shall be deemed to be unsatisfactory to the Required Holder(s) if (A) such debt investment (i) has any scheduled principal payments due prior to the maturity of the Notes, (ii) bears interest at a rate higher than that borne by the Notes or (iii) allows the debt to be prepaid other than on a pro rata basis with the holders of the Notes, or if (B) with respect to such debt investment, the investors receive warrants to subscribe for Common Stock of the Company, and such warrants either (i) are not in form and substance substantially the same as this Warrant or (ii) provide that the amount of Common Stock into which the warrants are exercisable is greater than 57,142.88 shares of Common Stock for each $1,000,000 of debt investment, or if (C) the terms of such debt investment described in clauses (A) and (B) above can be amended without the consent of the Required Holders. "Required Holders" shall mean the holders of Warrants exercisable into shares of Warrant Stock, which in the aggregate amount to at least seventy percent (70%) of the aggregate number of shares of Warrant Stock into which all the Warrants then outstanding are exercisable. "Preferred Equity" shall mean securities which have terms substantially of a kind similar to the terms of the Company's outstanding Series A, Series B, and Series C Preferred Stock (such as dividend and liquidation preferences, convertibility into Common Stock and voting rights) and which do not have terms of a kind (such as mandatory redemption or sinking fund provisions) functionally similar to terms found in debt investments such as the Notes. 2. Warrant Price. Subject to the adjustments set forth in Section 9, this ------------- Warrant shall be exercisable at a per share purchase price (the "Warrant Price") of $7.00; provided, however, that if (A) no Liquidity Event (as defined below) has occurred: (i) on or before June 30, 1998, the Warrant Price shall be adjusted to $6.00 per share, (ii) on or before June 30, 1999, the Warrant Price shall be adjusted to $5.00 per share, and (iii) on or before June 30, 2000, the Warrant Price shall be adjusted to $4.50 per share, or (B) the conditions set forth in clause (x) and (y) of Section 1.b hereof have not been satisfied, the Warrant Price shall be adjusted to $4.50 per share; and provided further, that each of the per-share prices in (A)(i), (ii), and (iii) or (B) of this Section 2 shall be adjusted, as provided in Section 9, on the same basis as the then applicable Warrant -2- Price. A "Liquidity Event" for purposes of this Section 2 shall mean the closing of a firm commitment underwritten public offering of the Common Stock of the Company pursuant to an effective registration statement under the Act (provided that any such public offering results in gross proceeds to the Company in excess of $10,000,000); the exchange of the Company's Common Stock for securities of a corporation which corporation has a pre- exchange market capitalization of at least $50,000,000 and whose shares are listed for trading on a national securities exchange or automated quotation system; or any other merger, acquisition or similar transaction in which the holders of the Company's Common Stock receive cash in exchange for such Common Stock, or receive a combination of cash and such listed securities. 3. Termination. This Warrant (and the right to purchase securities upon ----------- exercise hereof) shall terminate upon the earlier of (i) five (5) years from the date of this Warrant, or (ii) the closing of a firm commitment underwritten public offering of the Common Stock of the Company pursuant to an effective registration statement under the Act, which results in gross proceeds to the Company in excess of $10,000,000; provided, that if the holder of this Warrant has exercised its right to include the underlying Warrant Stock in such public offering, and any such Warrant Stock is excluded from such underwriting by reason of the underwriter's marketing limitation, then the holder shall have a period of ten (10) Business Days (as defined in the Note Agreement) to exercise its right pursuant to this Warrant to purchase such Warrant Stock, or to effect an exchange described in Section 8(c) below, at the then effective Warrant Price notwithstanding the termination provision of this Warrant pursuant to either clause (i) or (ii) above. The Company shall give the holder of this Warrant written notice of such public offering at least twenty (20) and no more than ninety (90) days prior to the closing of the effectiveness of such registration statement and shall deliver a copy of the preliminary prospectus with respect to any such public offering to the holder of this Warrant promptly after it becomes available. 4. No Adjustments. Except as provided in Section 9, no adjustment on account -------------- of dividends or interest on Warrant Stock will be made upon the exercise hereof. 5. No Fractional Shares. No fractional shares of Warrant Stock will be issued -------------------- in connection with any subscription hereunder. In lieu of any fractional shares which would otherwise be issuable, the Company shall pay cash equal to the product of such fraction multiplied by the Fair Market Value (as defined in Section 8) of one (1) share of Warrant Stock on the date of exercise (minus the Warrant Price if unpaid). 6. No Stockholder Rights. This Warrant shall not entitle its holder to any of --------------------- the rights of a shareholder of the Company; or -3- impose any liabilities on such holder to purchase any securities or as a shareholder of the Company, whether such liabilities are asserted by the Company or by creditors or shareholders of the Company or otherwise. 7. Reservation of Stock. The Company covenants that during the period this -------------------- Warrant is exercisable, the Company will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of Warrant Stock upon the exercise of this Warrant. The Company agrees that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for shares of Warrant Stock upon the exercise of this Warrant. 8. Exercise of Warrant. ------------------- a. Procedure for Exercise. This Warrant may be exercised by the ---------------------- registered holder or its registered assigns, in whole or in part, by the surrender of this Warrant at the principal office of the Company, accompanied by payment in full of the Warrant Price in cash or by check or by the cancellation of any present or future indebtedness from the Company to the holder hereof, in accordance with Section 8(b). Upon partial exercise hereof, a new warrant or warrants containing the same date and provisions as this Warrant shall be issued by the Company to the registered holder for the number of shares of Warrant Stock with respect to which this Warrant shall not have been exercised. A Warrant shall be deemed to have been exercised immediately prior to the close of business on the date of its surrender for exercise as provided above, and the person entitled to receive the shares of Warrant Stock issuable upon such exercise shall be treated for all purposes as the holder of such shares of record as of the close of business on such date. As promptly as practicable on or after such date, and in any event within ten (10) business days thereafter (unless such exercise shall be in connection with an underwritten public offering, in which event three (3) business days after such exercise), the Company at its expense (including the payment by it of any applicable taxes payable by the Company) will cause to be issued in the name of and delivered to the holder hereof or, subject to Section 8, as such holder (upon payment by such holder of any applicable transfer taxes) may direct, a certificate or certificates for the number of full shares of Warrant Stock issuable upon such exercise, together with cash in lieu of any fraction of a share as provided above in Section 5. b. Payment with Notes. Upon any exercise of this Warrant, the holder ------------------ hereof may, at its option, instruct the Company to apply to the payment required by Section 8(a) all or any -4- part of the principal amount then unpaid, the premium, if any, and the interest on such principal amount then accrued on any one or more Notes at the time held by such holder, in which case the Company will accept the aggregate amount of principal and accrued interest on such principal in satisfaction of a like amount of such payment. In case less than the entire unpaid principal amount of any Note shall be so specified, the principal amount so specified shall be credited, as of the date of such exercise, on a pro rata basis against all future installments of principal of such Note. In the event that the entire unpaid principal amount of any Note is applied to the payment of the Warrant Price, such Note shall be promptly surrendered and canceled and shall be deemed no longer outstanding for all purposes of the Note Agreement, except as provided in Section 6.4 thereof. Any interest on the principal amount applied as payment upon such exercise shall be paid through the date of payment as the next interest payment date under the Note Agreement. No premium shall be payable on principal amounts utilized to pay Warrant Price under this Section 8(b). c. Net Exercise Rights. Notwithstanding the payment provisions set forth ------------------- in this Section 8, the holder may elect to receive shares of Warrant Stock equal to the value (as determined below) of this Warrant by surrender of this Warrant at the principal office of the Company together with notice of such election, in which event the Company shall issue to the holder the number of shares of Common Stock determined by use of the following formula: X = Y(A-B) ------ A Where: X = the number of shares of Common Stock to be issued to the holder, pursuant to this Section 8(c). Y = the number of shares of Warrant Stock subject to this Warrant. A = the Fair Market Value (as defined below) of one (1) share of Warrant Stock. B = Warrant Price per share of Warrant Stock. For purposes of this Section 8, Fair Market Value of a share as of a particular date shall mean: i. If the Company's registration statement under the Act, covering its initial underwritten public offering of stock has been declared effective by the Securities and Exchange Commission, then the fair market value of -5- a share shall be the closing price (the last reported sales price, if not so reported, the average of the last reported bid and asked prices) of the Company's stock as of the last business day immediately prior to the exercise of this Warrant. ii. If such a registration statement has not been declared effective, if it has been declared effective but the offering is not consummated in accordance with the terms of the underwriting agreement between the Company and its underwriters relating to such registration statement, or if no such registration statement has been filed or prepared, then as determined in good faith by the Company's Board of Directors upon a review of relevant factors. If the Required Holders disagree in writing with such determination, then an investment banking firm mutually acceptable to the Company and the Required Holders shall be retained to appraise the Fair Market Value of the shares of Warrant Stock in accordance with recognized appraisal standards and the determination by such investment banking firm shall be final and binding. If either (1) no such investment banking appraisal has been performed within the prior six (6) months, or (2) the appraised value of a share of Warrant Stock is more than ten percent (10%) higher than the value determined by the Board of Directors, then the cost of such appraisal shall be paid by the Company; in all other circumstances, such cost shall be paid pro rata by the holders of Warrant Stock requesting such an appraisal. d. In the event that the Company determines to effect a private sale of its capital stock for cash or other consideration in an aggregate amount equal to $1,000,000 or more, and either (x) the securities held by other holder(s) of the Company's capital stock are included in such sale or (y) the proceeds of any such sale are used to repurchase the Company's outstanding securities, then the Company shall promptly give the holder written notice thereof and include in such sale (and any related qualification under blue sky laws or other compliance), and in any placement involved therein, the Warrant Stock specified in a written request by the holder received by the Company within fifteen (15) days after the Company mails such written notice. 9. Adjustment of Warrant Price and Number of Shares. The number and kind of ------------------------------------------------ securities issuable upon the exercise of this Warrant shall be subject to adjustment from time to time and the Company agrees to provide written notice to each holder promptly upon the happening of certain events as follows: -6- a. Adjustment for Dividends in Stock. In case at any time or from time --------------------------------- to time during the term of this Warrant the holders of the Common Stock of the Company (or any shares of stock or other securities at the time receivable upon the exercise of this Warrant) shall have received, or, on or after the record date fixed for the determination of eligible shareholders, shall have become entitled to receive, without payment therefor, other or additional securities or other property of the Company by way of dividend or distribution, then and in each case, the holder of this Warrant shall, upon the exercise hereof, be entitled to receive, in addition to the number of shares of Common Stock receivable thereupon, and without payment of any additional consideration therefor, the amount of such other or additional securities or other property of the Company which such holder would hold on the date of such exercise had it been the holder of record of such Common Stock on the date hereof and had thereafter, during the period from the date hereof to and including the date of such exercise, retained such shares and/or all other additional securities or other property receivable by it as aforesaid during such period, giving effect to all adjustments called for during such period by this Section 9. b. Adjustment for Reclassification or Reorganization. In case of any ------------------------------------------------- reclassification or change of the outstanding Common Stock of the Company or of any reorganization of the Company during the term of this Warrant (other than a merger of the Company with and into another corporation), then and in each such case the Company shall give the holder of this Warrant at least twenty (20) days notice of the proposed effective date of such transaction, and the holder of this Warrant, upon the exercise hereof at any time after the consummation of such reclassification, change or reorganization, shall be entitled to receive, in lieu of the stock or other securities and property receivable upon the exercise hereof prior to such consummation, the stock or other securities or property to which such holder would have been entitled upon such consummation if such holder had exercised this Warrant immediately prior thereto, all subject to further adjustment as provided in this Section 9. The terms of this Section 9 shall similarly apply to successive reclassifications, changes or reorganizations. c. Stock Splits and Reverse Stock Splits. If at any time during the term ------------------------------------- of this Warrant the Company shall subdivide its outstanding shares of Common Stock into a greater number of shares, the Warrant Price in effect immediately prior to such subdivision shall thereby be proportionately reduced and the number of shares receivable upon exercise of the Warrant shall thereby be proportionately increased; -7- and, conversely, if at any time on or after the date hereof the outstanding number of shares of Common Stock shall be combined into a smaller number of shares, the Warrant Price in effect immediately prior to such combination shall thereby be proportionately increased and the number of shares receivable upon exercise of this Warrant shall thereby be proportionately decreased. d. Adjustments with Respect to Certain Diluting Issuances. The Warrant ------------------------------------------------------ Price shall be subject to adjustment from time to time as follows: i. Warrant Price Adjustment. (1) If the Company shall issue any Additional Stock (as defined hereafter) without consideration or for a consideration per share less than the Warrant Price in effect immediately prior to the issuance of such Additional Stock, then such Warrant Price in effect immediately prior to each such issuance shall (except as otherwise provided in this Section 9(d)) be adjusted by dividing (X) an amount equal to the sum of (a) the product derived by multiplying the Warrant Price in effect immediately prior to such issue by the number of shares of Common Stock (including shares of Common Stock issued or issuable upon conversion of the outstanding Preferred Stock, upon exercise of outstanding stock options and warrants or otherwise under Section 9(d)(i)(5)) outstanding immediately prior to such issue, plus (b) the consideration, if any, received by or deemed to have been received by the Company upon such issuance, by (Y) an amount equal to the sum of (c) the number of shares of Common Stock (including shares of Common Stock issued or issuable upon conversion of the outstanding Preferred Stock, upon exercise of outstanding stock options and warrants or otherwise under Section 9(d)(i)(5)) outstanding immediately prior to such issuance, plus (d) the number of shares of Common Stock issued or deemed to have been issued in such issuance; or (2) No adjustment of the Warrant Price shall be made in an amount less than one cent per share, provided that any adjustment that is not required to be made by reason of this sentence shall be carried forward and taken into account in any subsequent adjustment. Except to the limited extent provided for in Sections 9(d)(i)(5)(c) and 9(d)(i)(5)(d), no readjustment of the Warrant Price shall have the effect of increasing the -8- Warrant Price above the Warrant Price in effect immediately prior to such adjustment. (3) In the case of the issuance of Additional Stock for cash, the consideration shall be deemed to be the amount of cash paid therefor before deducting any reasonable discounts, commissions or other expenses allowed, paid or incurred by the Company for any underwriting or otherwise in connection with the issuance and sale thereof. (4) In the case of the issuance of Additional Stock for a consideration in whole or in part other than cash, the consideration other than cash shall be deemed to be the fair value thereof as determined in good faith by the Board of Directors. If the Required Holders disagree in writing with such determination, then (A) if such consideration other than cash is not securities, an appraisal firm experienced in valuing property of such type which is mutually acceptable to the Company and the Required Holders shall be retained to appraise the fair market value of such consideration in accordance with recognized appraisal standards, and the determination by such appraisal firm shall be final and binding, and (B) if such consideration other than cash consists of securities, then an investment banking firm mutually acceptable to the Company and the Required Holders shall be retained to appraise the fair market value of the securities in accordance with recognized appraisal standards, and the determination by such investment banking firm shall be final and binding. If either (1) no such appraisal has been performed within the prior six (6) months with respect to the same property or securities, or (2) the appraised value of the consideration is more than ten percent (10%) higher than the value determined by the Board of Directors, then the cost of such appraisal shall be paid by the Company; in all other circumstances, such cost shall be paid pro rata by the holders of Warrant Stock requesting such an appraisal (5) In the case of the issuance of options to pur chase or rights to subscribe for Common Stock, securities by their terms convertible into or exchangeable for Common Stock or options to purchase or rights to subscribe for such convertible or exchangeable securities (where the shares of Common Stock issuable upon exercise of such options or rights or upon conversion or exchange of such securities are not excluded from the definition of Additional Stock), the following provisions shall apply: -9- (a) the aggregate maximum number of shares of Common Stock deliverable upon exercise of such options to purchase or rights to subscribe for Common Stock shall be deemed to have been issued at the time such options or rights were issued and for a consideration equal to the consideration (determined in the manner provided in Sections 9(d)(i)(3) and 9(d)(i)(4)), if any, received by the Company upon the issuance of such options or rights plus the minimum purchase price provided in such options or rights for the Common Stock covered thereby; (b) the aggregate maximum number of shares of Common Stock deliverable upon conversion of or in exchange for any such convertible or exchangeable securities or upon the exercise of options to purchase or rights to subscribe for such convertible or exchangeable securities and subsequent con version or exchange thereof shall be deemed to have been issued at the time such securi ties were issued or such options or rights were issued and for a consideration equal to the consideration, if any, received by the Company for any such securities and related options or rights (excluding any cash received on account of accrued interest or accrued dividends), plus the additional consideration, if any, to be received by the Company upon the conversion or exchange of such securities or the exercise of any related options or rights (the consideration in each case to be determined in the manner provided in Sections 9(d)(i)(3) and 9(d)(i)(4)); (c) in the event of any change in the number of shares of Common Stock deliverable upon exercise of such options or rights or upon conversion of or in exchange for such convertible or exchangeable securities, including, but not limited to, a change resulting from the anti-dilution provisions thereof, the Warrant Price in effect at the time shall forthwith be readjusted to such Warrant Price as would have applied had the adjustment that was made upon the issuance of such options, rights or securities not converted prior to such change or the options or rights related to such securities not converted prior to such change been made -10- upon the basis of such change, but no further adjustment shall be made for the actual issuance of Common Stock upon the exercise of any such options or rights or the conversion or exchange of such securities; and (d) upon the expiration of any such options or rights, the termination of any such rights to convert or exchange or the expiration of any options or rights related to such convertible or exchangeable securities (or upon purchase by the Company and cancellation or retirement of any such options or rights not exercised or of any such convertible securities, the rights of conversion or exchange under which shall not have been exercised), the Warrant Price shall forthwith be readjusted to such Warrant Price as would have applied had the adjustment which was made upon the issuance of such options, rights or securities or options or rights related to such securities been made upon the basis of the issuance of only the number of shares of Common Stock actually issued upon the exercise of such options or rights, upon the conversion or exchange of such securities or upon the exercise of the options or rights related to such securities. ii. "Effective Date" means the date of the first sale by the Company of the Notes. iii. "Additional Stock" shall mean any shares of Common Stock issued (or deemed to have been issued pursuant to Section 9(d)(i)(5)) by the Company after the Effective Date other than: (1) Common Stock issued in a transaction deemed to be a "liquidation" within the meaning of the Company's Articles of Incorporation in effect as of the Effective Date. (2) Common Stock issued or issuable to employees, officers, or directors of, or consultants to the Company approved by the Board. (3) Common Stock issued pursuant to the acquisition of another corporation by merger, purchase of all or substantially all of the assets, or other reorganization. -11- (4) Common Stock issued or issuable upon conversion of the shares of Series A, Series B and Series C Preferred Stock. (5) Common Stock issued or issuable pursuant to the exercise of warrants granted in connection with any lease, loan, or other financing transaction, approved by the Board. 10. Certificate of Adjustment. Whenever the Warrant Price or the number or ------------------------- type of securities issuable upon exercise of this Warrant is adjusted or readjusted, as herein provided, the Company at its expense shall promptly deliver to the record holder of this Warrant a certificate of an officer of the Company setting forth such adjustment or readjustment and showing in reasonable detail the facts upon which such adjustment or readjustment is based, including without limitation a statement of (a) the consideration received or to be received by the Company for any Additional Stock issued or sold or deemed to have been issued, (b) the number of shares of Common Stock outstanding or deemed to be outstanding, and (c) the Warrant Price in effect immediately prior to such issue or sale and as adjusted and readjusted (if required by Section 9) on account thereof. 11. No Dilution or Impairment. The Company covenants that it shall not, by ------------------------- amendment of its Articles of Incorporation or through any reorganization, consolidation, merger, transfer of assets, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but shall at all times in good faith assist in carrying out all those terms and in taking all actions necessary or appropriate to protect the rights of the holder of this Warrant against dilution or other impairment. Without limiting the generality of the above provision, the Company (a) will not take any action which results in any adjustment of the Warrant Price then in effect if the total number of shares of Common Stock (or other securities) issuable after the action upon the exercise of all of the Warrants would exceed the total number of shares of Common Stock (or other securities) then authorized by the Company's Articles of Incorporation and available for the purpose of issue upon such exercise, and (b) will take all necessary or appropriate action in order that the Company may validly and legally issue fully paid and nonassessable shares upon the exercise of this Warrant. 12. Transfer of Warrant. The rights and obligations of the Company and the ------------------- holders of this Warrant shall be binding upon and benefit the successors, assignors, heirs, administrators and transferees of the parties. Any transferee hereof agrees to be -12- bound by the restrictions set forth herein and in the Note Agreement. 13. Compliance with Securities Laws. This Warrant or the Warrant Stock may not ------------------------------- be transferred or assigned, in whole or in part, by the holder hereof (except to any affiliate hereof) without compliance with applicable federal and state securities laws. The holder represents and agrees that this Warrant is being acquired only for investment, for holder's own account, and not with a view to or for sale in connection with any distribution thereof within the meaning of the Act, and the holder acknowledges and agrees that, at any time that it exercises its Warrant, it will represent, among other things, to the Company that the Warrant Stock that it acquires through exercise of the Warrant is being acquired by it for its own account and not with a view to or for sale in connection with any distribution thereof within the meaning of the Act; provided, that in any case, the disposition of its property shall at all times be and remain within its control. The holder of this Warrant acknowledges and agrees that this Warrant and the Shares have not been registered under the Securities Act and accordingly will not be transferable except as permitted under the various exemptions contained in the Securities Act, or upon satisfaction of the registration and prospectus delivery requirements of the Securities Act. Therefore, the Warrant and the Warrant Stock must be held indefinitely unless they are subsequently regis tered under the Securities Act or an exemption from such regis tration is available. The holder understands that the certi ficate evidencing the Warrant Stock will be imprinted with a legend which prohibits the transfer of the Warrant Stock unless they are registered or unless the Company receives an opinion of counsel (which may be an opinion of in-house counsel) reasonably satisfactory to the Company that such registration is not required. The holder is aware of the adoption of Rule 144 by the Securities and Exchange Commission and that Company is not now and, at the time it wishes to sell the Warrant Stock, may not be satisfying the current public information requirements of Rule 144 and, in such case, holder would be precluded from selling the securities under Rule 144. The holder understands that a stop-transfer instruction will be in effect with respect to transfer of the Warrant and the Warrant Stock consistent with the requirements of the securities laws. 14. Waiver and Amendment. Any provision of this Warrant may be amended or -------------------- waived upon the written consent of the Company and the Required Holders, and any such amendment or waiver shall be binding upon the remaining holders of Warrants, except that, without the written consent of the holder of each Warrant, no amendment or waiver to this Warrant that increases the Warrant Price, changes the Termination Date, changes the number of shares purchasable hereunder, changes the method set forth in Sections 8 and 9 for calculating adjustments thereto, amends this Section 14, or reduces the percentage required for -13- modification, may be made.. All holders of Warrants, by acceptance hereof, specifically consent to the binding effect of a written consent authorized by this Section 14. No failure or delay by any party in exercising any right or remedy hereunder shall operate as a waiver thereof, and a waiver of a particular right or remedy on one occasion shall not be deemed a waiver of any other right or remedy or a waiver of the same right or remedy on any subsequent occasion. 15. Miscellaneous. This Warrant shall be governed by the laws of the State of ------------- New York. The headings in this Warrant are for purposes of convenience and reference only, and shall not be deemed to constitute a part hereof. Neither this Warrant nor any term hereof may be changed, waived, discharged or terminated orally but only by an instrument in writing signed by the Company and, except as provided in Section 14 hereof, the registered holder hereof. All notices and other communications from the Company to the holder of this Warrant shall be sent either by facsimile copy to such number and to the attention of such person as the last holder of this Warrant shall have furnished to the Company, or shall be mailed by first-class registered or certified mail, postage prepaid , or sent by courier, to the address furnished to the Company in writing by the last holder of this Warrant who shall have furnished an address to the Company in writing. -14- [Signature Page to Warrant] ISSUED this 15th day of August, 1995. MAGINET CORPORATION By:_______________________________________ James A. Barth, Chief Financial Officer -15- EXHIBIT D-1 ----------- (Form of Opinion of Counsel to the Company) EXHIBIT D-1 ----------- FORM OF OPINION OF COUNSEL TO THE COMPANY re: $30,000,000 Senior Secured Notes of Pacific Pay Video Holdings (the "Company") ------------------------------------------ The opinion shall be addressed to each of the Purchasers, dated the date of closing, and may contain such customary assumptions and indicate such investigations as are deemed necessary and appropriate by special US counsel to the Company and are acceptable to the Purchasers. The opinion shall state that it may be relied upon by any transferee of Securities and by White & Case, special counsel to Purchasers, in delivering their opinion. The opinion shall express a favorable opinion as to: 1. The due organization, valid existence and good standing of the Company; 2. The fact that the Company has the corporate power and authority (i) to enter into and perform its obligations under each of the Note Documents to which it is a party and (ii) to own its properties and carry on its business; 3. The due authorization by all requisite corporate action, execution and delivery of each of the Note Documents to which it is a party by the Company, and that each such Note Document constitutes a valid and binding agreement of the Company enforceable in accordance with its terms; 4. The issuance, sale and delivery of the Securities and the execution, delivery and performance by the Company of the Note Agreement, each Pledge Agreement and the Shareholders Agreement do not conflict with, nor result in any breach of, nor constitute a default under, nor result in the creation of any Lien upon any of the properties or assets of the Company pursuant to (a) the charter documents of the Company, (b) any statute, law, rule or regulation of the United States or the State of California, (c) any judgement, decree, writ, injunction, order or award of any arbitrator, court or governmental authority applicable to the Company or (d) any material agreement or other instrument to which the Company is a party or by which the Company may be bound; 5. The determination that no approval, consent or withholding of objection on the part of, or filing, registration or qualification with, any governmental body or regulatory authority or agency is necessary in the United States in connection with the issuance, sale and delivery of the Securities or the execution and delivery by the Company of the Note Agreement, each Pledge Agreement and the Shareholders Agreement; 6. The fact that the Company has the corporate power to submit to the jurisdiction of any court of the State of New York sitting in New York City and the federal courts of the United States sitting in New York City in respect of any legal action or proceeding relating to the Note Agreement or the Notes; 7. The enforceability in the State of California of a judgment rendered in any court of the State of New York sitting in New York City or in the federal courts of the United States sitting in New York City against the Company on the Note Agreement, any Pledge Agreement or the Securities without a substantive relitigation of the relevant issues; 8. The determination that a court in sitting in California will accept, and give effect to, the choice of New York law as the governing law of the Note Agreement and the Notes; 9. The absence of any material litigation pending or, to the knowledge of such counsel, threatened against the Company; 10. It is not necessary in connection with the offering, issuance, sale and delivery of the Securities under the circumstances contemplated by the Note Agreements to register the Notes or the Warrants under the Securities Act of 1933, as amended, or to qualify an indenture in respect of the Notes under the Trust Indenture Act of 1939, as amended; and 11. The extension of the credit represented by the Notes does not violate Regulation G of the Board of Governors of the Federal Reserve System; 12. The Company is not an "investment company" within the meaning of the Investment Company Act of 1940. EXHIBIT D-2 ----------- (Form of opinion of counsel to the Agent) [LETTERHEAD OF WHITE & CASE APPEARS HERE] JMD:MAC:ES August 15, 1995 re MagiNet Senior Secured Notes Due 2000 with Warrants --------------------------------------------------- To the Parties Listed on the Attached Schedule I Dear Ladies and Gentlemen: We have acted as counsel for The Chase Manhattan Bank, N.A. (the "Collateral Agent") in connection with each of the Pledge Agreements dated as of August 15, 1995 by and between the Collateral Agent and MagiNet corporation, as Pledgor, the Collateral Assignment Agreement, dated as of August 15, 1995 by and between Pacific Pay Video Limited and The Chase Manhattan Bank, N.A. as assignee, (the "Assignee"), and the Appointment Agreement dated an of August 15, 1995 by and among MagiNet Corporation, the Purchasers listed therein, and The Chase Manhattan Bank, N.A. as Collateral Agent (the "Agent"). The Chase Manhattan Bank, N.A., whether acting as Agent, Collateral Agent or Assignee shall be referred to herein as the "Agent." The documents referenced immediately above shall be referred to herein as the "Agent Documents." In this connection, we have examined such certificates of public officials, such certificates of officers of the Agent, and copies certified to our satisfaction of such corporate documents and records of the To the Parties Listed on the Attached Schedule I -2 Agent, and of such other papers, as we have deemed relevant and necessary for our opinion hereinafter set forth. We have relied upon such certificates of public officials and of officers of the Agent with respect to the accuracy of material factual matters contained therein which were not independently established. In rendering the opinion expressed below, we have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals and the conformity to authentic original documents of all documents submitted to us as certified, conformed or photostatic copies. Based upon the foregoing, it is our opinion that: l. The Agent has been duly incorporated and is validly existing as a national banking association under the laws of the United States of America and has the power and authority to enter into, and to take all action required of it under, the Agent Documents. 2. The Agent Documents been duly authorized, executed and delivered by the Agent and constitute valid and binding obligations of the Agent enforceable against the Agent in accordance with their terms, except as the enforceability thereof may be limited by (i) bankruptcy, insolvency, reorganization, or other similar laws affecting the enforcement of creditors' rights generally, as such laws would apply in the event of a bankruptcy, insolvency or reorganization or similar occurrence affecting the Agent, and (ii) general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). 3. The execution and delivery of the Agent Documents by the Agent and the performance by the Agent of their terms do not conflict with or result in a violation of (A) any law or regulation of the United States of America or the State of New York governing the banking or trust powers of the Agent or (B) the By-laws of the Agent. 4. No approval authorization or other action by, or filing with, any governmental authority of the United States of America or the State of New York having jurisdiction over the banking or trust powers of the Agent is required in connection with the execution and delivery To the Parties Listed on the Attached Schedule 1 -3 of the Agent Documents or the performance by the Agent of the terms of the Agent Documents. We express no opinion as to matters governed by any law other than the law of the State of New York and the Federal law of the United States. Very truly yours, /s/ White & Case Schedule I ---------- The Chase Manhattan Bank, N.A. 4 MetroTech Center, 3rd Floor Brooklyn, New York 11245 MagiNet Corporation 405 Tasman Drive Sunnyvale, California 94089 Purchasers: ---------- New York Life Insurance Company The Mutual Life Insurance Company of New York Waslic Company II Namtor BVC LP EXHIBIT D-3 ----------- FORM OF OPINION OF COUNSEL TO EACH SUBSIDIARY re: US$30,000,000 Senior Secured Notes of Pacific Pay Video Holdings (the "Company") ------------------------------------------ Each opinion with respect to a Subsidiary whose shares are pledged pursuant to a Pledge Agreement shall be addressed to the Purchasers, dated the date of closing, and may contain such customary assumptions and indicate such investigations as are deemed necessary and appropriate by the counsel to such Subsidiary and are acceptable to such Purchasers. The opinion shall state that it may be relied upon and by White & Case, special counsel to the Purchasers, in delivering their opinion, and by any transferee of a Note. The opinion shall express a favorable opinion as to: 1. The due organization and valid existence of such Subsidiary. 2. The taking of all requisite action by such Subsidiary to perfect the interest of the Trustee in the shares of such Subsidiary pledged under the Pledge Agreement. 3. The fact that such Subsidiary (i) has the corporate power and authority to own its properties and carry on its business and (ii) is duly qualified to do business and is, if applicable, in good standing, in each jurisdiction in which the character of the properties owned or held under lease by it or the nature of the business transacted by it requires such qualification. 4. The absence of any requirement to register the Pledge Agreement under the laws of the relevant jurisdictions. 5. The determination that no approval consent or withholding of objection on the part of, or filing, registration or qualification with, any governmental body is necessary in the jurisdiction of such Subsidiary in connection with the execution and delivery of the Pledge Agreement. 6. The determination that no stamp or stamp duty reserve tax will be payable in the jurisdiction of such Subsidiary in respect of the execution and delivery of the Pledge Agreement. 7. The enforceability in the jurisdiction in which such Subsidiary is established of a New York judgment rendered in any court of the State of New York sitting in New York City or in the federal courts sitting in New York City against the Collateral in the Pledge Agreement without a substantive relitigation of the relevant issues. 8. In the case of a Pledge Agreement governed by New York law, the determination that a court in the jurisdiction in which such Subsidiary is established will accept, and give effect to, the choice of New York law as the governing law of the Pledge Agreement. 9. The absence of withholding or similar taxes imposed by the jurisdiction in which such Subsidiary is established or any taxing jurisdiction thereof on payments under the Pledge Agreement. 10. With respect to such Subsidiary, the execution and delivery of the Pledge Agreement and fulfillment of and compliance with the respective provisions of the Pledge Agreement do not conflict with, or result in a breach of the terms, conditions or provisions of, or constitute a default under, or result in any violation of, or result in the creation of any Lien upon any of the properties or assets of such Subsidiary pursuant to, the charter or by-laws of such Subsidiary, any applicable law (including any securities laws), statute, rule or regulation or (insofar as is known to us after having made due inquiry with respect thereto) any agreement (including, without limitation, any agreement listed in Exhibit C to the Note Agreement), instrument, order, judgment or decree to which such Subsidiary is a party or otherwise subject. 2 EXHIBIT E TO NOTE AGREEMENT Collateral Assignment Agreement also appears as Exhibit 10.46 to this Registration Statement COLLATERAL ASSIGNMENT AGREEMENT ------------------------------- THIS COLLATERAL ASSIGNMENT AGREEMENT (this "Agreement") dated as of August 15, 1995, between PACIFIC PAY VIDEO LIMITED, a corporation organized under the laws of the State of California, as assignor (the "Assignor"), and THE -------- CHASE MANHATTAN BANK, N.A., as collateral agent (the "Assignee") for the benefit -------- of the Noteholders. Unless otherwise defined herein, capitalized terms used herein shall have the meanings provided in the Note Agreement, as defined below. W I T N E S S E T H : - - - - - - - - - - WHEREAS, MagiNet Corporation (the "Company") has entered into the Note Agreement dated as of August 15, 1995 with certain U.S. financial institutions, providing for the issuance and sale of up to $30,000,000 aggregate principal amount of its 10.5% Senior Secured Notes and the issuance of warrants (the "Note Agreement"); WHEREAS, the Company, the Assignee and the Purchasers have entered into the Appointment Agreement dated as of August 15, 1995 (the "Appointment Agreement") providing for the appointment of The Chase Manhattan Bank, N.A. to act as collateral agent for the benefit of the Noteholders under the Security Documents (including this Agreement); WHEREAS, it is a condition precedent under the Note Agreement to each Purchaser's obligation to purchase and pay for the Notes and to accept the Warrants to be issued under the Note Agreement that the Assignor shall have executed and delivered to the Assignee this Agreement; WHEREAS, the Assignor desires to execute this Agreement to satisfy the conditions described in the preceding paragraphs and to induce the Purchasers to enter into the Note Agreement and to purchase and pay for the Notes and the Warrants (and to induce any future Noteholders so to do); NOW, THEREFORE, in consideration of the benefits accruing to the Assignor and the Company, the receipt and sufficiency of which are hereby acknowledged, the Assignor hereby makes the following representations and warranties to the Assignee and hereby covenants and agrees with the Assignee as follows: 1. Grant of Security Interest. Assignor hereby grants to Assignee a -------------------------- security interest in the contract and related items described in Paragraph 2 below (the "Collateral") for the benefit of the Assignee as collateral trustee for the Noteholders to secure (i) the payment due of the principal of and interest in respect of the Notes and payment of all other obligations and liabilities (including without limitation indemnities, premium, if any, fees and interest thereon) of the Company, now existing or hereafter incurred under, arising out of or in connection with the Note Agreement, each Note or any other Note Document (other than the Warrants) and (ii) the due performance and compliance with the terms of the Note Documents (other than the Warrant) by the Company (all such principal, interest, obligations and liabilities, collectively, the "Secured Obligations"). In no event solely as a consequence of the grant of ------------------- this security interest shall the Assignee be liable for any obligations and/or amounts owing to On Command Video Corporation pursuant to the terms of the Technology License Agreement; provided that nothing in this sentence shall diminish the obligation of a transferee of the rights under the Technology License Agreement pursuant to Section 6 of this Agreement to pay royalties thereunder. 2. Collateral. The Collateral shall consist of all right and interest of ---------- Assignor in and to (A) all of Assignor's right and interest in the Technology License Agreement as now or hereafter amended, modified or supplemented, in accordance with the terms hereof and the Note Agreement and (B) all proceeds of the foregoing collateral, including whatever is receivable or received when the foregoing collateral is sold, collected, assigned, exchanged or otherwise disposed of, whether such disposition is voluntary or involuntary. 3. Representations and Warranties. Assignor hereby represents and warrants ------------------------------ that: (i) except as disclosed in Annex A, Assignor has a valid interest in the Collateral and that no other person has any right, title, claim or interest (by way of security interest or other lien or charge or otherwise) in, against or to the Collateral, (ii) it has full power, authority and legal right to assign its right and interest in the Collateral pursuant to this Agreement; and (iii) other than registrations or filings described in Annex B hereto (all of which have been made prior to the date hereof or will be made within the relevant statutory period) no consent, filing, recording or registration is required to perfect the Lien purported to be created by this Agreement. 4. Covenants of the Assignor. The Assignor covenants and agrees that (i) ------------------------- it will defend the Assignee's right, title and Lien in and to the Collateral against the claims and demands of all Persons, (ii) it will procure, execute and deliver from time to time any endorsements, assignments, financing statements and other writings deemed reasonably necessary or appropriate to perfect, maintain and protect the Assignee's security interest hereunder and the priority thereof (iii) except as otherwise permitted by Sections 8.1 and 8.8 of the Note Agreement, it will not sell, encumber, or otherwise dispose of or transfer the Collateral or right or interest therein except as hereinafter provided, and to keep the Collateral free of all levies and security interests or other liens or charges except those approved in writing by the Required Holders and Permitted Liens, (iv) except as otherwise permitted by Section 8.11 of the Note Agreement, it will not amend, modify or supplement the Technology License Agreement and (v) it will duly fulfill all obligations on its part to be fulfilled under or in connection with the Technology License Agreement and will do nothing to impair the rights of the Assignor in respect of the Collateral. 5. Authorized Action by Assignee. Effective upon and during the ----------------------------- continuance of an Event of Default, Assignor hereby irrevocably appoints Assignee as its attorney-in-fact to do (but Assignee shall not be obligated to and shall incur no liability to Assignor or any third party for failure so to do) any act which Assignor is obligated by this Agreement to do, and to cure a failure by Assignor to perform its obligations under the Technology License Agreement and, after an Event of Default and upon acceleration of the Notes in accordance with the terms of the Note Agreement, to exercise such rights and powers as Assignor might exercise with respect to the Collateral, including, without limitation, to the extent permitted by law and the terms of the Technology License Agreement, the right to (i) collect by legal proceedings or otherwise and endorse, receive and receipt for proceeds and other sums and property now or hereafter payable on or on account of the Collateral, (ii) enter into any extension or other agreement pertaining to, or deposit, surrender, accept, hold or apply other property in exchange for the Collateral, (iii) transfer the Collateral to its own or its nominee's name, and (iv) make any compromise or settlement, and take any action it deems advisable, with respect to the Collateral. Assignor agrees to reimburse Assignee upon demand for any costs and expenses, including, without limitation, attorneys' fees, Assignee may incur while acting as Assignor's attorney-in-fact hereunder, all of which costs and expenses are included in the Secured Obligations secured hereby. Assignee shall not be required to make any presentment, demand or protest, or give any notice and need not take any action to preserve any rights against any prior party or any other person in connection with the Secured Obligations or with respect to the Collateral. 6. Default and Remedies. Assignor shall be deemed in default under this -------------------- Agreement upon the occurrence of an Event of Default. Upon the occurrence and continuance of an Event of Default, Assignee may, at its option, and without notice to or demand on Assignor and in addition to all rights and remedies available to Assignee under any guaranty, this Agreement or any agreement with Assignor, or by law, do any one or more of the following: (i) enforce Assignee's security interest in any manner permitted by law, or provided for in this Agreement, (ii) sell, transfer, assign or otherwise dispose of any Collateral, for cash or credit or future delivery, on such terms and in such manner as Assignee may determine; and (iii) recover from Assignor all costs and expenses, including, without limitation, reasonable attorneys' fees, incurred or paid by Assignee in exercising any right, power or remedy provided by any guaranty, this Agreement, any agreement with Assignor, or by law. 7. Termination; Release. Upon: -------------------- (a) the receipt by the Assignee of a certificate, satisfactory to the Assignee executed by each Noteholder certifying that the conditions set forth in Section 5.3 of the Note Agreement to the release of the Collateral have been satisfied; or (b) the date on which the Secured Obligations have been discharged in full; this Agreement shall terminate, and the Assignee, at the written request and expense of the Assignor, will promptly execute and deliver to the Assignor a proper instrument or instruments acknowledging the satisfaction and termination of this Agreement, and will duly assign, transfer and deliver to the Assignor, without recourse and without any representation or warranty, such of the Collateral as may be in the possession of the Assignee and has not theretofore been sold or otherwise applied or released pursuant to this Agreement, together with any moneys at the time held by the Assignee hereunder. 8. Cumulative Rights. The rights, powers and remedies of Assignee under ----------------- this Agreement shall be in addition to all rights, powers and remedies given to Assignee by virtue of any statute or rules of law, or any agreement, all of which rights, powers and remedies shall be cumulative and may be exercised successively or concurrently without impairing Assignee's security interest in the Collateral. 9. Amendment; Waiver. Any forbearance or failure or delay by Assignee in ----------------- exercising any right, power or remedy shall not preclude the further exercise thereof, and every right, power or remedy of Assignee shall continue in full force and effect until such right, power or remedy is specifically waived in a writing executed by Assignee. Assignor waives any right to require Assignee to proceed against any person or to pursue any remedy in Assignee's power. This Agreement may be changed, waived, discharged or terminated only by an instrument in writing in accordance with Section 11.3 of the Note Agreement. 10. Binding Upon Successors. All rights of Assignee under this Agreement ----------------------- shall inure to the benefit of its successors and (subject to the prior written consent of On Command Video Corporation) assigns, and the Secured Obligations of Assignor shall bind its heirs, executors, administrators, successors and assigns; provided, however, that the Assignor may not, without the prior written -------- ------- consent of the Assignee (acting on the instructions of all the Noteholders), assign or transfer any of its rights or obligations under this Agreement. The Assignee may transfer, assign or grant its rights hereunder in connection with an assignment or transfer of all or any part of its interest in and rights under this Agreement pursuant to the provisions of Section 11 of the Appointment Agreement. 11. Severability. If any of the provisions of this Agreement shall be held ------------ invalid or unenforceable, this Agreement shall be construed as if not containing those provisions and the rights and obligations of the parties hereto shall be construed and enforced accordingly. If any agreement or obligation contained in this Agreement shall be held to be in violation of law, then such agreement or obligation shall be deemed to be the agreement or obligation of the party hereto to the full extent permitted by law. 12. Choice of Law. This Agreement is a contract made under the laws of the ------------- State of New York of the United States and shall for all purposes be construed and enforced in accordance with, and the rights of parties shall be governed by, the laws of such State and except as otherwise defined herein, terms used herein shall have the meanings given them in the New York Uniform Commercial Code. 13. Notice. Any written notice, consent or other communication provided for ------ in this Agreement shall be delivered or sent in accordance with Section 11.10 of the Note Agreement, provided that, for this purpose, the address of the Assignor and the Assignee shall be as follows: If to the Assignor: 405 Tasman Drive Sunnyvale, California 94089 Attention: Chief Financial Officer Facsimile: 408 734 1687 With a copy to: On Command Video Corporation 3301 Olcott Santa Clara, California 95054 Facsimile: 408 496 0668 If to the Assignee: The Chase Manhattan Bank, N.A. Corporate Trust Administration 4 Chase Metro Tech Center Third Floor Brooklyn, New York 11245 Facsimile: 718 292 5885 or sent to the Assignee at such other address as it may designate for itself by notice given in accordance with this Section 13. 14. Consent to Jurisdiction; Service of Process. For the purposes of ------------------------------------------- assuring that the Assignee and the Noteholders may enforce their respective rights under this Agreement, the Assignor for itself and its successors and assigns, hereby irrevocably (i) agrees that any legal or equitable action, suit or proceeding against the Assignor arising out of or relating to this Agreement or the Note Documents or any transaction contemplated hereby or the subject matter of any of the foregoing may be instituted in any state or Federal court in the Borough of Manhattan in the State of New York, (ii) waives any objection which it may now or hereafter have to the venue of any action, suit or proceeding in the State of New York or any claim of forum non conveniens in the -------------------- State of New York, and (iii) irrevocably submits itself to the non-exclusive jurisdiction of any state or Federal court of competent jurisdiction in the Borough of Manhattan in the State of New York for purposes of any such action, suit or proceeding. Without limiting the foregoing, the Assignor hereby appoints, in the case of any such action or proceeding brought in the courts of or in the State of New York, CT Corporation System, with offices on the date hereof at 1633 Broadway, New York, New York 10019, to receive, for it and on its behalf, service of process in the State of New York with respect thereto, provided the Assignor may appoint any other person, reasonably acceptable to the Assignee (acting on the instructions of the Required Holder(s)), with offices in the State of New York to replace such agent for service of process upon delivery to the Noteholders of a reasonably acceptable agreement of such new agent agreeing so to act. The Assignor agrees that service of process by means of notice (as provided in Section 11.10 of the Note Agreement) of any such action, suit or proceeding with respect to any matter as to which it has submitted to jurisdiction as set forth in this Section 14 shall be taken and held to be valid personal service upon it. 15. Counterparts. This Agreement may be executed in one or more ------------ counterparts, and each of which when so executed and delivered shall be deemed an original for all purposes but all of which together shall constitute but one and the same instrument. IN WITNESS WHEREOF, the Assignor and the Assignee have caused this Collateral Assignment Agreement to be executed by their duly elected officers duly authorized as of the date first above written. PACIFIC PAY VIDEO LIMITED, as Assignor By /s/ James A. Barth ------------------------- Name: James A. Barth Title: Chief Financial Officer THE CHASE MANHATTAN BANK, N.A., as Assignee By /s/ Rossana E. Abueua ------------------------- Name: Rossana E. Abueua Title: Second Vice President APPROVAL AND AGREEMENT The undersigned, being the licensor under the Technology License Agreement referred to in the foregoing Collateral Assignment Agreement, hereby approves said Collateral Assignment Agreement and the assignment of the Technology License Agreement thereunder for all purposes of said Collateral Assignment Agreement subject to the terms and conditions of the Technology License Agreement. ON COMMAND VIDEO CORPORATION By /s/ Robert Snyder ------------------------- Name: Robert Snyder Title: President Schedule A to Agreement of Assignment as Collateral New York Life Insurance Company 51 Madison Avenue New York, NY 10010 The Mutual Life Insurance Company of New York 1740 Broadway, 11th Floor New York, NY 10019 Namtor BVC LP 311 South Wacker Drive, Suite 4190 Chicago, IL 60606 Waslic Company II c/o Ft. Washington Investment Advisors 400 Broadway Cincinnati, OH 45202 APPENDIX A to Agreement of Assignment as Collateral Form of a Letter of Confirmation under Section 18 ------------------------------------------------- Date: ,19__ The Chase Manhattan Bank, N.A. as the Agent for the Noteholders (as Assignees) Re: Noteholders of the Notes issues by MagiNet Corporation pursuant to the Note Agreement dated August 15, 1995 and Assignees of the Agreement of Assignment as Collateral referred to below -------------------------------------------------------- Dear Sirs: We refer to the Agreement of Assignment as Collateral dated August 15, 1995 (as amended to date, "Assignment as Collateral") made between you as the Agent and an Assignee, the Purchasers and us. All Capitalized terms defined or used herein and not otherwise defined herein shall have the same meanings specified in the Assignment as Collateral. We understand that the current Noteholders, and accordingly the current Assignees (excluding you), are those listed below and confirm that all security interests created or to be created under the Assignment as Collateral are effective for the benefit of you and such other Assignees as if they all were Assignees on the date the Assignment as Collateral was first executed. Very truly yours, MagiNet Corporation ______________________ (Authorized Signatory) (List of Assignees): ANNEX A TO COLLATERAL ASSIGNMENT AGREEMENT Assignor has sublicensed its territorial rights under the Technology License Agreement to the territories of Central and South America and the republics of the Former Soviet Union to Comsat Video Enterprises, Inc. ("Comsat") pursuant to an Exclusive Sublicense Agreement, dated as of March 15, 1993, between Assignor and Comsat. ANNEX B TO COLLATERAL ASSIGNMENT AGREEMENT The filing of a UCC-1 financing statement naming Assignor as Debtor and Agent as Secured party with the Secretary of State of California. EXHIBIT F TO NOTE AGREEMENT APPOINTMENT AGREEMENT APPOINTMENT AGREEMENT (this "Agreement") dated as of August 15, 1995 among MAGINET CORPORATION, a corporation organized under the laws of the State of California (the "Company"); each of the Purchasers set forth on the Purchaser Schedule to the Note Agreement referred to below (herein, together with their respective successors and assigns, the "Purchasers") of the senior secured notes (herein called the "Notes") of the Company pursuant to the Note Agreement, dated as of August 15, 1995 (herein, as the same may be supplemented or amended from time to time, called the "Note Agreement") between the Company and the Purchasers; and The Chase Manhattan Bank, N.A., a national association organized under the laws of the United States, as collateral agent (the "Agent" which expression shall include any successor agent or agents holding the security constituted by the Security Documents hereinafter referred to). Capitalized terms used herein but not otherwise defined herein shall have the meaning assigned thereto in the Note Agreement. W I T N E S S E T H : WHEREAS, it is a condition precedent to the Purchasers purchasing the Notes that the Purchasers, the Company and the Agent execute and deliver this Agreement; WHEREAS, any and all amounts owing to the Purchasers or the Agent under the Note Agreement, the Notes and any other Note Document are to be secured by the Security Documents; NOW, THEREFORE, in consideration of the premises and of the commitments made hereunder by the parties hereto, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree as follows: Section 1. Appointment. The Purchasers hereby designate The Chase Manhattan Bank, N.A. as Agent to act as specified herein and in the Security Documents. Each Purchaser hereby authorizes the Agent to take such action on its behalf under the provisions of this Agreement, the Note Agreement and the Security Documents and to exercise such powers and to perform such duties hereunder and thereunder as are specifically delegated to or required of the Agent by the terms hereof and thereof and such other powers as are reasonably incidental thereto. The Agent may perform any of its duties hereunder and thereunder by or through its agents or employees. The Agent shall have no duties except those expressly set forth in this Agreement, the Note Agreement and the Security Documents. Neither the Agent nor any of its officers, directors, employees or agents shall be liable for any action taken or omitted by it or any of them as such hereunder or in connection herewith, unless caused by its or their gross negligence or wilful misconduct. Section 2. Authority to Execute Documents. The Purchasers hereby authorize and direct the Agent to execute and deliver the Security Documents to which the Agent is to be a party in the respective forms thereof in which delivered from time to time by the Noteholders to the Agent for execution and delivery and, subject to the terms hereof, to execute and deliver such other agreements, instruments and documents, to exercise its rights and perform its duties under each of the Security Documents to which it is a party as set forth in such documents, and to take such further actions, not otherwise specified herein, as may be necessary to consummate the transactions contemplated by this Agreement, the Note Agreement and the Security Documents and perform the duties and obligations of the Agent hereunder and under the Note Agreement and the Security Documents to which the Agent is to be a party and to do all other things which are incidental to the rights, powers, discretions, duties, obligations and responsibilities given or imposed on the Agent by the Note Agreement, the Security Documents or hereunder. The Purchasers hereby irrevocably agree that so long as any obligation is owed to any Noteholder under the Notes, the Note Agreement or any of the other Note Documents, the Agent shall, subject as hereinafter provided, take any and all actions, and refrain from taking any and all actions, pursuant to the written instructions of the Required Holder(s), and shall be deemed irrevocably to be bound by any limitations or restrictions expressly imposed on the rights of the Agent pursuant to the terms of any such other Note Document to which the Agent may be a party. The form of such other agreements, instruments and documents and the nature of such further actions shall be reasonably acceptable to the Agent. Section 3. Duties and Liabilities of the Agent Generally. The Agent, prior to its receipt of a notice from the Required Holder(s) informing it of the occurrence and continuance of a Default or an Event of Default, undertakes to perform such duties and only such duties as are specifically set forth in this Agreement, the Note Agreement and any other Security Document. In the event that the Agent has been so notified of a Default or an Event of Default (which has not been notified to the Agent as having been cured or waived), the Agent shall exercise such of the rights and powers vested in it by this Agreement, the Note Agreement and any other Security Document, and use the same degree of care and skill in their exercise, required of an agent by law and otherwise as a prudent person would exercise or use under the circumstances in the conduct of his or her own affairs. If the Agent shall not have received written instructions from the Required Holder(s) within twenty (20) days after receipt of such notice of Default or Event of Default, the Agent, until instructed otherwise by the Required Holder(s) may, but shall be under no duty to, take or refrain from taking such action with respect to such Default or Event of Default, as it shall deem advisable in the EXHIBIT F APPOINTMENT AGREEMENT best interests of the Noteholders. No provision of this Agreement, the Note Agreement or any other Security Document shall be construed to relieve the Agent from liability for its own gross negligence or its own wilful misconduct, except that: (i) No Implied Obligation; Reliance on Certificates and Opinions. ------------------------------------------------------------ (a) The duties and obligations of the Agent shall be determined solely by the express provisions of this Agreement, the Note Agreement and the other Security Documents, and the Agent shall not be liable except for the performance of such duties and obligations as are specifically set forth in this Agreement, the Note Agreement and the other Security Documents, and no implied covenants or obligations shall be read into this Agreement, the Note Agreement or any other Security Document against the Agent; and (b) in the absence of bad faith on the part of the Agent, the Agent may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any certificates or opinions furnished to the Agent which conform on their face to the requirements of this Agreement, the Note Agreement or the other Security Documents, but in the case of any such certificates or opinions which by any provision hereof or thereof are specifically required to be furnished to the Agent, the Agent shall be under a duty to examine the same to determine whether or not they conform on their face to the requirements of this Agreement, the Note Agreement or the other Security Documents; provided, that the Agent shall -------- be under no obligation to investigate any of the underlying facts or circumstances recited in any such certificate or opinion; (ii) Errors of Judgment. The Agent shall not be liable for any ------------------ error of judgment made in good faith by any responsible officer or officers; (iii) Actions in Accord with Direction. The Agent shall not be liable -------------------------------- with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Required Holder(s) (or such other greater or lesser number of holders of the Notes as shall be expressly provided for herein or in the Note Agreement) relating to the time, method and place of conducting any proceeding for any remedy available to the Agent or exercising any trust or power conferred upon the Agent under this Agreement, the Note Agreement or any other Security Document; and (iv) Validity and Perfection of Agreement. Notwithstanding anything ------------------------------------ to the contrary herein, the Agent shall have no responsibility as to the validity or perfection of any Lien purported to be created hereunder or under any other Security Document. The Agent shall have no duty to do, cause to be done or advise with respect to any EXHIBIT F APPOINTMENT AGREEMENT filing or recording or to the maintenance of any such filing or recording with any governmental agency or office or otherwise, unless and until it shall have been in each case directed by the Required Holder(s) with reasonable specificity to do so. At the expense of the Company, the Agent shall have the right, from time to time, where reasonable to seek advice of its own counsel in the United States and in each other jurisdiction in which an entity listed on Schedule 1.2 as a Foreign Subsidiary is organized regarding the recording, filing and registration of any Lien in connection herewith. None of the provisions of this Agreement, the Note Agreement or any other Security Document shall require the Agent to expend or risk its own funds or otherwise to incur any personal financial liability in the performance of any of its duties or in the exercise of any of its rights or powers howsoever arising. Section 4. Particular Duties and Liabilities of the Agent. Subject to the provisions of Section 3: (i) Reliance Generally. The Agent may rely and shall be protected ------------------ in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, approval or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties, and the Agent shall not be liable with respect to any action taken or omitted to be taken by it in good faith and without gross negligence in accordance with such resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, approval or other paper or document; (ii) Requests of the Company. Any request, direction, order or ----------------------- demand of the Company mentioned herein or in any Security Document shall be sufficiently evidenced (unless other evidence in respect thereof be herein or therein specifically prescribed) by a certificate signed by a Responsible Officer; (iii) Reliance on Legal Advisers. The Agent may consult with legal -------------------------- advisers (including without limitation in-house counsel for the Agent), and any advice or written opinion of such legal advisers shall be full and complete authorization and protection in respect of any action taken or omitted by it hereunder in good faith and without gross negligence and in accordance with such written advice; (iv) Duty to Investigate. The Agent shall not be bound to make any ------------------- investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, approval or other paper or document, unless requested in writing to do so by the Required Holder(s). The Agent EXHIBIT F APPOINTMENT AGREEMENT may require indemnity against any such expense or liability as a condition to proceeding in much manner; (v) Action Through Agents or Attorneys. The Agent may execute any ---------------------------------- of the trusts or powers hereunder or under any other Security Document or perform any duties hereunder or thereunder either directly or by or through agents (including, without limitation, any affiliates of the Agent, and prior to the occurrence of a Default or an Event of Default of which the Agent has received notice as specified in Section 3, the Company and any of its Affiliates) or attorneys appointed with due care; (vi) Delegation of Duties. The Agent may execute any of the trusts -------------------- or powers hereunder or perform any duties hereunder by or through any of its affiliates; (vii) Delay Awaiting Directions. The Agent shall not be liable for ------------------------- any delay or failure to act unless and until the Agent shall have been directed in writing to act in accordance with this Agreement; (viii) Marshaling of Assets. The Agent (a) need not marshal in any -------------------- particular order any particular part or piece of the Collateral held by the Agent in its capacity as Agent hereunder or as the secured party under any other document entered into in connection herewith or any of the funds or assets that the Agent may be entitled to receive or have claim upon and (b) may, but shall not be required, to vary, exchange, renew, modify, release, refuse to complete or to enforce or to assign any judgments, guarantees or other securities or instruments (negotiable or otherwise) held by it, whether or not satisfied by payment; and (ix) Right to Seek Direction. The Agent shall have the right to ----------------------- request instructions from the Noteholders with respect to taking or refraining from taking any action in connection with this Agreement, the Note Agreement or any other Security Document and shall be entitled to act or refrain from taking such action unless and until the Agent shall have received written instructions from the Required Holder(s), and the Agent shall not incur liability by reason of so refraining. Section 5. Responsibility for Documents; Recitals in Documents. The Agent is hereby directed by the Purchasers to execute and deliver each of the other Security Documents as may be necessary or appropriate on the date hereof and as may become so after the date hereof. The recitals contained in this Agreement, the Note Agreement and the Security Documents shall be taken as the statements of the Company, and the Agent assumes no responsibility for the correctness of the same. The Agent shall have no responsibility with respect to and shall have no obligation to EXHIBIT F APPOINTMENT AGREEMENT familiarize itself with any document other than this Agreement, the Note Agreement and the other Security Documents to which it is a signatory and makes no representation as to the validity or sufficiency of this Agreement or such other documents. Section 6. Segregation of Funds and Property; Interest. Subject to the provisions of Sections 3 and 4, moneys and other property received by the Agent shall, until used or applied as herein provided, be held in trust for the purposes for which they were received, and shall be segregated from other funds. The Agent shall not be under any liability for interest on any moneys received by it hereunder. Section 7. Compensation, Indemnification and Reimbursement of the Agent. The Company covenants and agrees to pay to the Agent from time to time, and the Agent shall be entitled to, reasonable compensation (which to the extent permitted by law shall not be limited by any provision of law in regard to the compensation of an agent of an express trust) for all services rendered by it, and the Company will pay or reimburse the Agent upon its request for all reasonable expenses, disbursements and advances incurred or made by the Agent in accordance with any of the provisions of this Agreement, the Note Agreement or any other Security Document (including the compensation and the expenses and disbursements of its agents and counsel and of all Persons not regularly in its employ). The Company also covenants to indemnify the Agent (which for purposes of this Section 7 shall include its directors, officers, employees and agents) for, and to hold it harmless from and against, any and all loss, liability or expense (including counsel fees and expenses) reasonably incurred without gross negligence, wilful misconduct or bad faith on the part of the Agent, arising out of or in connection with the acceptance or administration of this trust, the exercise of any rights and remedies arising out of this Agreement, the Note Agreement or any other Security Document, or the performance of any of its duties, including the reasonable costs and expenses of defending itself against any claim of liability and in enforcing any provision of this Agreement, the Note Agreement or any other Security Document (except any liability incurred with gross negligence, wilful misconduct or bad faith on the part of the Agent), with interest thereon at a rate equal to that in the Agent's customary banking practice with respect to overdrafts (including the imposition of interest, funds, wage and administrative fees) from the date the same shall have been paid until actually reimbursed. The obligations of the Company under this Section 7 to compensate and indemnify the Agent and to pay or reimburse the Agent for reasonable expenses, disbursements and advances shall constitute additional indebtedness under the Note Agreement and the Security Documents and shall survive the satisfaction, discharge or other termination of this Agreement and the resignation or removal of the Agent hereunder. The Company agrees to reimburse the Agent for any costs or expenses reasonably and properly EXHIBIT F APPOINTMENT AGREEMENT incurred by the Agent in connection with this Agreement, the Note Agreement and the other Security Documents. To secure payment of such compensation, reimbursement and indemnification, the Agent shall have a claim and Lien prior to that of any party, which Lien and claim and Lien shall constitute obligations secured by this Agreement and the Security Documents. Section 8. Reliance on Certificate. Subject to the provisions of Section 1, whenever in the administration of the provisions of this Agreement, the Note Agreement or the Security Documents, the Agent shall deem it necessary or desirable that a matter be proved or established prior to taking or suffering any action to be taken hereunder, such matter (unless other evidence in respect thereof be herein or therein specifically prescribed) may in the absence of gross negligence, wilful misconduct or bad faith on the part of the Agent, be deemed to be conclusively proved and established by a certificate signed by the required Holder(s) delivered to the Agent, and such certificate, in the absence of gross negligence, wilful misconduct or bad faith on the part of the Agent, shall be full warrant to the Agent for any action taken, suffered or omitted by it under the provisions of this Agreement the Note Agreement or the Security Documents, upon the faith thereof. Section 9. Qualification of the Agent. The Agent hereunder shall at all times be a corporation or national association doing business under the laws of the United States or any State thereof which is authorized under such laws to exercise corporate trust powers and is subject to supervision or examination by the Office of the Comptroller of the Currency and the Board of Governors of the Federal Reserve System or the equivalent State authority, as the case may be. In case at any time the Agent shall cease to be eligible in accordance with the provisions of this Section 9, the Agent shall resign immediately in the manner and with the effect specified in Section 10. Section 10. Resignation; Removal. (i) Resignation of the Agent. The ------------------------ Agent, or any agent or agents hereafter appointed, may at any time resign by giving not less than three months' written notice of resignation to the Company and each Noteholder. Upon receiving such notice of resignation and evidence satisfactory to them of the giving of such notice to all such holders of Notes, the Required Holder(s) (after consultation with the Company unless a Default or Event of Default has occurred and is continuing) shall promptly appoint a successor agent, by written instrument, in triplicate, one copy of which instrument shall be delivered to the Company, one copy to the resigning Agent and one to the successor agent, and upon such appointment, the Agent is hereby automatically, without any further act, released from its obligations hereunder (other than any causes of action arising prior to such resignation). If no successor agent shall have been so appointed and have accepted appointment within forty five (45) days after the giving of EXHIBIT F APPOINTMENT AGREEMENT such notice of resignation, the resigning Agent may petition any court of competent jurisdiction for the appointment of a successor agent, or any Noteholder which has been a bona fide holder thereof for at least six (6) months may, on behalf of itself and all others similarly situated, petition any such court for appointment of a successor agent. Such court may thereupon, after such notice, if any, as it may deem proper and as it may prescribe, appoint a successor agent. (ii) Removal of the Agent for Cause. In case at any time any of the ------------------------------ following shall occur: (a) the Agent shall cease to be eligible in accordance with the provisions of Section 9 and shall fail to resign after written request therefor by the Required Holder(s); (b) the Agent shall become incapable of acting, or shall be adjudged a bankrupt or insolvent, or a receiver of the Agent or its property shall be appointed, or any public officer shall take charge or control of the Agent or of its property or affairs for the purpose of rehabilitation, conservation or liquidation; or (c) any gross negligence or willful misconduct by the Agent in the performance by it of its duties or the exercise of its power hereunder; then the Required Holder(s) (after consultations with the Company, unless a Default or an Event of Default has occurred and is continuing) may remove the Agent and appoint a successor by written instrument, in triplicate, one copy of which instrument shall be delivered to the Company, one copy to the Agent so removed and one to the successor agent, or, failing such removal and appointment within forty-five (45) days after delivery of the written instrument of removal, any Noteholder which has been a bona fide holder thereof for at least six (6) months may, on behalf of itself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Agent and the appointment of a successor agent. Such court may thereupon, after such notice, if any, as it may deem proper and as it may prescribe, remove the Agent and appoint a successor agent. (iii) Removal of Agent Without Cause. The Required Holder(s) may (after consultations with the Company, unless a Default or an Event of Default has occurred and is continuing) at any time remove the Agent and appoint a successor agent by written notice of such action to the Company, the Agent and the successor agent. If no successor agent shall have been so appointed and have accepted appointment within forty-five (45) days after the giving of such notice of removal, the Agent may petition any court of competent jurisdiction for the appointment of a successor agent, or any Noteholder which has been a bona fide holder thereof for at least six (6) months may, on behalf of itself and all others similarly situated, petition any EXHIBIT F APPOINTMENT AGREEMENT such court for appointment of a successor agent. Such court may thereupon, after such notice, if any, as it may deem proper and as it may prescribe, appoint a successor agent. (iv) Effective Date of Removal, Resignation and New Appointment. Any ---------------------------------------------------------- resignation or removal of the Agent and appointment of a successor agent pursuant to any of the provisions of this Section 10 shall become effective upon acceptance of appointment by the successor agent as provided in Section 11. Section 11. Successor Agent. Any successor agent appointed as provided in Section 10 shall execute, acknowledge and deliver to each Noteholder, the Company and to its predecessor agent an instrument accepting such appointment hereunder, and thereupon the resignation or removal of the predecessor agent shall become effective and such successor agent, without any further act, deed or conveyance, shall become vested with all the rights, powers, duties and obligations of its predecessor hereunder, with like effect as if originally named as Agent herein; but, nevertheless, on the written request of the Required Holder(s) or of the successor agent, the agent ceasing to act shall, upon payment of all amounts then due it pursuant to the provisions of Section 7, execute and deliver an instrument or instruments transferring and assigning to such successor agent all the rights and powers of the agent so ceasing to act. Upon the request of any such successor agent, the Company shall execute any and all instruments in writing in order more fully and certainly to vest in and confirm to such successor agent all such rights and powers. Any agent ceasing to act shall nevertheless have a prior claim and Lien to that of the Noteholders upon all property or funds held or collected by such agent to the extent of all amounts then due it pursuant to the provisions of Section 7. Upon acceptance of appointment by a successor agent as provided in this Section 11, the Company shall give notice of the succession of such agent hereunder to the Noteholders and such other Persons as may be required by law or desirable to protect perfection of Lien within 20 days. If the Company fails to give such notice within such time, the successor agent shall give such notice in the name and at the expense of the Company. Section 12. Merger, Conversion or Consolidation of the Agent. Any corporation into which the Agent may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Agent shall be a party, or any corporation succeeding to the corporate trust business of the Agent, shall, if eligible hereunder, be the successor of the Agent hereunder; provided, that such corporation shall be -------- eligible under the provisions of Section 9 without the execution or filing of any paper with any party hereto or any further act on the part of any of the parties hereto except where an instrument of transfer or assignment is required by law to effect such succession, anything herein to the contrary notwithstanding. EXHIBIT F APPOINTMENT AGREEMENT Section 13. Appointment of Co-Agent. In case of any litigation under this Agreement, the Note Agreement or any other Security Document, or in case of any enforcement of remedies or exercise of rights upon the occurrence of a Default or an Event of Default, or in case the Agent deems that, by reason of any present or future law of any jurisdiction, it may not or may not effectively exercise any of the powers, rights or remedies herein or in any Security Document granted to it or hold title to the properties, in trust, as herein or in any Security Document granted, or take any other action which may be desirable or necessary in connection therewith, the Agent shall be entitled to appoint, to the extent consistent with applicable law, one or more separate or additional co-agents. In the event that the Agent appoints an individual or institution as a separate or additional co-agent, (i) any appointment of any such co-agent by the Agent (other than an appointment, if consistent with applicable law in effect at the time of such appointment, of a local affiliate of the Agent shall be made only with the prior written consent of the Company and the Required Holder(s) (except that, if the Agent shall have received written notice from any Noteholder that a Default or an Event of Default has occurred and is continuing, such consent shall be required only of the Required Holder(s)), which consent shall not be unreasonably withheld or delayed, and (ii) each and every remedy, power, right, title, interest, trust, duty and obligation expressed or intended by this Agreement or by any Security Document to be exercised by or vested in, conveyed to or imposed upon, the Agent with respect thereto shall be exercisable by and vest in such separate or additional co-agent but only to the extent necessary, appropriate or desirable to enable such separate or additional co- agent to exercise or have vested in it such powers, rights, trusts, titles, interests, duties and obligations and remedies, and every covenant and obligation necessary, appropriate or desirable to the exercise thereof by such separate or additional co-agent shall run to and be enforceable by either of them. The Agent shall have the right to terminate the appointment of any such co-agent hereunder with the prior written consent of the Company and the Required Holder(s) (except that, if the Agent shall have received written notice from any Noteholder that a Default or an Event of Default has occurred and is continuing, such consent shall be required only of the Required Holder(s)), which consent shall not be unreasonably withheld or delayed. Should any instrument in writing from the Company be required by the separate or additional co-agent so appointed by the Agent to more fully and certainly vest in and confirm to it such remedies, rights, powers, titles, interests, trusts, duties and obligations, any and all such instruments in writing shall, on request, be executed, acknowledged and delivered by the Company. In case any separate or additional co-agent, or a successor to either, shall become incapable of acting, resign or be removed, all the remedies, rights, powers, titles, interests, trusts, duties and obligations of such separate or additional co-agent, so far as permitted by law, shall vest in and be exercised by the Agent until the appointment of a new agent or successor to such separate or EXHIBIT F APPOINTMENT AGREEMENT additional co-agent. Section 14. New Noteholders. Any Transferee of all or any part of any Note shall enter into an agreement acceding to the terms of this Agreement in the form set out in Annex I whereby it agrees to be bound by the provisions of this Agreement binding upon the Noteholders. Section 15. Treatment of Noteholders. The Agent may deem and treat the person registered as the holder of any Note in the register maintained by the Company (the "Register") as the owner thereof for all purposes hereof. Any request, authority or consent of any Person who, at the time of making such request or giving such authority or consent, is the holder of any Note shall be conclusive and binding on any subsequent holder, transferee, assignee or indorsee, as the case may be, of such Note or any Note issued in exchange therefor. Section 16. Entire Agreement; Waivers. Each of the Agent, the Company and the Noteholders party hereto hereby agrees that this instrument contains the entire agreement between the parties and that there is and can be no other oral or written agreement or understanding whereby the provisions of this instrument have been or can be terminated, affected, varied, waived, amended or modified in any manner, unless the same be set forth and consented to in writing by the Required Holder(s). Section 17. Successors and Assigns. This Agreement shall without further consent of the Company or the Agent, pass to, and may be relied upon and enforced by, any successor or assignee of any Noteholder and any transferee or subsequent registered holder of any Note. Section 18. Notices. All communications provided for hereunder shall be in writing and in English and shall be sent by national overnight delivery service (with charges prepaid) or by facsimile with confirmation sent by first class mail and (i) if to any Purchaser, addressed to such Purchaser at the address specified for such communications in the Purchaser Schedule attached to the Note Agreement, or at such other address as such Purchaser shall have specified to the Company and the Agent in writing, (ii) if to any other holder of a Note, addressed to such other holder at such address as such other holder shall have specified to the Company and the Agent in writing or, if any such other holder shall not have so specified an address to the Company and the Agent, then addressed to such other holder in care of the last holder of such Note which shall have so specified an address to the Company and the Agent, and (iii) if to the Agent, addressed to the Agent at The Chase Manhattan EXHIBIT F APPOINTMENT AGREEMENT Bank, N.A., 4 MetroTech Center, 3rd Floor, Brooklyn, New York 11245; Facsimile: (718) 242-5885 or 5886 or (718) 242-3529, and (iv) if to the Company, addressed to the Company at the address specified for such communications in the Note Agreement. Section 19. Governing Law, etc. This Agreement shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the internal laws of the State of New York, without regard to conflicts of law. Section 20. No Waiver. No delay on the part of any holder of a Note, the Company or the Agent in exercising any rights hereunder or failure to exercise the same shall operate as a waiver of such rights; and no notice to or demand on the Agent shall be deemed to be a waiver of the obligation of the Agent or of the rights of any holder of a Note to take further action without notice or demand as provided herein. Section 21. Headings. The descriptive headings of the several Sections of this Agreement are inserted for convenience only and do not constitute a part of this Agreement. Section 22. Counterparts. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original, and it shall not be necessary in making proof of this Agreement to produce or account for more than one such counterpart. EXHIBIT F APPOINTMENT AGREEMENT IN WITNESS WHEREOF, the parties hereto have caused this Appointment Agreement to be duly executed and delivered by their duly authorized officers on the day and year first above written. MAGINET CORPORATION By:/s/ James A. Barth ------------------------------- Name: James A. Barth Title: Chief Financial Officer THE CHASE MANHATTAN BANK, N.A. By:/s/ Rossana E. Abueun ------------------------------- Name: Rossana E. Abueum Title: Second Vice President NEW YORK LIFE INSURANCE COMPANY By:/s/ Himi Kittner ------------------------------- Name: Himi Kittner Title: Vice President THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK By:/s/ Peter W. Oliver ------------------------------- Name: Peter W. Oliver Title: Managing Director WASLIC COMPANY II By:/s/ Daniel F. Lindley ------------------------------- Name: Daniel F. Lindley Title: President & Secretary NAMTOR BVC LP By:/s/ Noel Rothman ------------------------------- Name: Noel Rothman Title: Partner EXHIBIT F APPOINTMENT AGREEMENT ANNEX 1 ------- INSTRUMENT OF ACCESSION ----------------------- INSTRUMENT OF ACCESSION dated ________, _____, made by [New Noteholder], a ---------------- company organized under the laws of __________ (the "Acceding Noteholder") in respect of the Appointment Agreement dated August 15, 1995 (the "Appointment Agreement") among The Chase Manhattan Bank, N.A., as collateral agent (the "Agent"), each of the Purchasers set forth on the Purchaser Schedule to the Note Agreement referred to below of the senior secured notes of MagiNet Corporation (the "Company") pursuant to the Note Agreement, dated as of August 15, 1995 (as the same may be supplemented or amended from time to time, herein called the "Note Agreement") among the Purchasers, the Company and the Agent. This Instrument of Accession is entered into pursuant to Section 11.5 of the Note Agreement and Section 14 of the Appointment Agreement. Capitalized terms used herein without definition shall have the meanings assigned to such terms in the Note Agreement. 1. Assumption. The Acceding Noteholder hereby expressly assumes and ---------- agrees, with effect from and after the date hereof, to perform and observe each and every one of the covenants, conditions, obligations, duties and liabilities applicable to a "Noteholder" under the Appointment Agreement, jointly and severally with all other Noteholders under the Appointment Agreement, as if the Acceding Noteholder had been an original party thereto. All references to any Noteholder in any Note Document or any document, instrument or agreement executed and delivered or furnished in connection therewith shall be deemed to be and include references to the Acceding Noteholder. 2. Governing Law. This Agreement shall be construed and enforced in ------------- accordance with, and the rights of the parties shall be governed by, the law of the State of New York. IN WITNESS WHEREOF, the a Acceding Noteholder has caused this Agreement to be duly executed and delivered as a deed as of the day and year first above written. [ACCEDING NOTEHOLDER] By ----------------------- Title: EXHIBIT F APPOINTMENT AGREEMENT The subsequent, executed Agreement is included as Exhibit 4.3 to this Registration Statement, the amendment to that agreement is included as Exhibit 4.4 to that agreement. SECOND AMENDMENT TO SHAREHOLDERS' AGREEMENT This SECOND AMENDMENT dated as of August 15, 1995, (the "Second Amendment") ---------------- to the Shareholders' Agreement dated as of September 29, 1994, (the "Shareholders' Agreement"), as amended by the First Amendment dated May 16, ----------------------- 1995, attached hereto as Exhibit A, is entered into among MagiNet Corporation, a California corporation (the "Company") (formerly known as Pacific Pay Video ------- Limited), the Holders of the Registration Rights pursuant to the Company's Shareholders' Agreement (individually, an "Existing Rights Holder", and ---------------------- collectively, the "Existing Rights Holders") and the holders of Common Stock ----------------------- Warrants listed on Exhibit B attached hereto (the "the New Rights Holders"). ---------------------- The Company and the Existing Rights Holders have, pursuant to Section 1.12 of the Shareholders' Agreement, agreed to amend the Shareholders' Agreement as set forth herein. SECTION 1. ADDITIONAL SHAREHOLDERS. ----------------------- In consideration of the purchase by the New Rights Holders of the Company's Senior Secured Notes due 2000 (the "Notes") in the aggregate principal amount of ----- up to $30,000,000 and the issue of such Notes pursuant to the Note Agreement (the "Note Agreement") dated as of August 15, 1995 by and between the New -------------- Rights Holders and the Company, the Company, the Existing Rights Holders and the New Rights Holders agree that: (a) The New Rights Holders shall be considered Holders under the Shareholders' Agreement for all purposes, to the same extent as if they had been one of the original parties to the Shareholders' Agreement and the New Rights Holders accept the terms, conditions, rights and obligations of the Shareholders' Agreement; provided, however, that the New Rights Holders shall not be considered "Shareholders" for purposes of the Shareholders' Agreement. (b) The definition of "Common Warrants" shall be added to Section 1.1 of the Shareholders' Agreement as follows: ""Common Warrants" means those warrants to purchase shares of --------------- Common stock of the Company granted to certain investors in connection with the purchase and sale of the Company's Senior Secured Notes due 2000 in the aggregate principal amount of up to $30,000,000 pursuant to the Note Agreement dated August 15, 1995." (c) The definition of "Holder" in Section 1.1 of the Shareholders' Agreement is restated as follows: ""Holder" means any holder of outstanding Registrable Securities; ------ provided, however, that for all purposes under this Section, a holder of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, the COMSAT Warrant, the Original Warrants (as defined below), the First Bridge Warrants, the SVB\H&Q Warrants, the Second Bridge Warrants, Series C Warrants, the SVB Warrants, or the Common Warrants shall be deemed to be a Holder of the Registrable Securities into which such shares are then convertible or for which such warrants are then exercisable." (d) The definition of "Registrable Securities," in Section 1.1 of the Shareholders' Agreement is restated as follows: ""Registrable Securities" means (i) the shares of Common Stock ---------------------- issuable upon conversion of the Company's Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock (the "Conversion Stock"), (ii) the shares of Common Stock issuable upon exercise of the warrants issued pursuant to the Second Series B Agreement (the "Original Warrants"), the COMSAT Warrant, the First Bridge Warrants, the SVB\H&Q Warrants, the Second Bridge Warrants, the SVB Warrants, the Common Warrants, or the Common Stock issuable upon conversion of the Series C Preferred Stock issuable upon exercise of the Series C Warrants (collectively, the "Warrant Shares"), (iii) the shares of Common Stock currently outstanding and not issued pursuant to the exercise of options or warrants (the "Founders' Stock"), and (iv) any shares of Common Stock of the Company issued or issuable, directly or indirectly, in respect of the stock described in (i), (ii) and (iii) upon any stock split, stock dividend, recapitalization, or similar event, or any shares of Common Stock otherwise issued or issuable with respect to such stock; provided, however, that Registrable Securities shall not include shares of Common Stock that have been sold to or through a broker or dealer or underwriter in a public distribution or a public securities transaction, sold in a transaction exempt from the registration and prospectus delivery requirements of the Securities Act under Section 4(1) thereof so that all transfer restrictions, and restrictive legends with respect thereto, if any, are removed upon the consummation of such sale, or Registrable Securities sold by a person in a transaction in which rights under this Section 1 are not assigned." (e) The definition of "Registration Expenses" in Section 1.1 of the Shareholders' Agreement is restated as follows: ""Registration Expenses" means all expenses incurred by the --------------------- Company in complying with Sections 1.2, 1.3, and 1.4, including, without limitation, all registration, qualification and filing fees, printing expenses, escrow fees, fees and disbursements of counsel for the Company, blue sky fees and expenses, and the expense of any special audits incident to or required by any such registration (but excluding the compensation -2- of regular employees of the Company which shall be paid in any event by the Company). Registration Expenses shall not include expenses of the holders of Registrable Securities to the extent limited or precluded in applicable blue sky laws. Registration Expenses shall include the fees or expenses of one legal counsel to the Holders and one legal counsel to the New Rights Holders. Registration Expenses shall not include selling commissions, discounts or other compensation paid to underwriters or other agents or brokers to effect the sale, or the fees or expenses of any additional legal counsel retained by any Holder or Holders." (f) The definition of "Restricted Securities" in Section 1.1 of the Shareholders' Agreement is restated as follows: ""Restricted Securities" means the Company's currently --------------------- outstanding Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock, the Conversion Stock, the Founders' Stock, the Original Warrants, the COMSAT Warrant, the First Bridge Warrants, the SVB\H&Q Warrants, the Second Bridge Warrants, the Series C Warrants, the SVB Warrants, the Common Warrants and the Warrant Shares, and any other securities issued in respect thereof upon any stock split, stock dividend, recapitalization, merger, consolidation or similar event." (g) Section 1.3(b) of the Shareholders' Agreement is restated as follows: "(b) Underwriting. The right of any Holder to registration pursuant ------------ to Section 1.3 shall be conditioned upon the participation by such Holder in such underwriting, if any, and the inclusion of the Registrable Securities of such Holder in the underwriting to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall (together with the Company and the other holders distributing their securities through such underwriting) enter into an underwriting agreement in customary form with the managing underwriter selected for such underwriting by the Company. Notwithstanding any other provision of this Section 1.3, if the managing underwriter determines that marketing factors require a limitation of the number of shares to be underwritten, the managing underwriter may limit the Registrable Securities held by Holders. If a limitation of the number of shares to be included in such registration is required, then the Company shall so advise all Holders, and the number of shares of Registrable Securities and other securities that may be included in the registration and underwriting shall be allocated among all Holders and other holders of securities thereof: first, among all Holders of the Common Warrants in proportion as nearly as practicable, to the respective amounts of securities entitled to inclusion (determined without regard to any requirement of a request to be included in such registration) in such registration held by all such Holders at the time of filing the registration statement; second, should the underwriter's limitation permit inclusion of any additional securities, among all remaining Holders and other holders in proportion, as nearly as practicable, to the respective amounts of securities, other than Founders Shares, entitled to inclusion (determined without regard to any requirement of a request to be included in such -3- registration)in such registration held by all such remaining Holders and other holders at the time of filing the registration statement; and third, should the underwriter's limitation permit inclusion of any additional securities, among all Holders in proportion, as nearly as practicable, to the respective amounts of Founders Shares entitled to inclusion (determined without regard to any requirement of a request to be included in such registration) in such registration held by all such Holders at the time of filing the registration statement; provided, however, that the number of Registrable Securities entitled to inclusion in any such registration, except for the registration of the initial public offering of the Company's securities, shall be no less than twenty percent (20%) of the total number of shares covered by such registration. To facilitate the allocation of shares in accordance with the above provisions, the Company may round the number of shares allocated to any Holder to the nearest 100 shares. If any Holder or other holder disapproves of the terms of any such underwriting, he may elect to withdraw therefrom by written notice to the Company and the managing underwriter. Any securities excluded or withdrawn from such underwriting shall be withdrawn from such registration." (h) Section 1.7(b) of the Shareholders' Agreement is restated as follows: "(b) Each Holder will, if Registrable Securities held by such Holder are included in the securities as to which such registration, qualification or compliance is being effected, indemnify the Company, each of its directors and officers and its legal counsel and independent accountants, each underwriter, if any, of the Company's securities covered by such a registration statement, each person who controls the Company or such underwriter within the meaning of Section 15 of the Securities Act, and each other such Holder, each of its officers and directors and each person controlling such Holder within the meaning of Section 15 of the Securities Act, against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any such registration statement, prospectus, offering circular or other document, or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse the Company, such Holders, such directors, officers, persons, underwriters or control persons for any legal or any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such registration statement, prospectus, offering circular or other document in reliance upon and in conformity with written information (which information shall be limited to a brief description of the Holder, its holdings of the Registrable Securities to be sold, and its plan of distribution therefor) furnished to the Company by an instrument duly executed by such Holder and stated to be specifically for use therein; provided, however, that the obligations of each Holder hereunder shall be limited to an amount equal to the net proceeds to each such Holder of Registrable Securities sold pursuant to such registration statement." -4- (i) Section 1.7(d) of the Shareholders' Agreement is amended to add the following proviso to the end of such section: "provided, however, that the obligations of each Holder to make contributions shall be limited to an amount equal to the net proceeds received by each such Holder of Registerable Securities sold pursuant to such registration statement." (j) Section 1.7 of the Shareholders' Agreement is amended by adding the following Section 1.7(e) thereto: "(e) The indemnity and contribution provided by each Holder of Registrable Securities under this Section 1.7 shall be provided severally and not either jointly or jointly and severally with any other Holder." (k) Section 1.12 of the Shareholders' Agreement is restated as follows: "1.12 Amendment of Registration Rights. The registration rights -------------------------------- provided in this Section may be amended or waived with the written consent of the Company and the holders of a majority of the Registrable Securities except (i) the rights of Holders of the Registrable Securities issuable upon exercise of the Common Warrants may only be amended or waived with the written consent of the Company and Holders of Common Warrants exercisable into shares of common stock which in the aggregate amount to at least seventy percent (70%) of the aggregate number of shares of common stock into which all the Common Warrants are exercisable, to the extent such rights are adversely affected by such amendment or waiver in a manner different from other Holders, and (ii) the rights provided in Section 1.3 may not be amended or waived, so as to adversely affect the holders of Founders Shares in a manner different from other Holders, without the written consent of the holders of a majority of the Founders Shares." (l) Section 3.3(a) of the Shareholders' Agreement is restated as follows: "(a) Common Stock issuable upon conversion of Preferred Stock or exercise of common stock warrants (to the extent such common stock warrants are outstanding as of the closing of the transactions contemplated by the Note Agreement) or upon conversion of the Series C Preferred Stock issuable upon exercise of the Series C Warrants." SECTION 2. CONDITIONS OF EFFECTIVENESS. --------------------------- This Second Amendment shall become effective as of the date hereof only upon satisfaction in full of the following conditions precedent (the date upon which all such conditions have been satisfied being herein called the "Effective --------- Date"): - ---- (a) The closing of the transaction set forth in the Note Agreement shall have occurred. -5- (b) The New Rights Holders, the Company and the holders of a majority in interest of the Existing Rights Holders shall have executed this Second Amendment, and counterparts hereof bearing the signature of such parties shall have been delivered to the Company. SECTION 3. APPLICABLE LAW. -------------- This Second Amendment shall be governed by and construed in accordance with the laws of the State of California. SECTION 4. COUNTERPARTS. ------------ This Second Amendment may be executed in two or more counterparts, each of which shall constitute an original, but all of which when taken together shall constitute but one instrument. SECTION 5. AGREEMENT; TERMS. ---------------- Except as expressly amended or waived hereby, the Shareholders' Agreement, as amended by the First Amendment, shall continue in full force and effect in accordance with the provisions thereof on the date hereof. Capitalized terms used and not defined herein shall have the meanings assigned to such terms in the Shareholders' Agreement, as amended. SECTION 6. HEADINGS. -------- The headings of this Second Amendment are for reference only and shall not limit or otherwise affect the meaning hereof. -6- [Signature Page to Second Amendment to Shareholders' Agreement] IN WITNESS WHEREOF, the parties have caused this Second Amendment to be duly executed by their duly authorized officers, all as of the date first above written. COMPANY: MAGINET CORPORATION By:_________________________________________ Name:_______________________________________ Title:______________________________________ -7- [Signature Page to Second Amendment to Shareholders' Agreement] EXISTING RIGHTS HOLDERS: ____________________________________________ ROBERT R. CREAGER SUNSET PARTNERS, L.P. By:_________________________________________ Name:_______________________________________ Title:______________________________________ SUNSET PARTNERS II, L.P. By:_________________________________________ Name:_______________________________________ Title:______________________________________ SUNSET PARTNERS III, L.P. By:_________________________________________ Name:_______________________________________ Title:______________________________________ -8- [Signature Page to Second Amendment to Shareholders' Agreement] NEW RIGHTS HOLDER: By:_________________________________________ Name:_______________________________________ Title:______________________________________ -9- PACIFIC PAY VIDEO LIMITED SHAREHOLDERS' AGREEMENT This Shareholders' Agreement (the "Shareholders' Agreement") is made as of September 29, 1994 by and among PACIFIC PAY VIDEO LIMITED, a California corporation (the "Company"), and the persons and entities listed on Exhibit A --------- attached hereto (the "Shareholders"). R E C I T A L S A. On July 23, 1992, the Company and certain securityholders of the Company entered into a Series A Preferred Stock Purchase Agreement (the "Series A Agreement"), which, among other things, conferred upon certain securityholders of the Company rights regarding the registration of shares of the Company's Common Stock, certain covenant rights, and rights of first refusal upon the sale of securities by any Purchasers (as those terms are defined in the Series A Agreement). B. On August 31, 1992, the Company and certain securityholders of the Company entered into a Series B Preferred Stock Purchase Agreement (the "Series B Agreement"), which, among other things, conferred upon certain securityholders of the Company certain covenant rights and rights regarding the registration of shares of the Company's Common Stock which superseded the registration rights granted in the Series A Agreement. C. On March 17, 1993, the Company and certain securityholders of the Company entered into a Series B Preferred Stock and Warrant Purchase Agreement (the "Second Series B Agreement"), which, among other things, conferred upon certain securityholders of the Company certain covenant rights, rights of first refusal, and rights regarding the registration of shares of the Company's Common Stock which superseded the registration rights granted in the Series B Agreement. D. On September 29, 1993, the Company granted to COMSAT Video Enterprises a warrant to purchase up to 1,575,000 shares of the Company's Common Stock (the "COMSAT Warrant") and in connection therewith, the Company and certain other parties to the Second Series B Agreement entered into an Amendment No. 1 to the Second Series B Agreement (the "Series B Amendment"), which provided that the shares of Common Stock issuable upon exercise of the COMSAT Warrant would be deemed "Registrable Securities" under Section 8 of the Series B Agreement. E. On March 10, 1994, in connection with the Note and Warrant Purchase Agreement, the Company issued Warrants to purchase Common Stock (the "First Bridge Warrants"); and the Company and certain parties to the Second Series B Agreement, as amended, entered into a new agreement (the "Registration Rights Agreement"), which superseded Section 8 of the Second Series B Agreement, as amended by the Series B Amendment, in its entirety, contained provisions substantially similar to those of Section 8 of the Second Series B Agreement, as amended by the Series B Amendment, and granted such rights to the holders of First Bridge Warrants. F. On June 20, 1994, the Company granted to Silicon Valley Bank ("SVB") and Hambrecht & Quist Guaranty Finance ("H&Q") warrants to purchase Common Stock of the Company (the "SVB/H&Q Warrants"), and in connection therewith, the Company and certain other parties to the Registration Rights Agreement entered into the First Amendment to Registration Rights Agreement (the "First Amendment"), which provided that the shares of Common Stock issuable upon exercise of the SVB/H&Q Warrants would be deemed "Registrable Securities" under the Registration Rights Agreement. G. On September 12, 1994, in connection with the Second Note and Warrant Purchase Agreement, the Company agreed to issue certain warrants to purchase Common Stock (the "Second Bridge Warrants"); and the Company and certain parties to the Registration Rights Agreement, as amended, entered into the Second Amendment to Registration Rights Agreement (the "Second Amendment"), which provided that the shares of Common Stock issuable upon exercise of the Second Bridge Warrants would be deemed "Registrable Securities" under the Registration Rights Agreement, as amended. H. In connection with the issuance of Series C Preferred Stock (the "Series C Preferred") and warrants to purchase Series C Preferred Stock (the "Series C Warrants") pursuant to the Series C Preferred Stock Purchase Agreement (the "Series C Agreement"), the Shareholders constituting the holders of a majority of the Registrable Securities (as that term is defined in the Registration Rights Agreement, as amended) desire to enter into a new agreement which will restate and supersede the Registration Rights Agreement, in its entirety, and which will grant such registration rights to the holders of the Series C Preferred and Series C Warrants. In addition, the Shareholders desire to provide for certain rights and restrictions as to the securities held by certain Shareholders as provided herein. The parties hereto agree as follows: SECTION 1 REGISTRATION RIGHTS ------------------- 1.1 Certain Definitions. As used in this Shareholders' Agreement, the ------------------- following definitions shall apply: "Commission" means the Securities and Exchange Commission or any ---------- other federal agency at the time administering the Securities Act. -2- "Holder" means any holder of outstanding Registrable Securities; ------ provided, however, that for all purposes under this Section, a holder of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, the COMSAT Warrant, the Original Warrants (as defined below), the First Bridge Warrants, the SVB\H&Q Warrants, the Second Bridge Warrants, or the Series C Warrants shall be deemed to be a Holder of the Registrable Securities into which such shares are then convertible or for which such warrants are then exercisable. "Initiating Holders" means Holders of not less than 40% of the ------------------ Registrable Securities. "Registrable Securities" means (i) the shares of Common Stock ---------------------- issuable upon conversion of the Company's Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock (the "Conversion Stock"), (ii) the shares of Common Stock issuable upon exercise of the warrants issued pursuant to the Second Series B Agreement (the "Original Warrants"), the COMSAT Warrant, the First Bridge Warrants, the SVB\H&Q Warrants, the Second Bridge Warrants, or the Common Stock issuable upon conversion of the Series C Preferred Stock issuable upon exercise of the Series C Warrants (collectively, the "Warrant Shares"), (iii) the shares of Common Stock currently outstanding and not issued pursuant to the exercise of options or warrants (the "Founders' Stock"), and (iv) any shares of Common Stock of the Company issued or issuable, directly or indirectly, in respect of the stock described in (i), (ii) and (iii) upon any stock split, stock dividend, recapitalization, or similar event, or any shares of Common Stock otherwise issued or issuable with respect to such stock; provided, however, that Registrable Securities shall not include shares of - -------- ------- Common Stock that have been sold to or through a broker or dealer or underwriter in a public distribution or a public securities transaction, sold in a transaction exempt from the registration and prospectus delivery requirements of the Securities Act under Section 4(1) thereof so that all transfer restrictions, and restrictive legends with respect thereto, if any, are removed upon the consummation of such sale, or Registrable Securities sold by a person in a transaction in which rights under this Section 1 are not assigned. "Registration Expenses" means all expenses incurred by the Company --------------------- in complying with Sections 1.2, 1.3 and 1.4, including, without limitation, all registration, qualification and filing fees, printing expenses, escrow fees, fees and disbursements of counsel for the Company, blue sky fees and expenses, and the expense of any special audits incident to or required by any such registration (but excluding the compensation of regular employees of the Company which shall be paid in any event by the Company). Registration Expenses shall not include expenses of the holders of Registrable Securities to the extent limited or precluded in applicable blue sky laws. Registration Expenses shall not include selling commissions, discounts or other compensation paid to underwriters or other agents or brokers to effect the sale. Registration Expenses shall include the fees or expenses of one legal counsel to the Holders. -3- "Restricted Securities" means the Company's currently outstanding --------------------- Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock, the Conversion Stock, the Founders' Stock, the Original Warrants, the COMSAT Warrant, the First Bridge Warrants, the SVB\H&Q Warrants, the Second Bridge Warrants, the Series C Warrants, and the Warrant Shares, and any other securities issued in respect thereof upon any stock split, stock dividend, recapitalization, merger, consolidation or similar event. "Securities Act" means the United States Securities Act of 1933, as -------------- amended, or any similar federal statute and the rules and regulations of the Commission thereunder, as shall be in effect at the time. The terms "register", "registered" and "registration" refer to a -------- ---------- ------------ registration effected by preparing and filing a registration statement in compliance with the Securities Act (and any post-effective amendments filed or required to be filed), and the declaration or ordering of the effectiveness of such registration statement; provided, however, that the foregoing terms shall also include a registration in a foreign jurisdiction to the extent set forth in Section 1.18. 1.2 Requested Registration. ---------------------- (a) Request for Registration. In case the Company shall receive ------------------------ from Initiating Holders a written request six (6) months after the effective date of the initial registration of the Company's securities, that the Company effect any underwritten registration, qualification, or compliance with respect to Registrable Securities held by such Initiating Holders, then the Company shall: (i) promptly give written notice of the proposed registration, qualification, or compliance to all other Holders; and (ii) as soon as practicable, use its most diligent efforts to effect all such registration, qualification, or compliance (including, without limitation, the execution of an undertaking to file post-effective amendments, appropriate qualification under applicable blue sky or other state securities laws, and appropriate compliance with applicable regulations issued under the Securities Act and any other governmental requirements or regulations) as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of such Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any Holders joining in such request as are specified in a written request received by the Company within 20 days after the date the Company mails such written notice; Provided, however, that the Company shall not be obligated to take any action to effect any such registration, qualification, or compliance pursuant to this Section 1.2: -4- (A) In any jurisdiction in which the Company would be required to execute a general consent to service of process in effecting such registration, qualification, or compliance unless the Company is already subject to service in such jurisdiction and except as may be required by the Securities Act; (B) During the period starting with the date sixty days prior to the Company's estimated date of filing of, and ending on the date six months immediately following the effective date of any registration statement pertaining to equity securities of the Company (other than a registration of securities in a Rule 145 transaction or with respect to an employee benefit plan or initiated by security holders); (C) Unless the registration will be requested for at least ten percent (10%) of the Registrable Securities; or (D) At any time during which the Company is qualified to use Form S-3 for registration of the Registrable Securities held by the Holders. Subject to the foregoing clauses (A) through (D), the Company shall file a registration statement covering the Registrable Securities so requested to be registered as soon as practicable, and in any event within 90 days, after receipt of the request or requests of the Initiating Holders; provided, however, that if the Company shall furnish to Holders requesting a registration statement under this Section 1.2, a certificate signed by the President of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its shareholders for such registration statement to be filed and it is therefore essential to defer the filing of such registration statement, the Company shall have the right to defer such filing for a period of not more than ninety (90) days after receipt of the request of the Initiating Holders; provided further, that the Company may not utilize this right more than once in any twelve month period. (b) Underwriting. The right of any Holder to registration ------------ pursuant to this Section 1.2 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting to the extent requested (unless otherwise mutually agreed by a majority in interest of the Initiating Holders and such Holder) and to the extent provided herein. The Company shall (together with all Holders and holders of other securities proposing to distribute their securities through such underwriting) enter into an underwriting agree ment in customary form with the managing underwriter selected for such underwriting by a majority in interest of the Initiating Holders. Notwithstanding any other provision of this Section 1.2, if the managing underwriter advises the Initiating Holders in writing that marketing factors require a limitation of the number of shares to be underwritten, then the securities of the Company entitled to be included in such registration which are not Registrable Securities shall be -5- excluded from such registration to the extent required by such limitation. If a limitation of the number of shares is still required, then the Company shall so advise all Holders, and the number of shares of Registrable Securities that may be included in the registration and underwriting shall first be allocated among Holders thereof in proportion, as nearly as practicable, to the respective amounts of Registrable Securities, other than Founders Shares, entitled to inclusion (determined without regard to any requirement of a request to be included in such registration) in such registration held by all such Holders at the time of filing the registration statement and, second, should the underwriter's limitation permit inclusion of any additional securities, among all Holders in proportion, as nearly as practicable, to the respective amounts of Founders Shares entitled to inclusion (determined without regard to any requirement of a request to be included in such registration) in such registration held by all such Holders at the time of filing the registration statement. No Registrable Securities or other securities excluded from the underwriting by reason of the underwriter's marketing limitation shall be included in such registration. To facilitate the allocation of shares in accordance with the above provisions, the Company or the underwriters may round the number of shares allocated to any Holder to the nearest 100 shares. If any Holder of Registrable Securities disapproves of the terms of the underwriting, such person may elect to withdraw therefrom by written notice to the Company, the managing underwriter and the Initiating Holders. The Registrable Securities and/or other securities so withdrawn shall also be withdrawn from registration, and such Registrable Securities shall not be transferred in a public distribution prior to 90 days after the effective date of such registration, or such other shorter period of time as the underwriters may require. If by the withdrawal of such Registrable Securities a greater number of Registrable Securities held by other Holders may be included in such registration (up to the maximum of any limitation imposed by the underwriters), then the Company shall offer to all Holders who have included Registrable Securities in the registration the right to include additional Registrable Securities in the same proportion and manner used in determining the underwriter limitation in this Section 1.2(b). If the managing underwriter has not limited the number of Registrable Securities to be underwritten, the Company may include securities for its own account or for the account of others in such registration if the underwriter so agrees and if the number of Registrable Securities which would otherwise have been included in such registration and underwriting will not thereby be limited. -6- 1.3 Company Registration. -------------------- (a) Notice of Registration. If at any time or from time to time, ---------------------- the Company shall determine to register any of its securities, either for its own account or the account of a security holder or holders exercising their respective demand registration rights, other than (i) a registration relating solely to employee benefit plans, or (ii) a registration relating solely to a Rule 145 transaction, the Company shall: (i) promptly give to each Holder written notice thereof; and (ii) include in such registration (and any related qualification under blue sky laws or other compliance), and in any underwriting involved therein, all the Registrable Securities specified in a written request by each Holder received by the Company within 15 days after the Company mails such written notice, subject to the provisions below. (b) Underwriting. The right of any Holder to registration ------------ pursuant to Section 1.3 shall be conditioned upon the participation by such Holder in such underwriting, if any, and the inclu sion of the Registrable Securities of such Holder in the underwriting to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall (together with the Company and the other holders distributing their securities through such underwriting) enter into an underwriting agreement in customary form with the managing underwriter selected for such underwriting by the Company. Notwithstanding any other provision of this Section 1.3, if the managing underwriter determines that marketing factors require a limitation of the number of shares to be underwritten, the managing underwriter may limit the Registrable Securities held by Holders. If a limitation of the number of shares to be included in such registration is required, then the Company shall so advise all Holders, and the number of shares of Registrable Securities and other securities that may be included in the registration and underwriting shall be allocated among all Holders and other holders of securities thereof first among all Holders and other holders in proportion, as nearly as prac ticable, to the respective amounts of securities, other than Founders Shares, entitled to inclusion (determined without regard to any requirement of a request to be included in such registration) in such registration held by all such Holders and other holders at the time of filing the registration statement and, second, should the underwriter's limitation permit inclusion of any additional securities, among all Holders in proportion, as nearly as practicable, to the respective amounts of Founders Shares entitled to inclusion (determined without regard to any requirement of a request to be included in such registration) in such registration held by all such Holders at the time of filing the registration statement; provided, however, that the number of Registrable Securities entitled to inclusion in any such registration, except for the registration of the initial public offering of the Company's securities, shall be no less than twenty percent (20%) of the total number of shares covered by such registration. To facilitate the allocation of shares in accordance with the above provisions, the Company may round the number of shares allocated to any Holder to the nearest 100 shares. If any Holder or other holder disapproves of the terms of any such underwriting, he may elect to -7- withdraw therefrom by written notice to the Company and the managing underwriter. Any securities excluded or withdrawn from such underwriting shall be withdrawn from such registration. (c) Right to Terminate Registration. The Company shall have the ------------------------------- right to terminate or withdraw any registration initiated by it under this Section 1.3 prior to the effectiveness of such registration whether or not any Holder has elected to include securities in such registration. 1.4 Form S-3 Registration. In case the Company shall receive from a --------------------- Holder or Holders a written request that the Company effect a registration on Form S-3 and any related qualification or compliance with respect to an amount of the Registrable Securities owned by such Holder or Holders for which the anticipated aggregate offering price would be at least $500,000, the Company shall: (a) promptly give written notice of the proposed registration, and any related qualification or compliance to all other Holders; and (b) as soon as practicable, effect such registration and all such qualifications and compliances as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of such Holder's or Holders' Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any other Holder or Holders joining in such request as are specified in a written request given within 20 days after receipt of such written notice from the Company; provided, however, that the Company shall not be obligated to effect any such registration, qualification, or compliance pursuant to this Section 1.4: (1) if Form S-3 is not available for such offering by the Holders; (2) if the Company shall furnish to the Holders a certificate signed by the president of the Company stating that in the good faith judgment of the board of directors of the Company, it would be seriously detrimental to the Company and its shareholders for such Form S-3 Registration to be effected at such time, in which event the Company shall have the right to defer the filing of the Form S-3 registration statement for a period of not more than 90 days after receipt of the initiating request of the Holder or Holders under this Section 1.4; provided, however, that the Company shall not utilize this right more than twice in any twelve month period; (3) if the Company has, within the 12 month period preceding the date of such request, already effected one (1) registration on Form S-3 for the Holders pursuant to this Section 1.4; or (4) in any jurisdiction in which the Company would be required to execute a general consent to service of process in effecting such registration, qualification or compliance unless the Company is already subject to service in such jurisdiction and except as may be required by the Securities Act. Subject to the foregoing, the Company shall effect such registration, qualification, or compliance (including, without limitation, the execution of an undertaking to file post-effective amendments, appropriate qualification under applicable blue sky or other state -8- securities laws and appropriate compliance with applicable regulations issued under the Securities Act and any other governmental requirements or regulations) covering the Registrable Securities and other securities so requested to be registered as soon as practicable after receipt of the request or requests of the Holders. Registrations effected pursuant to this Section 1.4 shall not be counted as demands for registration or registrations effected pursuant to Sections 1.2 or 1.3. If the registration to be effected pursuant to this Section 1.4 is to be an underwritten public offering, it shall be managed by an underwriter or underwriters acceptable to the Company selected by a majority in interest of the Holders requesting registration. In such event, the right of any Holder to registration pursuant to Section 1.4 shall be conditioned upon the participation by such Holder in such underwriting and the inclusion of the Registrable Securities of such Holder in the underwriting to the extent provided herein. If the managing underwriter so selected determines that marketing factors require a limitation of the number of shares to be underwritten, the managing underwriter may limit the Registrable Securities held by such Holders to be included in such registration. The Company shall so advise such Holders, and the number of shares of Registrable Securities that may be included in the registration shall be allocated among such Holders in propor tion to the respective amounts of Registrable Securities which would be held by each of such Holders at the time of filing of the registration statement. Any Registrable Securities that are so excluded from the underwriting shall be excluded from the registration. As used throughout this Section the term "Form S-3" shall be deemed to include any equivalent successor form for registration pursuant to the Act. 1.5 Expenses of Registration. ------------------------ All Registration Expenses incurred in connection with the registration, qualification or compliance pursuant to Sections 1.2, 1.3, and 1.4 shall be borne by the Company; provided, however, that the Company shall not be required to pay for expenses of (i) any registrations requested pursuant to Section 1.2 after the Company has effected three (3) such registrations pursuant to Section 1.2 or 1.4 and such registrations have been declared or ordered effective, and (ii) any registration proceeding begun pursuant to Section 1.2, the request of which has been subsequently withdrawn by the Initiating Holders, in which case such expenses shall be borne by the Holders of securities (including Registrable Securities) pro rata in accordance with the number of shares initially sought to be registered requesting or causing such withdrawal, unless the Holders shall agree that such withdrawn registration shall be counted as a registration for purposes of Section 1.2(a)(ii)(D). Notwithstanding the foregoing, if such withdrawal is occasioned by the disclosure to the Initiating Holders of a material adverse fact regarding the Company not known by the Initiating Holders at the time of their request for registration then the Company will bear such Registration Expenses and the Holders will retain their rights under Section 1.2 hereof. 1.6 Registration Procedures. If and whenever the Company is required by ----------------------- the provisions of this Section to use its most diligent efforts to effect promptly the registration of Registrable Securi ties, the Company shall: -9- (a) Prepare and file with the Commission a registration statement with respect to such Registrable Securities and use its most diligent efforts to cause such registration statement to become and remain effective as provided herein. (b) Prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective and current and to comply with the provisions of the Securities Act with respect to the sale or other disposition of all Registrable Securities covered by such registration statement, including such amendments and supplements as may be necessary to reflect the intended method of disposition of the prospective seller or sellers of such Registrable Securities, but for no longer than one hundred twenty (120) days subsequent to the effective date of such registration in the case of a registration statement on Form S-1 (or any similar form of registration statement required to set forth substantially identical information) and for no longer than 90 days in the case of a registration statement on Form S-3. (c) Furnish to each prospective seller of Registrable Securities such number of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents, as such seller may reasonably request in order to facilitate the public sale or other disposition of the Registrable Securities of such seller. 1.7 Indemnification. In the event any of the Registrable Securities are --------------- included in a registration statement under this Section: (a) The Company will indemnify each Holder, each of its officers and directors and partners and such Holder's separate legal counsel and independent accountants, and each person con trolling such Holder within the meaning of Section 15 of the Securities Act, and each underwriter, if any, and each person who controls any underwriter within the meaning of Section 15 of the Securities Act, against all expenses, claims, losses, damages or liabilities (or actions in respect thereof), including any of the foregoing incurred in settlement of any litigation, commenced or threatened, arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any registration statement, prospectus, offering circular or other document, or any amendment or supplement thereto, incident to any such registration, qualification or compliance, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading, or any violation by the Company of any rule or regulation promulgated under the Securities Act applicable to the Company in connection with any such registration, qualification or compliance, and the Company will reimburse each such Holder, each of its officers and directors and partners and such Holders' separate legal counsel and independent accountants and each person con trolling such Holder, each such underwriter and each person who controls any such underwriter, for any legal and any other expenses reasonably incurred in connection with investigating, preparing or defending any such claim, loss, damage, liability or action, provided that the Company will not be liable in any such -10- case to the extent that any such claim, loss, damage, liability or expense arises out of or is based on any untrue statement or omission or alleged untrue statement or omission, made in reliance upon and in conformity with written information furnished to the Company by an instrument duly executed by such Holder or underwriter and stated to be specifically for use therein. (b) Each Holder will, if Registrable Securities held by such Holder are included in the securities as to which such registration, qualification or compliance is being effected, indemnify the Company, each of its directors and officers and its legal counsel and independent accountants, each underwriter, if any, of the Company's securities covered by such a registration statement, each person who controls the Company or such underwriter within the meaning of Section 15 of the Securities Act, and each other such Holder, each of its officers and directors and each person con trolling such Holder within the meaning of Section 15 of the Securities Act, against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any such registration statement, prospectus, offering circular or other document, or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse the Company, such Holders, such directors, officers, persons, underwriters or control persons for any legal or any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such registration statement, prospectus, offering circular or other document in reliance upon and in conformity with written information furnished to the Company by an instrument duly executed by such Holder and stated to be specifically for use therein; provided, however, that the obligations of each Holder hereunder shall be limited to an amount equal to the proceeds to each such Holder of Registrable Securities sold as contemplated herein. (c) Each party entitled to indemnification under this Section (the "Indemnified Party") shall give notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting therefrom, provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or litigation, shall be approved by the Indemnified Party (whose approval shall not unreasonably be withheld), and the Indemnified Party may participate in such defense at such party's expense. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation. (d) If the indemnification provided for in this Section is held by a court of competent jurisdiction to be unavailable to an Indemnified Party with respect to any loss, liability, -11- claim, damage or expense referred to herein, then the Indemnifying Party, in lieu of indemnifying the Indemnified Party, shall contribute to the amount paid or payable by such Indemnified Party with respect to such loss, liability, claim, damage or expense in the proportion that is appropriate to reflect the relative fault of the Indemnifying Party and the Indemnified Party in connection with the state ments or omissions that resulted in such loss, liability, claim, damage or expense, as well as any other relevant equitable considerations. The relative fault of the Indemnifying Party and the Indemnified Party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of material fact or the omission to state a material fact relates to information supplied by the Indemnifying Party or by the Indemnified Party, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. 1.8 Information by Holder. The Holder or Holders of Registrable --------------------- Securities included in any registration shall furnish to the Company such information regarding such Holder or Holders and the distribution proposed by such Holder or Holders as the Company may request in writing and as shall be required in connection with any registration, qualification or compliance referred to in this Section. 1.9 Rule 144 Reporting. With a view to making available the benefits of ------------------ certain rules and regulations of the Commission which may at any time permit the sale of the Restricted Securities to the public without registration, after such time as a public market exists for the Common Stock of the Company and until five years from the date hereof, the Company shall use its best efforts to: (a) Make and keep public information available, as those terms are understood and defined in Rule 144 under the Securities Act, beginning 90 days after (i) the effective date of the first registration statement filed by the Company for an offering of its securities to the general public, (ii) the Company registers a class of securities under Section 12 of the Securities Exchange Act of 1934, as amended, or (iii) the Company issues an offering circular meeting the requirements of Regulation A under the Securities Act; (b) File with the Commission in a timely manner all reports and other documents required of the Company under the Securities Act and the Securities Exchange Act of 1934, as amended (at any time after it has become subject to such reporting requirements); (c) Furnish to any Holder promptly upon request a written statement as to its compliance with the reporting requirements of Rule 144 (at any time after 90 days after the effective date of the first registration statement filed by the Company for an offering of its securities to the general public), and of the Securities Act and the Securities Exchange Act of 1934 (at any time after it has become subject to such reporting requirements), a copy of the most recent annual or quarterly report of the Company, and such other reports and documents of the Company and other information in the possession of or reasonably obtainable by the Company as a Holder -12- may reasonably request in availing itself of any rule or regulation of the Commission allowing a Holder to sell any such securities without registration. 1.10 Assignment of Registration Rights. The rights to cause the --------------------------------- Company to register securities granted under this Section may be assigned to a transferee or assignee in connection with the transfer or assignment of Registrable Securities only if such shares represent at least 1% of the outstanding shares of the Company's capital stock (assuming conversion of all Preferred Stock to Common Stock, exercise of all warrants for Common Stock and the conversion of all Series C Preferred Stock issuable upon the exercise of the Series C Warrants) on the date of such assignment. 1.11 Limitations on Subsequent Registration Rights. From and after the --------------------------------------------- date of this Shareholders' Agreement, the Company shall not, without the prior written consent of the Holders of a majority of the outstanding Registrable Securities, enter into any agreement with any holder or prospective holder of any securities of the Company which would allow such holder or prospective holder (a) to include such securities in any registration filed under Section 1.2 hereof, unless under the terms of such agreement, such holder or prospective holder may include such securities in any such registration only to the extent that the inclusion of his securities will not reduce the amount of the Registrable Securities of the Holders which is included or (b) to make a demand registration which could result in such registration statement being declared effective prior to the earlier of either of the dates set forth in subsection 1.2(a) or within 120 days of the effective date of any registration effected pursuant to Section 1.2. 1.12 Amendment of Registration Rights. The registration rights provided -------------------------------- in this Section may be amended or waived with the written consent of the Company and the holders of a majority of the Registrable Securities except that the rights provided in Section 1.3 may not be amended or waived, so as to adversely affect the holders of Founders Shares in a manner different from other Holders, without the written consent of the holders of a majority of the Founders Shares. 1.13 Termination of Registration Rights. No Holder shall be entitled to ---------------------------------- exercise any right provided for in this Section 1 after five years following the consummation of the sale of securities pursuant to a registration statement filed by the Company under the Securities Act in connection with the initial firm commitment underwritten offering of its securities to the general public or at such time as all Registrable Securities held by such Holder may immediately be sold under Rule 144 during any 90-day period. 1.14 Lock-Up Provision. If requested by the Company and an underwriter ----------------- of securities of the Company, no Holder shall sell or otherwise transfer or dispose of any Restricted Securities (other than those securities included in the registration) during the up to 180-day period following the effective date of a registration statement filed in connection with the public offering of the Company's securities, provided that all officers and directors enter into similar agreements. The obligations described in this Section 1.14 shall not apply to a registration relating solely to -13- employee benefit plans on Form S-1 or Form S-8 or similar form that may be promulgated in the future. The Company may impose stop-transfer instructions with respect to the securities subject to the foregoing restriction until the end of the one hundred eighty (180) day period. 1.15 Option to Conduct Foreign Registration. To the extent the Company -------------------------------------- is obligated to register securities pursuant to this Section 1, such obligation may be satisfied, at the Company's option, by effecting a registration in a jurisdiction other than the United States, pursuant to the applicable securities laws of such jurisdiction. In the event the Company effects a registration in a foreign jurisdiction, provided that in the good faith judgment of the board of directors of the Company registration in such jurisdiction is in the best interests of the Company and its shareholders, and the Holders will not be materially adversely affected by such choice of jurisdiction, (i) the rights of holders of Registrable Securities pursuant to Section 1.3 hereof shall apply to such registration, and (ii) references in this Section 1 to laws, rules, and customary practices applicable to a registration under United States securities laws shall be interpreted so as to reflect as nearly as possible the relevant laws, rules, and customary practices related to a securities registration in the jurisdiction in which such registration is made. 1.16 Coordination of Prior Rights. Certain of the Shareholders, ---------------------------- constituting a majority in interest of the Holders (as defined in the Registration Rights Agreement, as amended) hereby agree that the execution and delivery of this Shareholders' Agreement is an amendment of the Registration Rights Agreement, as amended, and that the registration rights contained therein shall be null and void as of the execution hereof and shall be superseded in their entirety by the terms of this Shareholders' Agreement. SECTION 2 VOTING ------ 2.1 Voting of Shares. The Shareholders each agree to hold all shares of ---------------- voting capital stock of the Company registered in their respective names or beneficially owned by them or any of their respective affiliates as of the date hereof (and any and all other securities of the Company legally or beneficially acquired by each such Shareholder after the date hereof) (hereinafter collectively referred to as the "Shares") subject to, and to vote the Shares in accordance with, the provisions of this Section 2. 2.2 Election of Directors. Each time the Shareholders shall meet, or --------------------- act by written consent in lieu of acting at a meeting, for the purpose of electing one or more directors of the Company, each Shareholder agrees to vote its Shares for the election of (i) three (3) representatives of Sunset Partners (hereinafter defined as Sunset Partners, L.P., Sunset Partners II, L.P., and Sunset Partners III, L.P. collectively), and (ii) one (1) representative of Pomona Capital and its affiliated partnerships; provided, however, that each -------- ------- Shareholder also agrees to vote its -14- shares for the election of two representatives of the holders of Series C Preferred Stock as two additional directors (resulting in a board of nine directors) if the Company fails to meet any one or more of the following three criteria for the period (the "Relevant Period") commencing on the date hereof and ending December 31, 1996: (a) average gross revenues per room of not less than $30 per month for the Relevant Period, (b) at least 100,000 rooms installed by the end of the Relevant Period, and (c) a capital cost per room (including the cost of interactive shopping, but excluding the cost of televisions) of not more than $600 based on rooms added during the Relevant Period. The obligation assumed by each Shareholder hereunder to vote its Shares as set forth above shall be deemed to be a right coupled with an interest in favor of each other Shareholder, and each other Shareholder may, by acting through a person designated by Shareholders holding a majority of the Shares subject to this provision, vote such Shareholder's Shares by proxy. The parties to this Agreement shall vote their Shares to maintain a board of seven directors, unless one or more of the foregoing three criteria are not met during the Relevant Period. In which case, the parties hereto shall vote their Shares to increase the board to nine directors with the additional two directors nominated and elected as set forth above. 2.3 Successors; Directors. In the event that any of the individuals or --------------------- entities identified in Section 2.2 is unable or unwilling to serve on the Board of Directors of the Company, his successor shall be chosen by the person or entity (or persons or entities) whom that director is representing. With respect to the representatives of holders of the Series C Preferred Stock, the representatives shall be selected by a majority of the Series C Preferred Stock. 2.4 Effectiveness; Termination. This Section 2 shall become effective -------------------------- on the date hereof. This Section 2 shall terminate upon the closing of the Company's first offering of voting equity securities to the public pursuant to a registration statement filed with the Securities and Exchange Commission. If Sunset Partners holds less than 50% of the shares of Series C Preferred Stock it holds on the effective date of this Shareholders' Agreement, then each Shareholder agrees to vote its shares for the election of two (2) representatives of Sunset Partners. If Sunset Partners holds less than 25% of the shares of Series C Preferred Stock it holds on the effective date of this Shareholders' Agreement, then each Shareholder agrees to vote its shares for the election of one (1) representative of Sunset Partners. With respect to Sunset Partners, the provisions of this Section 2 shall terminate when Sunset Partners holds less than 10% of the shares of Series C Preferred Stock it holds on the effective date of this Shareholders' Agreement. With respect to Pomona Capital, the provisions of this Section 2 shall terminate when Pomona Capital and its -15- affiliated partnerships hold less than 50% of the shares of Series C Preferred Stock such entities hold on the effective date of this Shareholders' Agreement. 2.5 Representations. Each Shareholder represents and warrants to the --------------- other Shareholders that (a) it now owns (or, upon the distribution thereof, will own) the Shares, free and clear of liens or encumbrances, and has not, prior to the date of this Agreement, executed or delivered any proxy or entered into any other voting agreement or similar arrangement with respect to the Shares other than one which has expired or terminated prior to the date hereof, and (b) such Shareholder has full power and capacity to execute, deliver and perform this Agreement, which has been duly executed and delivered by, and evidences the valid and binding obligation of, such Shareholder enforceable in accordance with its terms. SECTION 3 RIGHT OF FIRST REFUSAL ---------------------- 3.1 The Right. The Company hereby grants to ((a) each holder of --------- Series C Preferred Stock of the Company and (b) holders of more than five percent (5%) of the voting capital of the Company prior to the issuance of the Series C Preferred Stock (collectively the Right Holders and each a "Right Holder"), the right to purchase such Right Holder's Pro Rata Share (as defined below) of any New Securities (as defined below) which the Company may, from time to time, proposed to sell and issue, on the same terms and conditions and for the same price as set forth in the notice described in Subsection 3.2 hereof. Each Right Holder's "Pro Rata Share" for purposes of this right of first refusal is the ratio of (i) the total number of shares of Common Stock held by Shareholder as of the date of the notice, assuming the conversion of all Preferred Stock, to (ii) the total aggregate shares of Common Stock outstanding assuming the conversion of all Preferred Stock. 3.2 Notice. The Company shall give to such Right Holder written notice ------ of the proposed offer to sell and issue any of the new Securities, which written notice shall contain the terms of such proposed sale in reasonable detail and shall be delivered to such Right Holder not less than twenty (20) days prior to the date such securities are proposed to be sold and issued. Such Right Holder shall have the right to exercise the option granted pursuant to Subsection 3.1 above by giving written notice thereof to the Company prior to the expiration of such twenty (20) day period, specifying the amount of securities which such Right Holder desires to purchase. In the event such Right Holder does not give such notice, then the Company shall be free to sell and issue such New Securities to other parties, but only on the same terms as set forth in said written notice. If the Company does not sell and issue such New Securities on such terms within 180 days of the expiration of the Right Holder's right of first refusal hereunder, then such New Securities shall once again be subject to the right of first refusal set forth in this Section 3. -16- 3.3 New Securities. The term "New Securities" as used in this Section 3 -------------- shall mean any shares of the Company's Common Stock or Preferred Stock, rights, options or warrants to purchase such shares of Common Stock or Preferred Stock, Convertible Securities, and securities of any type whatsoever that are, or may become, convertible into such shares of Common Stock or Preferred Stock; provided that "New Securities" does not include: (a) Common Stock issuable upon conversion of the Preferred Stock or exercise of the Common Warrants or upon conversion of the Series C Preferred Stock issuable upon exercise of the Series C Warrants; (b) securities issued in an underwritten public offering, pursuant to an effective registration statement under the Securities Act of 1933, as amended; (c) securities issued pursuant to the acquisition of another corporation by merger, purchase of all or substantially all of the assets, or other reorganization; (d) securities issued to employees, officers, or directors of, or consultants to, the corporation, pursuant to stock option, purchase or bonus plans or agreements on terms approved by the Board of Directors; (e) securities issued to dealers, trade vendors, sales representatives, equipment lessors, commercial lenders (or their guarantors) or joint venturers of the Company on terms approved by the Board of Directors; and (f) securities issued to effect any stock split or stock dividend by the Company. 3.4 Termination. The rights granted by this Section 3 shall terminate ----------- immediately prior to the closing of a public offering of the Company's equity securities pursuant to registration statement filed under the Securities Act of 1933, as amended. SECTION 4 TRANSFER RESTRICTIONS; RIGHTS OF FIRST OFFER -------------------------------------------- 4.1 Restrictions on Transfer. The Shareholders agree not to sell, ------------------------ assign, pledge, or in any other manner transfer any of the Company's securities held by them, or any right or interest therein, whether voluntarily or by operation of law, or otherwise, except (a) sales made in a registered public offering or in an open market transaction, or (b) private sales for cash consideration made subject to the rights of first offer specified in this Section 4. The foregoing notwithstanding, no sale, assignment, pledge, or transfer, of any of the Company's securities, or any right or interest therein, whether voluntarily or by operation of law, or otherwise, may be -17- made by any Shareholder (i) to an Adverse Person, as defined below, or (ii) that would result in such transferee holding in excess of ten percent (10%) of voting capital stock of the Company registered in their respective names or beneficially owned by them or any of their respective affiliates as of the date thereof. 4.2 Adverse Person. The term "Adverse Person" as used in this Section 4 -------------- shall mean any corporation or entity which at such time is a competitor of the Company or any affiliate of such corporation or entity. 4.3 Right of First Offer. Pursuant to the restrictions set forth in -------------------- Section 4.1 above: (a) Prior to any transfer of the Company's securities, the Transferring Shareholder (the "Transferring Shareholder") shall promptly notify the Company and all holders of Series C Preferred Stock (not including the Transferring Shareholder) (the "Remaining Series C Holders") of the terms and conditions of such purchase offer (the "Purchase Offer"). Such notice shall set forth (a) the Transferring Shareholder's bona fide intention to transfer such securities; (b) the securities to be transferred; and (c) the cash price or, in reasonable detail, other consideration, per share for which the Transferring Shareholder proposes to transfer such securities. (b) For twenty (20) days following receipt of such notice, the Company shall have the option to purchase all or any portion of the securities specified in the notice upon the terms specified in the Purchase Offer. If the Company elects to purchase any of the securities specified in the notice, the Company will deliver written notice to the Transferring Shareholder. Settlement for the purchase of the securities shall be made as provided below. (c) In the event the Company does not elect to acquire all of the securities specified in the Purchase Offer, the Company shall so notify the Remaining Series C Holders who at such time shall have the option to purchase such securities on a pro rata basis determined by applying (i) the ratio of the number of shares of Common Stock held by the Series C Holder as of the date of the notice to the number of shares of Common Stock held by the Remaining Series C Holders in aggregate, assuming the conversion of all Preferred Stock in both cases, to (ii) the number of securities available through the Purchase Offer, provided that the securities allocated to any remaining Series C Holder that does not elect to acquire the securities shall be allocated pro rata to those that do elect. If any Remaining Series C Holder elects to purchase any of the remaining securities specified in the notice, such Remaining Series C Holder shall deliver written notice to the Transferring Shareholder and the Company. Settlement for the purchase of the securities shall be made as provided below. (d) In the event the Remaining Series C Holders elect not to purchase all of the remaining securities specified in the Transferring Shareholder's notice, the Transferring Shareholder may sell to any transferee (subject to Sections 4.1 and 4.2 above) on the terms of the -18- Purchase Offer the remainder of the securities specified in the notice provided that such sale closes within sixty (60) days of the expiration of the Remaining Series C Holder's twenty (20) day notice period and that the sale is on terms substantially similar to those specified in the Transferring Shareholder's notice. (e) Settlement for any or all of the securities elected to purchase under this Section 4 shall be made in cash within five (5) business days after the Transferring Shareholder receives the notice from the Company or the Remaining Series C Holders that it is electing to purchase some or all of the securities; provided, however, that if the terms of the Purchase Offer called for payment other than in cash, the Company or the Remaining Series C Holders shall pay for such securities on the same terms and conditions set forth in the Transferring Shareholders' notice. (f) Any sale or transfer, or purported sale or transfer, of the Company's securities shall be null and void unless the terms, conditions and provisions of this Section 4 are strictly observed and followed. The Company will not be required (i) to transfer on its books any shares that have been sold, gifted or otherwise transferred in violation of this Shareholders' Agreement, or (ii) to treat as owner of such shares, or to accord the right to vote or pay dividends to any purchaser, donee or other transferee to whom such shares may have been so transferred. (g) Each certificate representing securities now or hereafter owned by the Shareholders or issued to any permitted transferee shall be endorsed with the following legend or its substantial equivalent: "THE SALE OR TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO THE TERMS AND CONDITIONS OF A CERTAIN RIGHT OF FIRST OFFER COPIES OF WHICH MAY BE OBTAINED WITHOUT CHARGE UPON WRITTEN REQUEST TO THE SECRETARY OF THE CORPORATION." (h) The legend shall be removed and the right of first offer shall terminate immediately prior to the closing of the sale of the Company's Common Stock in a bona fide underwritten public offering registered under the Act. 4.4 Permitted Transfers. The transfer restrictions and rights of first ------------------- offer of the Company and of the Series C Preferred Stock shall not pertain or apply to (i) any transfer to the spouse or to a trust for the benefit of the Transferring Shareholder or his or her spouse, brother(s), sister(s), ancestors, descendants, in any combination, (ii) any sale of securities pursuant to any exercise of registration rights as set forth in Section 1 of this Shareholders' Agreement, (iii) any affiliates of the Transferring Shareholder, or (iv) any distribution to the partners of a Transferring Shareholder which is a limited partnership, which distribution is consistent with the terms of such limited partnership agreement; provided that (A) the Transferring Shareholder shall inform the -19- Company and Remaining Series C Holders of such transfer prior to effecting it and (B) except for Section 4.4(ii), the transferee (the "Permitted Transferee") shall furnish the Company with a written agreement to be bound by and comply with all provisions of this Shareholders' Agreement applicable to the shareholder. SECTION 5 COORDINATION OF PRIOR RIGHTS OF FIRST REFUSAL --------------------------------------------- 5.1 Second Series B Agreement Rights of First Refusal. Pursuant to ------------------------------------------------- Section 10.4 ("Entire Agreement; Amendment and Waiver") of the Second Series B Agreement, as amended, certain of the undersigned Shareholders, constituting a majority in interest of the persons entitled to the right of first refusal set forth in Section 9 ("Right of First Refusal") therein, hereby agree that the execution and delivery of this Shareholders' Agreement is an amendment of the Second Series B Agreement, as amended, and that the rights of first refusal contained therein shall be null and void as of the execution hereof and shall be superseded in their entirety by the terms of this Shareholders' Agreement. 5.2 Series A Agreement Rights of First Refusal. Pursuant to Section ------------------------------------------ 10.4 ("Entire Agreement; Amendment and Waiver") of the Series A Agreement, certain of the undersigned Shareholders, constituting a majority in interest of the holders of Securities (as defined therein) and the Company hereby agree that the execution and delivery of this Shareholders' Agreement is an amendment of the Series A Agreement and that the rights of first refusal contained in Section 9 ("Right of First Refusal of Company and Purchasers") therein shall be null and void as of the execution hereof and shall be superseded in their entirety by the terms of this Shareholders' Agreement. SECTION 6 COORDINATION OF PRIOR COVENANTS RIGHTS -------------------------------------- 6.1 Series B Agreement Covenants. Pursuant to Section 9.4 ("Entire ---------------------------- Agreement; Amendment and Waiver") of the Series B Agreement certain of the undersigned Shareholders, constituting a majority in interest of the holders of Securities (as defined therein) and the Company hereby agree that the execution and delivery of this Shareholders' Agreement is an amendment of the Series B Agreement, and that the covenant rights set forth in Section 7 ("Covenants of the Company and the Purchaser") of the Series B Agreement shall be null and void as of the execution hereof and shall be superseded in their entirety by the terms of this Shareholders' Agreement. -20- 6.2 Series A Agreement Covenants. Pursuant to Section 10.4 ("Entire ---------------------------- Agreement; Amendment and Waiver") of the Series A Agreement, certain of the undersigned Shareholders, constituting a majority in interest of the holders of Securities (as defined in the Series A Agreement) and the Company hereby agree that the execution and delivery of this Shareholders' Agreement is an amendment of the Series A Agreement and that the covenant rights set forth in Section 7 ("Covenants of the Company and the Purchaser") shall be null and void as of the execution hereof and shall be superseded in their entirety by the terms of this Shareholders' Agreement. 6.3 Second Series B Agreement Covenants. Pursuant to Section 10.4 ----------------------------------- ("Entire Agreement; Amendment and Waiver") of the Second Series B Agreement, as amended, certain of the undersigned Shareholders constituting a majority in interest of the holders of Securities (as defined therein) and the Company hereby agree that the execution and delivery of this Shareholders' Agreement is an amendment of the Second Series B Agreement, as amended, and that the covenant rights set forth in Section 7 ("Covenants of the Company and Purchaser") shall be null and void as of the execution hereof and shall be superseded in their entirety by the terms of this Shareholders' Agreement. SECTION 7 COORDINATION OF PRIOR CO-SALE AGREEMENT --------------------------------------- Pursuant to Section 5.5 of the Amended and Restated Co-Sale Agreement dated March 17, 1993, by and between Robert R. Creager, the Company, and certain Securityholders of the Company (the "Restated Co-Sale Agreement'), certain of the undersigned Shareholders, constituting the Major Shareholder and the Preferred Shareholders holding a majority of the Preferred Shares (as those terms are defined therein) and the Company hereby agree that the Restated Co- Sale Agreement is null and void as of the execution hereof and that this Shareholders' Agreement supersedes any and all rights contained therein. SECTION 8 COORDINATION OF PRIOR VOTING AGREEMENT -------------------------------------- Pursuant to Section 3.3 of the Voting Agreement (the "Voting Agreement") dated as of October 15, 1992, by and among the Company and certain Securityholders of the Company as amended by the Amendment and Agreement to be Bound dated March 17, 1993, the undersigned Shareholder, constituting holders of more than 50% of the Shares (as defined therein) subject to the Voting Agreement, hereby agree that the execution and delivery of this Shareholders' Agreement is an amendment of the Voting Agreement, and that the Voting Agreement, as -21- amended, is null and void as of the execution hereof and that this Shareholders' Agreement supersedes any and all rights contained therein. SECTION 9 COORDINATION OF PRIOR RIGHT OF FIRST OFFER AGREEMENT ---------------------------------------------------- The Company and COMSAT Video Enterprises, Inc. hereby agree to renegotiate the Right of First Offer Agreement dated as of March 15, 1993 in good faith subsequent to the execution of this Shareholders' Agreement. SECTION 10 GENERAL PROVISIONS ------------------ 10.1 Necessary Actions. If and whenever the Shares are sold by a ----------------- Shareholder or its representative, the Shareholder or its representative shall do all things and execute and deliver all documents and make all transfers, and cause any transferee of the Shares to do all things and execute and deliver all documents, as may be necessary to consummate such sale consistent with this Agreement. 10.2 Equitable Relief. The parties hereto declare that it is impossible ---------------- to measure in money the damages which will accrue to a party hereto or to their heirs, personal representatives, or assigns by reason of a failure to perform any of the obligations under this Agreement and agree that the terms of this Agreement shall be specifically enforceable. If any party hereto or his heirs, personal represen tatives, or assigns institutes any action or proceeding to specifically enforce the provisions hereof, any person against whom such action or proceeding is brought hereby waives the claim or defense therein that such party or such personal representative has an adequate remedy at law, and such person shall not offer in any such action or proceeding the claim or defense that such remedy at law exists. 10.3 Reclassifications, etc. In the event that subsequent to the date of ---------------------- this Agreement any shares or other securities are issued on, or in exchange for, any of the Shares held by the Shareholders by reason of any stock dividend, stock split, consolidation of shares, reclassification, merger or consolidation involving the Company, such shares or securities shall be deemed to be Shares for purposes of this Agreement. 10.4 Further Assurances. Each Shareholder agrees to execute and deliver ------------------ such additional documents and take such additional actions as may be necessary or reasonably desirable to carry out the intent of this Agreement. -22- 10.5 Governing Law. This Shareholders' Agreement shall be governed by ------------- and construed according to the laws of the State of California. 10.6 Survival. The representations, warranties, and covenants of the -------- parties made herein shall survive the Closing. 10.7 Successors and Assigns. Except as otherwise expressly limited ---------------------- herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors, and administrators of the parties hereto. 10.8 Entire Agreement; Amendment and Waiver. This Shareholders' -------------------------------------- Agreement and the other documents delivered pursuant hereto constitute the full and entire understanding and agreement between the parties with regard to the subject matters hereof and thereof. Except as provided in Section 1.15, any term of this Shareholders' Agreement may be amended and the observance of any term hereof may be waived (either prospectively or retroactively and either generally or in a particular instance) only with the written consent of a majority in interest of the Holders and the written consent of the Company. Any amendment or waiver effected in accordance with this Section 10.8 shall be binding upon each Holder and the Company. In addition, the Company may waive performance of any obligation owing to it, as to some or all of the Holders, or agree to accept alternatives to such performance, without obtaining the consent of any Holder. 10.9 Rights of Holders. Each Holder shall have the absolute right to ----------------- exercise or refrain from exercising any right or rights that such Holder may have by reason of this Shareholders' Agree ment, including without limitation the right to consent to the waiver of any obligation of the Company under this Shareholders' Agreement and to enter into an agreement with the Company for the purpose of modifying this Shareholders' Agreement or any agreement affecting any such modification, and such Holder shall not incur any liability to any other Holder or Holders with respect to exercising or refraining from exercising any such right or rights. 10.10 Notices, etc. All notices and other communications required or ------------- permitted hereunder shall be in writing and shall be mailed by registered or certified mail, postage prepaid, or otherwise delivered by hand or by messenger, addressed (i) if to a Holder, at the address such Holder shall have furnished to the Company in writing, or (ii) if to the Company, one copy to its principal executive offices addressed to the attention of the Corporate Secretary, or at such other address as the Company shall have furnished to the Holders, and another copy to the Company's legal counsel, Wilson, Sonsini, Goodrich & Rosati, 650 Page Mill Road, Palo Alto, California 94304-1050, to the attention of Thomas C. DeFilipps, Esq. 10.11 Delays or Omissions. No delay or omission to exercise any right, ------------------- power, or remedy accruing to any party upon any breach or default under this Shareholders' Agreement, shall be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any -23- waiver, permit, consent, or approval of any kind or character on the part of any party of any breach or default under this Shareholders' Agreement, or any waiver on the part of any party of any provisions or conditions of this Shareholders' Agreement, must be in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Shareholders' Agreement or by law or otherwise afforded to any of the parties, shall be cumulative and not alternative. 10.12 References. Unless context otherwise requires, any reference to a ---------- "Section" refers to a section of this Shareholders' Agreement. Any reference to "this Section" refers to the whole numbered section in which such reference is contained. 10.13 Severability. If any provision of this Shareholders' Agreement is ------------ held to be unenforceable under applicable law, then such provision shall be excluded from this Shareholders' Agreement and the balance of this Shareholders Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms. The court in its discretion may substitute for the excluded provision an enforceable provision which in economic substance reasonably approximates the excluded provision. 10.14 Counterparts. This Shareholders' Agreement may be executed in any ------------ number of counterparts, each of which shall be deemed an original and enforceable against the parties actually executing such counterpart, and all of which together shall constitute one instrument. -24- [Signature Page to Pacific Pay Video Limited Shareholders' Agreement] IN WITNESS WHEREOF, this Shareholders' Agreement is executed effective as of the date first set forth above. THE COMPANY: PACIFIC PAY VIDEO LIMITED By:_____________________________________ Title:__________________________________ SHAREHOLDERS: ________________________________________ ALLAN ASHMEAD ASIA PACIFIC GROWTH FUND, L.P. By: ASIA PACIFIC GROWTH FUND, L.P. By: H & Q ASIA PACIFIC, G.P. GENERAL PARTNER OF ASIA PACIFIC GROWTH FUND, L.P. By: H & Q ASIA PACIFIC, LTD. GENERAL PARTNER OF H & Q ASIA PACIFIC, G.P. By:_____________________________________ DANIEL A. CARROLL SENIOR VICE PRESIDENT H & Q ASIA PACIFIC, LTD. -25- [Signature Page to Pacific Pay Video Limited Shareholders' Agreement] BANCORP HAWAII SMALL BUSINESS INVESTMENT COMPANY, INC. By:_____________________________________ Title:__________________________________ ________________________________________ CORNELIUS BOND CLARION CAPITAL CORPORATION By:_____________________________________ Title:__________________________________ COMSAT VIDEO ENTERPRISES, INC. By:_____________________________________ Title:__________________________________ ________________________________________ ROBERT CREAGER -26- [Signature Page to Pacific Pay Video Limited Shareholders' Agreement] CSK VENTURE CAPITAL CO., LTD. AS INVESTMENT MANAGER FOR CSK-1(A) INVESTMENT FUND By:_____________________________________ Title:__________________________________ CSK VENTURE CAPITAL CO., LTD. AS INVESTMENT MANAGER FOR CSK-1(B) INVESTMENT FUND By:_____________________________________ Title:__________________________________ DUNWOODIE FAMILY TRUST By:_____________________________________ Title:__________________________________ REVOCABLE TRUST OF JAROLD A. EVANS U/T/D APRIL 19, 1994 By:_____________________________________ Title:__________________________________ -27- [Signature Page to Pacific Pay Video Limited Shareholders' Agreement] FREIDENRICH FAMILY TRUST By:_____________________________________ Title:__________________________________ HAKMAN CAPITAL CORPORATION By:_____________________________________ Title:__________________________________ H & Q PPV INVESTORS, L.P. By:_____________________________________ Title:__________________________________ ________________________________________ ERIC HASS ________________________________________ JOSEPH S. HROUDA J.F. SHEA CO., INC. By:_____________________________________ -28- [Signature Page to Pacific Pay Video Limited Shareholders' Agreement] Title:__________________________________ ________________________________________ WILLARD L. KAUFFMAN THE WALTER LOEWENSTERN, JR. SEPARATE PROPERTY TRUST U/D/T DATED 2/12/90 By:_____________________________________ Title:__________________________________ ________________________________________ W. PATRICK MCDOWELL NIKKO CAPITAL CO., LTD By:_____________________________________ Title:__________________________________ N.C. NO. 2, INVESTMENT PARTNERSHIP By:_____________________________________ Title:__________________________________ -29- [Signature Page to Pacific Pay Video Limited Shareholders' Agreement] -30- [Signature Page to Pacific Pay Video Limited Shareholders' Agreement] O'ROURKE INVESTMENT CORPORATION By:_____________________________________ Title:__________________________________ OSCCO III, L.P. By:_____________________________________ Title:__________________________________ PARTECH INTERNATIONAL By:_____________________________________ Title:__________________________________ POMONA CAPITAL, L.P. By:_____________________________________ Title:__________________________________ ROGERS FAMILY TRUST By:_____________________________________ Title:__________________________________ -31- [Signature Page to Pacific Pay Video Limited Shareholders' Agreement] R & W VENTURES II By:_____________________________________ Title:__________________________________ SOF VENTURE CAPITAL, L.P. By:_____________________________________ Title:__________________________________ SP VENTURE CAPITAL By:_____________________________________ Title:__________________________________ SP OFFSHORE VENTURE CAPITAL, L.P. By:_____________________________________ Title:__________________________________ SUNSET PARTNERS, L.P. By:_____________________________________ Title:__________________________________ -32- [Signature Page to Pacific Pay Video Limited Shareholders' Agreement] -33- [Signature Page to Pacific Pay Video Limited Shareholders' Agreement] SUNSET PARTNERS II, L.P. By:_____________________________________ Title:__________________________________ SUNSET PARTNERS III, L.P. By:_____________________________________ Title:__________________________________ UNTERBERG HARRIS INTERACTIVE MEDIA LIMITED PARTNERSHIP C.V. By:_____________________________________ Title:__________________________________ ________________________________________ GUNNAR WETLESEN ________________________________________ MICHAEL W. WILSEY WS INVESTMENTS 94A By:_____________________________________ -34- Title:__________________________________ Exhibit A --------- Allan Ashmead Asia Pacific Growth Fund, L.P. Bancorp Hawaii Small Business Investment Company, Inc. Cornelius Bond Clarion Capital Corporation Comsat Video Enterprises, Inc. Robert Creager CSK Venture Capital Co., Ltd. As Investment Manager For CSK-1(a) Investment Fund CSK Venture Capital Co., Ltd. As Investment Manager for CSK-1(b) Investment Fund Dunwoodie Family Trust Revocable Trust of Jarold A. Evans U/T/D April 19, 1994 Freidenrich Family Trust Hakman Capital Corporation H & Q PPV Investors, L.P. Eric Hass Joseph S. Hrouda J.F. Shea Co., Inc. Willard L. Kauffman The Walter Loewenstern, Jr. Separate Property Trust U/D/T dated 2/12/90 W. Patrick McDowell Nikko Capital Co., Ltd N.C. No. 2, Investment Partnership O'Rourke Investment Corporation OSCCO III, L.P. Partech International Pomona Capital, L.P. Rogers Family Trust R & W Ventures II SOF Venture Capital, L.P. SP Venture Capital SP Offshore Venture Capital, L.P. Sunset Partners, L.P. Sunset Partners II, L.P. Sunset Partners III, L.P. Unterberg Harris Interactive Media Limited Partnership C.V. Gunnar Wetlesen Michael W. Wilsey WS Investments 94A -35- EXHIBIT H TO NOTE AGREEMENT PACIFIC PAY VIDEO LIMITED GROSS REVENUE ANALYSIS JUN-95
--------------------- CALCULATED -------------------------------------------------------------------------------------------------- ROOM ON-LINE GROSS $ GROSS HOTEL BUY ROOM REV COUNT DATE BUYS PRICE REVENUES OCCUPANCY RATE PER MO - -------------------------------------------------------------------------------------------------------------------------------- Australia Sheraton on the Park 560 2/18/94 1,705 $9.90 $16,888 61% 17% $30.16 TowmaUille TLodge 186 5/3/96 570 $9.19 $5,241 85% 16% $28.18 Melbourne Aiport T L 202 6/7/94 660 $8.48 $5,600 70% 16% $27.72 St Ki/ds Rd TLodge 225 6/16/94 829 $8.48 $7,034 80% 15% $31.26 Park Royal 220 7/27/94 910 $8.48 $7,721 87% 21% $35.10 Beaufort Darwom 196 12/13/94 667 $8.48 $5,659 82% 14% $28.87 Bartswood Resort 414 4/08/95 2,830 $9.90 $28,031 88% 26% $67.71 Intercontinental Sydney 504 5/22/95 1,146 $8.90 $11,351 86% 13% $22.52 --- ----- ---- ------ --- --- ----- Total 2,507 9,317 $8.39 $87,525 70% 18% $34.91 1995 Plan 4,320 13,382 $3.95 $133,152 88% 18% $32.72 - ------------------------------------------------------------------------------------------------------------------------------- Guam - ------------------------------------------------------------------------------------------------------------------------------- Hilton Hotel Intntl. 591 3/3/94 2,235 $12.95 $28,943 84% 13% $41.89 Palace 413 8/31/93 1,477 15.00 22,155 96% 12% $53.84 Pacific Star 421 4/12/93 1,724 12.95 22,326 80% 17% $53.03 Pacific Islands Club 520 10/14/93 1,587 12.95 20,293 93% 11% $38.02 Alupang Beach 104 4/28/93 473 12.95 5,125 82% 18% $58.90 Guam Dai Ichi 333 1/31/94 1,234 12.95 15,980 75% 18% $47.99 Fujiti Turrom Beach 217 12/18/93 570 9.95 5,872 70% 13% $28.14 Hafa Adai 280 12/10/93 805 12.95 10,425 96% 11% $37.23 Hafa Adai 132 12/30/93 380 12.95 4,921 87% 11% $37.28 Sotetsu Tropicana 200 1/31/94 721 12.95 9,337 91% 13% $48.88 Guam Reef 458 7/25/94 1,580 12.95 20,591 94% 12% $44.96 Guam Okura 336 11/8/94 1,591 18.00 23,865 80% 20% $71.03 Plumeria 114 1/31/95 180 12.95 2,072 83% 8% $18.18 --- ------ ------ ------- ------ --- ------ Total 4219 14,557 $13.27 191,905 88% 13% $45.88 1995 Plan 4080 12,157 170,332 71% 14% $41.78 - ------------------------------------------------------------------------------------------------------------------------------- Hong Kong - ------------------------------------------------------------------------------------------------------------------------------- Mandarin Oriental 541 4/11/94 2,300 $10.34 $23,780 55% 28% $43.96 City Garden 615 3/17/95 2,555 $9.55 $25,426 81% 15% 41.34 J.W. Marriott 604 3/12/95 2,878 $10.34 $29,755 83% 19% 48.27 The Wharney 335 4/13/95 1,011 $11.26 $11,384 72% 14% 33.99 Kowleon Shangri-La 717 5/13/95 2,890 $10.34 $29,880 83% 16% 41.67 ----- ----- ------ ------- --- --- ------ Total 2812 11,634 $10.33 $120,227 78% 18% $42.75 1995 Plan 6048 23,872 $10.50 $256,568 71% 21% $48.87 - ------------------------------------------------------------------------------------------------------------------------------- Israel - ------------------------------------------------------------------------------------------------------------------------------- Hilton Tel Aviv 599 4/12/95 1,539 $10.00 $15,390 88% 10% $26.89 Shalem Plaza Eilot 153 5/22/95 203 $10.00 $ 2,030 83% 8% $13.27 ----- ----- ------ ------- --- --- ------ Total 752 1,742 $10.00 $17,420 78% 10% $23.18 1995 Plan 850 2,870 $10.00 $28,201 88% 18% $30.83
7/27/95
------------------------ CALCULATED ----------------------------------------------------------------------------------------------------- ROOM ON-LINE GROSS $ GROSS HOTEL BUY ROOM COUNT DATE BUYS PRICE REVENUES OCCUPANCY RATE REV PER MO - ------------------------------------------------------------------------------------------------------------------------------ Isreal Japan Okuru Harramatsu 324 10/9/94 581 $13.74 $9,082 48% 14% $28.03 Okuru Tokyo 883 12/30/94 1,802 $16.03 $28,882 82% 11% $32.71 Pacific Meridian Tokyo 954 2/15/95 2,288 $15.33 $34,773 6% 12% $36.45 Mana Beach 401 4/7/95 834 $14.15 $11,803 66% 10% $29.43 --- ----- ------ ------- ---- --- ------ Total 2562 5,505 $15.19 $84,540 62% 12% $33.00 1995 Plan 6492 12,447 $13.50 $168,032 58% 14% $31.75 New Zealand Regent Aukland 332 5/2/94 538 $10.42 $5,605 67% 8% $16.88 Plaza Wellington 84 5/17/94 428 $10.42 $4,470 73% 11% $24.29 Centra 252 8/22/94 800 $10.42 $8,335 78% 14% $33.08 Auckland Airport 243 12/1/94 517 $10.42 $5,388 70% 10% $22.17 Noah's Christhcurch 203 3/27/95 355 $10.42 $3,699 70% 8% $18.22 --- --- ------ ------ --- --- ------ Total 1214 2,638 $10.42 $27,497 71% 10% $22.65 1995 Plan 1719 4,239 $9.95 $42,179 59% 12% $24.54 Singapore Marina Mandarin 575 10/19/94 484 $9.52 $4,587 79% 4% $8.07 Orchard Hotel 677 3/31/95 740 $9.55 $7,087 85% 4% $10.44 Traders Hotel 539 6/29/95 66 $9.50 $627 66% 8% $17.45 --- ----- ----- --- -- ------ Total 1791 1,290 $9.54 $12,301 77% 5% $11.79 1995 Plan 2543 4,059 $9.00 $36,526 78% 7% $14.36 South Korea Intercontinental 583 4/26/95 1,846 $11.21 $20,698 91% 12% $35.50 Westin Chesun 480 6/25/95 311 $11.21 $3,487 95% 11% $36.32 --- ------ ------ --- --- ------- Total 1063 2,157 $11.21 $24,185 93% 11% $35.87 1995 Plan 2683 31 $10.00 $66,183 89% 12% $24.86 Taiwan Grand Formoss Regent 570 10/29/94 1,665 $9.54 $16,043 37% 11% $28.14 Lai Lai Sheraton 705 12/27/94 2,861 $9.44 $25,108 84% 13% $35.81 Far Eastern Plaza 422 1/14/95 1,130 $10.33 $11,675 58% 15% $27.87 Ritz Taipei 209 5/22/95 606 $9.80 $7,902 65% 18% $37.81 --- --- ----- ------ --- --- ------ Total 1906 6,262 $9.70 $60,728 77% 14% $31.86 1995 Plan 3482 10,103 $10.00 $101,028 71% 15% $31.85
[PACIFIC PAY VIDEO LIMITED] [GROSS REVENUE ANALYSIS] [Jun-95]
Calculated Room On-Line Gross $ Gross Motel Buy Room Rev Count Date Days Price Revenue Occupancy Rate per Mo Thailand Royal Orchid 773 4/28/94 1,034 $10.22 $10,588 47% 9% $13.87 Royal Garden Riverside 426 8/1/94 627 $10.22 $6,408 58% 8% $14.97 Royal Garden Hus Hin 221 8/1/94 78 $10.22 $777 48% 2% $3.51 Montian 396 8/23/94 925 $10.22 $9,453 51% 15% $23.87 Royal Garden Village Hus Hin 162 10/5/94 100 $10.22 $1,022 37% 6% $8.31 Royal Garden Pattaya 300 10/19/94 458 $10.22 $4,681 63% 8% $15.60 Le Meridian Phu? 470 11/8/94 1,267 $10.22 $12,940 58% 16% $27.55 Siam City Motel 507 12/31/94 525 $10.22 $5,385 36% 10% $10.58 Holiday Inn Crown Plaza 728 1/17/95 1,016 $10.22 $10,383 51% 9% $14.26 Central Plaza Bangkok 807 1/27/95 1,235 $10.22 $12,822 72% 9% $20.79 Novatal Siam Square 421 4/25/95 818 $10.22 $8,338 69% 9% $19.81 Novatal Sangna 300 4/28/95 501 $10.22 $5,120 38% 15% $17.07 Shangri-La Bangkok 882 6/19/95 123 $10.22 $1,257 66% 2% 43.65 --- --- ------ ------ --- --- ------ Total 6,393 8,707 $10.22 $89,174 56% 9% $14.71 1995 Plan 6,754 15,335 $9.50 $145,588 68% 12% $22.57 Grand Total 25,001 53,836 $11.22 716,069 71% 12.4% $29.70 1995 Plan 39,149 104,839 $10.95 1,139,953 68% 14.3% $31.50
[_]. Estimate Occupancy [_]. Prior Month Occupancy The following went on-line on 6/30 with no revenue OZ Sheraton Wentworth 423 HK Island Shangri-La 585 TW Ambassador 446 TW Imperial 338 TL Laguna Beach 252 TL Phu? Arcadia 475 KR Seoul Plaza 470 Total 2,989 EX-10.15 3 MASTER GUEST VIDEO SERVICES AGREEMENT EXHIBIT 10.15 MAGINET CORPORATION 405 Tasman Drive, Sunnyvale, CA 94089 USA Tel (408) 752-1000 Fax (408) 734-1687 September 15, 1995 Hyatt International-Asia Pacific Limited 3rd Floor, Hyatt Regency Hong Kong 67 Nathan Road Kowloon Hong Kong Hyatt Chain Services Limited Suite 31 A, New Henry House 10 Ice House Street Central Hong Kong RE: GUEST VIDEO SERVICES AGREEMENT Gentlemen: This is written in reference to that certain Master Guest Video Services Agreement (the "Master Agreement") dated August 11 1995, by and among Hyatt International-Asia Pacific Limited ("Hi"), Hyatt Chain Services Limited ("Hyatt Services"; collectively, with HI, being herein "Hyatt"), MagiNet International Corporation ("MagiNet") and Guest Serve Development Group (GDG). In order to induce HI and Hyatt Services to enter into the Master Agreement, we hereby represent and warrant that our wholly-owned subsidiary, MagiNet, in its exclusive license agreement with GDG for the GDG Technology, as defined in the Master Agreement, will have both an escrow arrangement for GDG Technology source code as well as rights to access GDG Technology source code without triggering the escrow, as may be needed in order to insure that MagiNet will meet its commitments to Hyatt under the Master Agreement should GDG fail to perform under the Master Agreement. Accordingly, MagiNet will be in a position to ensure Hyatt's use of GDG Technology as contemplated in the Master Agreement in the event GDG should fail to perform thereunder prior to its expiration. [***] Confidential treatment requested pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission. September 15, 1995 Page Two We acknowledge that, in the event that at any time in the future any of the representations and warranties and statements above made should no longer be of full force and effect, this would constitute an event of default pursuant to Section 26.1 of the Master Agreement. MagiNet Corporation By: /s/ R.R. Creager Name: R. R. Creager Title: President Acknowledgment: We hereby confirm that the representations and warranties and statements made by MagiNet Corporation in the foregoing letter are true and valid in all respects, and that to the best of our knowledge, there are no facts or circumstances likely to prevent or interfere with their continuing veracity during the term of the Master Agreement. Guest Serve Development Group By: /s/ Philip S. Knudsen Name: Philip S. Knudsen Title: CFO/DIRECTOR Date: 9/15/95 MAGINET CORPORATION 405 Tasman Drive, Sunnyvale, CA 94089 USA Tel (408) 752-1000 Fax (408) 734-1687 PERFORMANCE GUARANTEE --------------------- By this Guarantee MagiNet Corporation (hereinafter the "Guarantor"), a California corporation, the sole shareholder of MagiNet International Corporation (hereinafter "MagiNet"), is held and firmly bound unto Hyatt International-Asia Pacific Limited and Hyatt Chain Services Limited: (hereinafter jointly called "Hyatt"), to guarantee unconditionally on written notice as provided below, the full performance by MagiNet of its obligations pursuant to that certain Master Guest Video Services Agreement dated August 11, 1995 (the "Contract") between and among Hyatt, MagiNet and Guest Serve Development Group respecting the provision of guest video services and systems to Hyatt hotels. The condition of the above written guarantee is such that if MagiNet should, duly perform and observe all terms, provisions, conditions and stipulations of the said Contract according to the true purport, intent and meaning thereof, or if on default by MagiNet the Guarantor shall satisfy and discharge the obligations of MagiNet thereunder, then this obligation shall be null and void but otherwise shall remain in full force and effect, but no alteration of the terms of the said Contract or in the extent or nature of obligations of MagiNet thereunder, and no allowance of time by Hyatt nor any forbearance or forgiveness of or in respect of any matter or thing concerning the said Contract on the part of Hyatt shall in any way release the Guarantor from any liability under the above-written Guarantee, except insofar as MagiNet itself is released. Provided always that the above obligation of Guarantor to satisfy and discharge the obligations of MagiNet to Hyatt shall arise only on written notice from Hyatt that MagiNet has failed fully to satisfy and comply with any obligations of the said contract. MagiNet Corporation By: R. R. Creager Title:. President Date: 9/15/95 MASTER GUEST VIDEO SERVICES AGREEMENT ------------------------------------- This Master Guest Video Services Agreement (hereinafter referred to as this "Agreement" or "Master Agreement"), is made this day of August, 1995 ("Effective Date") by and among Hyatt International-Asia Pacific Limited, a Hong Kong corporation ("Hyatt AP"), and Hyatt Chain Services Limited, a Hong Kong corporation ("Hyatt Services") (collectively the "Hyatt Parties"), Guestserve Development Group, a California corporation ("GDG"), and MagiNet International Corporation, a California corporation ("MagiNet"), which is a wholly-owned subsidiary of MagiNet Corporation (all such signatories herein being individually a "Party" and collectively the "Parties"). WHEREAS, the Hyatt Parties wish to arrange, for all hotels for which Hyatt AP has and will have responsibility during the term of this Agreement (the "Hotels"), for the procurement from GDG and MagiNet of consistent, high quality guest in-room video and audio content and all necessary hardware and software that will permit the transmission to hotel rooms and remote guest selection of such content (the "System," as further defined in Section 4. below) over each Hotel's video and audio transmission and receiving systems, including antenna systems (the "MATV," which includes all required wiring to the guest rooms); WHEREAS, the Hyatt Parties wish to arrange for the updating, installation, operation and maintenance and current and future design and development of the System for and in the Hotels,, and the ongoing maintenance of the MATV (collectively the "Activities"); WHEREAS, GDG owns or is licensed to provide software programs and related hardware ("GDG Technology," as further described, represented and warranted in sections 4.1. and 19.2. below) which GDG represents and warrants meets the Technical Requirements (defined below) and will therefore permit GDG, MagiNet and, to the extent desired and permitted hereunder, the Hyatt Parties and others to perform the Activities; WHEREAS, the Hyatt Parties and GDG recognize that GDG requires the assistance of one or more other persons and entities located in the countries in which the Hotels are or will be operated in undertaking the Activities; WHEREAS, the System enables guests, in the privacy of the Hotels' guest rooms (the "Rooms"), to obtain full audio and visual access to off-air broadcast, satellite and cable television transmissions, on demand movies and televised events, interactive games, advertising (including infomercials), informational programs, product and services ordering systems, and other interactive activities, services and programming as provided hereunder and as may be agreed upon among the parties or between MagiNet and any Hotel (the"Content"), through channels provided through the System (the "Channels") and transmitted to the Rooms over the MATV, all in accordance with the specific requirements and general guidelines of Exhibit A (the "Technical Requirements"); WHEREAS, MagiNet has been performing similar activities on similar systems, providing Content in other hotels, and has represented that it is fully capable of undertaking the Activities, and GDG has warranted that it has assessed MagiNet's capabilities and believes MagiNet is fully capable of performing its obligations as defined herein; WHEREAS, GDG and MagiNet will continue to work throughout the term of this Agreement August 22, 1995 for the Hyatt Parties in developing new technologies, services, enhancements, hardware, software and Content for the Hyatt Parties, the Hotels and the System; and WHEREAS, MagiNet is willing to install, operate and maintain the System in the Hotels, to upgrade and maintain the MATVs, and to procure movies, video games and other Content, GDG is willing to provide all necessary technical support to MagiNet to perform its obligations within respect to deployment of GDG Technology hereunder, and the Hyatt Parties and the Hotels wish to accomplish the same pursuant to this Master Agreement and separate individual agreements ("Individual Agreements") with each Hotel; NOW, THEREFORE,, the Parties do hereby warrant, covenant and agree for good and valuable consideration duly received as follows: 1. MASTER AGREEMENT ---------------- 1.1. Consistent with the above recitals, which are incorporated herein as if set forth fully below, the Parties have agreed as follows: 1.1.1. MagiNet will procure, install, operate and maintain, and undertake current and future design and development of, the System, the Content and the related MATV for and in the Hotels, with GDG's assistance with respect to the Activities relating to GDG Technology and with the participation and direction of the Hyatt Parties, Hotels and others, all as further provided for in the Technical Requirements and elsewhere in this Agreement. Except as otherwise provided herein, MagiNet and GDG shall be solely responsible for all capital and operating expenditures required to fulfill their obligations hereunder; 1.1.2. GDG will provide all needed support on the GDG Technology to MagiNet, the Hyatt Parties and the Hotels that is necessary to accomplish the Activities; 1.1.3. GDG has licensed or will license the GDG Technology to MagiNet so that the GDG Technology and any improvements thereon can be provided to the Hyatt Parties, the Hotels and other Hyatt entities according to the terms of this Agreement for as long as the Master Agreement is in effect. GDG has retained sufficient rights in the GDG Technology so that GDG can continue (i) to work on and improve the GDG Technology and all other necessary parts of the System, (ii) to select and work on the Content, and (iii) to provide further and continuing assistance to the Hyatt Parties and through MagiNet to the Hotels in connection with the System and the Content; 1.1.4. The Hyatt Parties and the Hotels are hereby fully licensed as provided herein by GDG and MagiNet for as long as the Master Agreement is in effect to have and use the GDG Technology and any improvements thereon made by GDG, MagiNet and/or any third party acting under a license or contract from either party; and -2- August 22, 1995 1.1.5. The Hyatt Parties are hereby fully licensed by GDG and MagiNet to have and use a software development tool kit (the "Tool Kit") that enables the Hyatt Parties to create their own Content for display on the System through the GDG Technology (as described in Section 9.2 below). This license covers all uses in the Hotels by the Hyatt Parties and any other entities affiliated with the Hyatt Parties (the "Hyatt Affiliates") throughout the duration of this Master Agreement and for such time thereafter as permitted by this Agreement. Subject to GDG and MagiNet's consent, not to be unreasonably withheld, the Tool Kit will permit changes to the System required both to work on the Activities, System features and the Hyatt Property (defined below). Any Party making changes to the System will ensure that there is as little disruption of the Hotels' and others operations as possible. Any third parties selected by Hyatt Parties to be licensed to use the Tool Kit under this provision will enter into appropriate licensing and confidentiality agreements with GDG and MagiNet, such licenses to be at no cost and restricted to Hyatt Content (defined below) production only. 1.2. This Master Agreement governs the relationship of the Parties, and shall take precedence over the terms in each Individual Agreement insofar as the Parties' obligations are concerned unless all Parties hereto expressly agree in writing that such term(s) do not apply. 1.3. The language in this Master Agreement shall take precedence in the event of any inconsistency with language used in any exhibit or other attachment to this Agreement. 1.4. The Parties have agreed to enter into agreements containing the same terms as herein with respect to Hyatt International properties in Europe, Africa, the Middle East and Latin America (the "Related Hyatt Agreements"). 2. INDIVIDUAL AGREEMENTS ---------------------- 2.1 The form that will be used for all Individual Agreements is attached as Exhibit B. As soon as practicable and legally permissible, beginning immediately with the signing of this Master Agreement, the Parties shall undertake commercially reasonable efforts to ensure that MagiNet and the Hotels have entered into Individual Agreements, and that GDG has entered into any needed agreements directly with each Hotel, so that the purposes of this Agreement can be achieved. 2.2. MagiNet may have distributors and subsidiaries act on its behalf insofar as is necessary for the installation, operation and maintenance of the System and the MATV at each Hotel. MagiNet and GDG hereby fully and directly guarantee the performance of the GDG Technology at the Hotels. MagiNet hereby fully and directly guarantees the performance of the System at the Hotels and of all distributors and subsidiaries performing all or part of any Individual Agreement. Subject to the dispute resolution provisions of this Agreement and the Individual -3- August 22, 1995 Agreements, MagiNet and GDG agree that they remain fully obligated under the terms of this Agreement and all Individual Agreements for their respective obligations, so that the Hyatt Parties and each Hotel shall have full immediate and direct recourse against them for their respective obligations without ever being required first to proceed against any distributor, subsidiary or other third par, 2.3. The Hyatt Parties shall have no payment or any other obligations under any Individual Agreement. Any payments to be paid by the Hotels are and shall be the sole responsibility of the Hotels. 3. TERMS OF THE AGREEMENTS ----------------------- 3.1. The term of this Master Agreement will begin on the Effective Date and, will terminate seven (7) years after this date (the "Initial Termination Date"). This Master Agreement will continue thereafter for as long as any single Individual Agreement remains in effect. Upon termination, the Parties' obligations shall continue as to any required payments and audits not completed, and specifically as to sections 1.1.5., 4.5 (with respect to that portion of the manuals that deal with the tool kit), 9., 10., 15.7., 15.8., 20., 21., 28., and 30. of this Agreement. 3.2. On or about the expiration of the fifth year of the Master Agreement, the Parties will commence discussions regarding the possible extension of the Master Agreement for an additional term. Should no agreement be reached concerning such an extension prior to the Initial Termination Date, the Master Agreement and all Individual Agreements will be automatically extended after the Initial Termination Date to a date at least ninety (90) days after MagiNet's receipt of written notice of the Hyatt Parties' and/or a given Hotel's intent to terminate the particular agreement(s) involved. 3.3. Each Individual Agreement will continue to be effective at least until the Initial Termination Date. Upon the expiration of one or more Individual Agreements, or the refusal of MagiNet to install the System at a Hotel as permitted under section 3.4 of this Agreement, other guest video systems may be installed at those Hotels. 3.4. MagiNet will not be required to sign any Individual Agreement if there are less than twenty-four (24) months remaining prior to the Initial Termination Date. If there are less than twenty-four (24) months remaining, MagiNet may, at its option exercised through written notice within thirty (30) days of any installation request, refuse to sign an Individual Agreement. If MagiNet determines not to go forward with any installation, then the Hyatt Parties may seek another vendor to install the guest video services system for any Hotel for which installation has been refused. 3.5. The Parties agree that the System shall be installed in all existing Hotels in accordance with the timetable attached hereto as Exhibit C, and they shall take all commercially reasonable actions to achieve this goal. The Parties warrant -4- August 22, 1995 and agree that, except as set forth in Exhibit C, there are no known existing contractual obligations or legal restrictions that would prevent them or the Hotels from completing such installations within two (2) years from the Effective Date. 3.6. MagiNet and GDG shall cooperate fully with any and all third party vendors chosen by the Hyatt Parties and/or the Hotels, including those hired as consultants, designers, advertising experts and programmers to assist in developing Content and to provide advice concerning the System, and the use of other vendors for another guest video services system when such system(s) can be installed in accordance with this Agreement. 4. THE SYSTEM ---------- 4.1. The System shall include at least: (i) a module for each television set that can remotely control on demand requests made by guests from Rooms to central storage devices within the Hotel; (ii) a remote control and appropriate spares for each television in the Hotel; (iii) Content storage sufficient for the Content initially installed and a reasonable amount of expansion capability for additional Content that may be installed in the future; (iv) a front-desk personal computer, monitor and printer; and (v) all necessary software, electronic, computer and switching equipment, including GDG Technology to permit the receipt, transmission, monitoring and on demand remotely controlled interactive guest operated in-room display of the Content. GDG Technology shall include all technologies developed by GDG and currently available and, as further provided for herein, future technology developed by GDG, provided to or usable by hotel customers. 4.2. MagiNet and GDG shall provide for use during the term of this Agreement at no charge one, demonstration System, including the updated Content except for the Movies, for Hyatt International headquarters in Chicago, Illinois. 4.3. As part of the consideration to MagiNet for installation of the Systems, in the absence of material breach by MagiNet, the Hyatt Parties agree that they will undertake their best efforts to ensure that the System will be the sole and exclusive in-room guest video services system provided to their guests for each Hotel during the term of its Individual Agreement (except as provided for herein, including section 4.16 of this Agreement). The Hyatt Parties will not either directly or indirectly solicit the installation of any video system in Hotels which might directly compete or cause transmission interference with the System. MagiNet will not be obligated to install the System in any Hotel that will not agree to such exclusivity. 4.4. MagiNet and/or GDG shall develop and install software, and MagiNet shall repair, purchase, build and install all hardware required to operate the System, including all needed upgrades to Hotel MATVs. All installed and provided hardware and software shall be specified and listed as an exhibit to the Individual Agreements, and their presence shall be verified in each Individual -5- August 22, 1995 Agreement. 4.5. MagiNet and GDG shall provide documentation to provide the reader with sufficient information so that the System can be operated without further consultation (the "System Manual"). Two (2) copies of each System Manual shall be provided for each Hotel, with one copy to both Hyatt Parties. 4.6. Ten (10) copies of a manual that describes the Tool Kit sufficiently to permit its use shall be provided to the Hyatt Parties (the "Tool Kit Manual"). 4.7. System Manuals and Tool Kit Manuals may be copied and printed in whole or in part by Hyatt Parties and Hotels on an as needed basis. All Manuals shall be marked and treated by all Parties as confidential. Notice of copying of each Manual shall, with best efforts, be given to MagiNet and/or GDG. 4.8. The System shall provide guests with the Content in as efficient and effective a manner as is reasonably and technically possible at the time the System is installed in each Hotel, and as further specified and described in the Technical Requirements. 4.9. The System shall accommodate, and MagiNet and GDG shall ensure the delivery of across the System and the MATVs., to the extent reasonable and commercially possible, all Content that the Hyatt Parties determine in the future would benefit Hotel guests or Hotel staffs and would be economically viable to add to each Hotel's services. 4.10. The System will be multilingual, and shall permit displays and commands in at least three separate languages in any given Hotel. The selected languages have been preliminary designated in Exhibit A for the Hotels identified, which designations can be modified at the Hyatt Parties' and/or Hotel's option and at the Hotels or Hyatt Parties' expense for Hyatt Content. 4.11. MagiNet and GDG shall at all times in the future ensure that the System and all other computer,, reservations and information systems operated or used by the Hyatt Parties and Hotels ("Hyatt Systems") are interoperable, and each will ensure that it takes no action(s) that could jeopardize such interoperability provided that Hyatt Parties will ensure standard ------------- industry interfaces are provided by such Hyatt Systems for interface with GDG Technology. If such interoperability of the System and Hyatt Systems were threatened, then the Hyatt Parties and/or the Hotel(s) affected can immediately seek any assistance deemed necessary by the Hyatt Parties and/or those Hotel(s) to disconnect the System from the point of interface to such Hyatt System to avoid, prevent and/or cure any such threat or defect. In the event that any Hyatt Systems are modified after the System is installed, MagiNet and GDG shall be required, if necessary in order for the System to function with the Hyatt Systems, to use their best efforts to modify the System so that it operates in accordance with the requirements of this Agreement and any Individual Agreement that exists with the Hotel(s) involved. If such modifications are feasible, then MagiNet and GDG shall -6- August 22, 1995 provide the Hotel(s) affected with an estimate of what is required to undertake the modifications. The estimate shall be binding upon MagiNet and GDG, but the affected Hotel(s) may seek other quotes for the work required, and are not bound by the estimate unless it indicates in writing that it agrees with the estimate. 4.12. MagiNet and GDG understand and agree that the System must meet or exceed all Technical Requirements. MagiNet shall provide sufficient spare equipment to minimize the effect of component failure on guest services and to enable rapid repair and replacement of defective components, including spare converters and remote controls to enable Hotel staff to meet the short term needs of its guests if repair and/or replacement of components are required as further referenced in Section 12.8. 4.13. The development and use of the System shall not interfere with the operations of the Hyatt Parties or any Hotel, including any interference with the continued operation of the Hotels during the period of installation except as may reasonably be required to effectuate the installation. 4.14. Each Hotel will ensure the safety and security of the System and all related property of MagiNet at all times while the System is installed in the Hotel, and will be liable for any loss or damage to the System resulting from negligence on the part of Hotel's employees or third parties (excepting MagiNet and GDG and their associated entities) to which Hotel permits access to the System. 4.15. The System shall not contain any undocumented features. MagiNet, GDG, the Hyatt Parties, the Hotels or any other person shall not adversely or improperly affect or alter either the Content or other materials being transmitted over the System and/or Hyatt Systems. MagiNet and GDG are specifically prohibited from knowingly including, and agree not to include, any virus, timer, clock, or limitations in design or routine designed to adversely affect or alter the Content or components of the System and/or Hyatt Systems, in particular any devices that destroy or otherwise make data inaccessible. 4.16. Nothing in this Master Agreement nor any Individual Agreement shall be deemed to affect in any way, and/or preclude: (i) the Technical Requirements;(ii) the Hyatt Parties or the Hotels from entering into agreements in order to obtain other vendors as otherwise permitted by this Agreement; (iii) the complete and unfettered right and ability of the Hyatt Parties and the Hotels to install video devices, cd players and other devices, including telefax machines, computers and computer lines (collectively the "Devices"), in Hotels for guest or others' use provided that content made available by Hyatt Parties and the Hotels for such Devices does not compete with content provided via the System; (iv) the Hyatt Parties' and Hotels' rights and ability to connect other communications devices that will be able to communicate with guests through the guests' televisions and other forms of monitors; (v) the Hyatt Parties' and Hotels' rights to continue to broadcast the Hyatt Content after termination of this Agreement or any Individual Agreements; and (vi) guests' rights to have and use -7- August 22, 1995 their own Devices with their own content in the Rooms. Any installation or use of Devices by Hotels and guests may not interfere with delivery, reception or use of Content anywhere else in the Hotel by any other guest, or violate any copyright restrictions of any other Content. 5. ADVISORY BOARD -------------- 5.1. An Advisory Board (the "Advisory Board") shall be formed for the purpose of assisting in the administration of the relationships between the Parties contemplated by this Agreement. 5.2. The Advisory Board shall be comprised of at least three (3), not to exceed (4), voting persons, at least one of whom shall be designated by each of the two Hyatt Parties, MagiNet and GDG. Such number of Board members shall in no event be reduced below three, Each party shall be entitled to have as many nonvoting persons attend Advisory Board meetings as they desire. 5.3. The Hyatt Parties representative(s) shall be entitled to cast a total of two (2) votes on any issue. MagiNet and GDG shall be entitled to cast one (1) vote each. No action voted upon and approved by a majority of the Advisory Board's votes shall be acted upon without subsequent written approval of the chief executive officer of each party or his or her designee. 5.4. Meetings of the Advisory Board shall be held not less than four times per year. A meeting of the Advisory Board may be called by any Advisory Board member by telephonic or written notice to all Advisory Board members at least ten (10) days prior to such meeting of the time, place and general purpose of such meeting. The meeting may be held telephonically. 5.5. The Advisory Board shall have specific authority to discuss and vote on the following matters: 5.5.1. Advertising Rates - The Advisory Board shall discuss standard advertising rates for local, regional and global advertising. 5.5.2. System And New Technology Development and Implementation - The Advisory Board shall serve in an advisory role in evaluating System and new technology development and implementation alternatives and schedules, and confirming the eligibility of development expenditures for reimbursement from revenue obtained from any approved new services revenue or otherwise. 5.5.3. Dispute Resolution - The Advisory Board shall consider all disputes that arise during the day-to-day conduct of the relationship, including the key account status of certain accounts. 5.5.4. General Oversight - The Advisory Board will generally oversee the relationships and activities contemplated by this Agreement, and will provide executive commitment and direction to such relationships and -8- August 22, 1995 activities. Such oversight shall include, but not be limited to, considering issues arising concerning compliance by the Parties with the terms of this Agreement. 5.6. Each party shall designate a senior executive of their respective organizations to serve as a senior executive affected by a particular issue ("Senior Executive"). The Senior Executives shall jointly hear appeals of issues which are submitted by the Advisory Board. 5.7. An affirmative vote is required from the Hyatt representative(s) in order for any vote to be binding. 6. HYATT INTERFACES AND CONTENT ---------------------------- 6.1. The Hyatt Parties will have the exclusive right to develop, design, and implement, and obtain and retain full ownership rights of: (i) the design elements, including the color scheme used, for all Hyatt Content other than that covered by third party copyrights and approved by the Hyatt Parties, including all screens and displays; (ii) all materials and designs created for or by the Hyatt Parties for the System; and (iii) all Hyatt Parties' Intellectual Property that relates to these elements, including all those that are subject to trademark and trade dress ownership under United States or any local laws. All such elements shall be known as the "Hyatt Interfaces." 6.2. The Hyatt Interfaces may be changed by the Hyatt Parties at any time. Such changes shall be implemented within a reasonable time after the Hyatt Parties' written request to do so, and in any event no later than ninety (90) days after written notice thereof unless additional time is reasonably necessary and approved by the Parties. 6.3. The Hyatt Parties shall have the right and complete control to utilize the Hyatt designated System capacity in Hotels to display infomercials, programs on other hotels and resorts, and similar advertising and merchandising of hospitality industry products and services MM by Hyatt or Hyatt Affiliates ("Hyatt Products"), including Hyatt Interactive Services (see Section 7. below) and Hotel Services (see Section 8. below) (collectively, "Hyatt Content"). 6.4. The Hyatt Parties may use the Tool Kit to develop, design and implement the Hyatt Interfaces and Hyatt Content. If the Hyatt Parties choose to do so, the Hyatt Parties may pay GDG and/or MagiNet their standard rates to undertake such development, design and implementation. Nothing herein shall relieve GDG and MagiNet from their obligation to install, operate and maintain the System and the MATVs, and to implement Hyatt Interfaces and Hyatt Content in accordance with this Agreement. All persons who work on such implementation shall sign all necessary documents to ensure that all ownership rights to Hyatt Interfaces and Hyatt Content vest fully and completely in the Hyatt Parties. 6.5. Hyatt Content shall not be directly competitive with any then currently available -9- August 22, 1995 Content. 6.6. Except as specifically otherwise provided herein, all Content other than Movies must First be approved by the Hyatt Parties and the Hotels prior to installation on the System. 7. HYATT INTERACTIVE SERVICES -------------------------- 7.1. "Hyatt Interactive Services" shall mean those Interactive Services that relate to Hyatt Products that are developed for or by one or more of the Hyatt Parties or Hyatt Affiliates. Hyatt Interactive Services may be offered to guests and others through the System. 7.2. Any person or entity working for or related to any Hyatt Party or Hyatt Affiliate may develop Hyatt Interactive Services. Nothing in this Agreement shall be read to prohibit such independent development. 7.3. All specialized hardware and software not covered by this Agreement for the provision of or constituting Hyatt Interactive Services shall be paid for by and deemed to be the property of one of the Hyatt Parties or its designee or assignee. 7.4. MagiNet and GDG shall cooperate fully in providing and fully implementing, all interfaces and operating procedures required so that any Hyatt Interactive Services may be used on the System. 8. HOTEL SERVICES -------------- 8.1. "Hotel Services" shall mean those guest information and other services available now and in the future from Hyatt Parties, Hyatt Affiliates and Hotels, including the development, storage and transmission of information about: (1) guest billings status, (2) minibar consumption and other charges, (3) hotel, transportation, and restaurant reservations, (4) guest marketing information for or on behalf or third parties, and (5) guest messaging systems and services. 8.2. MagiNet shall ensure that Hotel Services are available through the System, and can be accessed with no more delay than may be experienced in order to obtain Interactive Services from MagiNet, including such assistance as may be needed for each Hotel so that all technical requirements are met for the transmission of Hotel Services through the System. 8.3. If any of the Hyatt Parties or any individual Hotel requires MagiNet or GDG to provide services requiring the modification of hardware or software interfaces other than those on the System in order to implement Hotel Services, then the party making such a request shall be solely responsible for such costs. If MagiNet or GDG satisfies such requirements, then any direct costs for the alteration of existing interfaces solely for the purpose of providing Hotel Services, and approved by the Hyatt Parties and one or more Hotels, shall be paid by the approving entity. The Hyatt Parties' own costs of development and -10- August 22, 1995 transmission of Hotel Services shall be borne by Hyatt AP or any specific Hotel or group of Hotels responsible for approving such costs. 9. OWNERSHIP RIGHTS ---------------- 9.1. "Hyatt Systems" shall mean those hardware and software systems other than the System used by Hyatt Parties and the Hotels to deliver Content to guests in their rooms, including any transmitting devices and equipment, wiring, televisions, and cable or master antennae transmission systems, as well as all software and hardware used for each Hotel's PMS and MATV. 9.2. The Hyatt Interactive Services, Hyatt Interfaces, Hyatt Content, Hyatt Systems, all signal boosters, wiring and faceplates, and any portions of the System that are permanently installed, or installed in such a way that the removal of that part would cause more than incidental wear and tear to the premises, and all other property at the Hotels and with the Hyatt Parties apart from the System, shall be considered by the Parties to be the sole and exclusive property of the Hyatt Parties and/or the Hotels (the "Hyatt Property"). All Hyatt Property shall be considered by the Parties to be the property of the Hyatt Parties and/or the Hotels, irrespective of whether such information, materials, hardware and software systems are used on or developed by MagiNet and/or GDG and/or any affiliated entities or third parties. 9.3. The System and Content provided by MagiNet and/or GDG that is not Hyatt Property shall be either the property of MagiNet or GDG or property licensed to MagiNet or GDG by a third party. 9.4. Hotels will not allow any lien, encumbrance, mortgage, claim or security interest to be attached to or be made against those portions of the System owned by MagiNet and/or GDG. MagiNet and GDG and those working for these Parties shall not allow any lien, encumbrance, mortgage, claim or security interest to be attached to or be made against Hyatt Property. 9.5. Hotels will maintain all MagiNet notices or plaques affixed to the System's equipment, stating that all such equipment is the sole and exclusive property of MagiNet. If MagiNet elects to file documents with governmental agencies for the purpose of notifying potential creditors of' Hotels that the equipment is the property of MagiNet, Hotels will assist with such filing at no expense to the Hotels, if requested to do so by MagiNet. Nothing herein shall require the expenditure of any time or resources by any Hotels beyond administrative assistance on any legally required and appropriate documents, which shall first be reviewed and approved by the Hyatt Parties for form and content relative to their own ownership interests. 9.6. Equipment comprising part of the System and owned by MagiNet will not be removed from Hotels for any purpose whatsoever during the. term of the Individual Agreements except for purposes of repair, and when otherwise permitted hereunder. -11- August 22, 1995 9.7. In the event the safety of the System is threatened due to earthquake, flood, fire, strike, civil disruption or similar force majeure causes, MagiNet will be entitled to enter upon Hotel premises and to remove the System from danger upon reasonable notice to Hotel. This provision shall not entitle MagiNet to disrupt normal guest services, nor to intrude on or violate the privacy of the Hotels' guests. 9.8. Upon termination of its Individual Agreement, each Hotel will allow MagiNet to remove that portion of the Systems owned by MagiNet. MagiNet will undertake to remove the System from the premises within thirty (30) days after such termination, and, at Hotel's option, will return the premises affected by the installation and or removal of the System to their original condition, normal wear and tear excepted, at no cost to Hotel and with minimal disruption to the provision of Content to Rooms and other Hyatt Property. MagiNet also hereby agrees that if a new vendor is installing a system in the Rooms, that MagiNet will remove those portions of the System owned by MagiNet in a timely and efficient manner. 10. INTELLECTUAL PROPERTY --------------------- 10.1. "Intellectual Property" shall mean all trademarks, service marks, trade names, trade dress, patents, copyrights, trade secrets, and other proprietary rights recognized under the laws of any nation. 10.2. Subject to the provisions of this Agreement, all Intellectual Property owned by Hyatt Parties, the Hotels and any related entities shall be and remain the property of those entities. MagiNet and GDG and any related entities shall be provided the limited right to use and practice such Intellectual Property solely for the purpose of ensuring that they can perform the Activities. 10.3. Subject to the provisions of this Agreement, all Intellectual Property of MagiNet and GDG and any related entities shall be and remain the property of those entities. Hyatt AP, Hyatt Services, the Hotels and any related entities shall be provided the limited right to use and practice such Intellectual Property solely for the purposes described in this Agreement and the Individual Agreements. 10.4. The Parties recognize and agree that it is necessary Or each party to use certain Intellectual Property of the other in their activities contemplated under this Agreement. The Parties shall protect the other parties' Intellectual Property to the same degree as they protect their own Intellectual Property, but in any event reasonable steps shall be taken to ensure its protection, including steps to prevent any reverse engineering of software, hardware, or other proprietary technology. 10.5. Nothing herein shall be interpreted to transfer, convey or license any rights whatsoever in any party's Intellectual Property unless provision therefore is specifically provided for herein. No party shall have the right to use any trademarks or service marks in the absence of the owning party's specific -12- August 22, 1995 written agreement to permit such use. 11. INSTALLATION ----------- 11.1. MagiNet shall apply for and obtain all licenses, permits and other government approvals required to do work on each Hotel's premises, and shall at all times comply with the applicable legal and regulatory requirements for such work. It shall be MagiNet's responsibility to handle all such requirements, and also its responsibility to pay for any legal expenses and fines incurred due to MagiNet's failure to comply with such requirements. 11.2. MagiNet and its subsidiaries and distributors shall carry and maintain for each installation, and any later work at the Hotels, worker's compensation insurance, or such other insurance as is required and or needed to pay for any actions of MagiNet's personnel and all such other personnel, in the amount of at least $1,000,000 combined single limit comprehensive general contractual liability insurance, and at least $1,000,000 combined single limit vehicle liability insurance. Copies of all applicable policies and certificates of insurance shall be provided to the Hyatt Parties and the relevant Hotel prior to commencement of any work on the premises of any Hotel. All such policies and other contracts and certificates of insurance shall include the following provision, or wording with the same legal effect: "Hyatt International - Asia Pacific Limited, its affiliates and subsidiaries and the owners of Hyatt hotels are named as additional insureds under these policies; such insurance shall be primary to and not contributory with these entities' and persons' own insurance." 11.3. An interface with each Hotel's PMS shall be completed by MagiNet and GDG during installation of the System. A front-desk personal computer and printer will be included as a part of the System for printing charges for each guest purchase or rental in case such interface fails at any time. MagiNet and GDG will ensure that the System will fully interface and integrate with the PMS. As a part of such integration, guest usage charges shall be automatically posted to each individual guest's bill, counts of access shall be available to the Hotel and centrally consolidated for all Hotels, and other reporting will be permitted. Each Hotel will cooperate with MagiNet and GDG for the purpose of successfully implementing the interface, and shall undertake its best efforts to insure cooperation. between MagiNet and GDG and each PMS software vendor used by the Hotel. All interface protocol installation or maintenance charges asserted by the PMS software vendor and agreed upon in advance by the Hotel will be paid for by each Hotel. 11.4. Each Hotel will provide such access as may be reasonably requested by authorized personnel to enable complete installation of the System in the Hotel, including without limitation providing all Hotel facilities set forth in Exhibit A within a reasonable time to permit complete installation. Each Hotel will make reasonable efforts to provide sufficient access to guest rooms for the purpose of -13- August 22, 1995 equipment installation so that such installation is performed with a minimum of delay. During the installation process, each Hotel will provide complimentary or discounted rooms for out of town members of the installation team consistent with its practices for other vendors. 11.5. Appropriate fully qualified personnel of MagiNet and GDG shall perform MagiNet's and GDG's obligations hereunder in an efficient, courteous, effective and timely manner and all such personnel shall be bonded, trained and supervised in accordance with appropriate hospitality industry practices consistent with local practice and custom. All actions of any person acting for or on behalf of MagiNet and GDG shall be subject to the same rules and regulations as are applicable to Hotel staff. All such persons shall wear identification badger and shall be dressed in a proper fashion. 11.6. Upon completion of the installation, MagiNet and GDG will test and ensure that the System in each Hotel, and in all Rooms is fully functional without material defects. Upon the successful conclusion of such testing, MagiNet and GDG will each deliver to the Hotel and the Hyatt Parties a written Certification (the "Certification") that the System is fully functional and without material defects and meets all Technical Requirements. Such Certifications will be attached to the Individual Agreement and added to this Agreement as exhibits. 11.7. MagiNet shall visit each Hotel and shall train all employees deemed by a Hotel to be appropriate in the use of the System at installation, as specified in Section 23.3. 11.8. Each Hotel will begin the process of billing guests for and generating revenue from the Content no later than the date of the Certification. 11.9. Each Hotel shall provide access to its MATV. MagiNet shall be responsible for all work required to and all costs incurred in upgrading MATVs as required for proper operation of the System, except that improvements required for in-wall cable and its installation in excess of $5,000 shall be paid by the Hotels. If these costs exceed [***] and MagiNet elects not to pay for such excess, then the Movie commission rate payable to the Hyatt Parties and/or the Hotels for the Movies shown at those Hotels shall be increased by five percent [***] for a period of three years. Nothing herein shall be deemed to allow or require either the Hyatt Parties or any Hotel to submit any records beyond those showing the actual costs of the purchase and installation. 11.10.The installation of the System and upgrading of MATVs shall not degrade MATVs, or impair the ordinary reception of broadcast programs or other services on the MATV. Any MATV hardware and equipment owned by Hotel which has been disconnected as a result of the installation will be taken to Hotel designated storage locations by the installation personnel. 11.11.Hyatt Parties shall exercise best efforts to ensure that new Hotels to be added hereunder shall be constructed with MATV which comports with the Technical [***] Confidential treatment requested pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission. -14- August 22, 1995 Requirements. 12. MAINTENANCE ----------- 12.1. MagiNet will promptly provide all maintenance, repairs and replacement of all software and hardware and other equipment necessary to ensure proper operation of the System and the MATV in each Hotel, including satisfactory signal quality and shall ensure that a qualified person is available on a twenty-four (24) hour basis to receive service requests. GDG will provide backup support to MagiNet as necessary to ensure proper maintenance, repair and replacement occurs. Such maintenance and technical assistance will be provided free of charge, unless the maintenance is occasioned by a breach by Hotel of any of its obligations as set forth in the Individual Agreement, or by unauthorized use, access, theft, negligence or damage caused by Hotel staff or third parties not under contract to MagiNet or GDG. Hotels shall be trained so that they can undertake routine maintenance as agreed upon by the Hotel and MagiNet. MagiNet shall not have any obligations under Ws paragraph for maintenance of hardware which the Hotel has contracted to other parties. 12.2. Each Hotel will, at the Hotel's expense, notify a person designated by MagiNet by telephone or by fax of any failure or degradation of any part of the System anywhere within the Hotel, including in any Room. 12.3. The Hotel will notify MagiNet as soon as is reasonably possible and upon Hotel's actual notice of any unauthorized use, access, theft, damage or malfunction of or to the System. 12.4. Each Hotel will allow authorized personnel of MagiNet and GDG to have escorted access to the System at reasonable times in order to conduct routine maintenance, to observe and to monitor the System, to ensure suitable operating conditions, to implement improvements in the System, to conduct repairs, and to otherwise carry out MagiNet's and GDG's obligations set out in this Agreement or the Individual Agreement. 12.5. In the event that any malfunction, nonconformity or other defect in the System is believed to exist by Hotel or the Hyatt Parties, and notice of such defect is given, MagiNet shall promptly undertake their best efforts to have the defect corrected and in no event shall there be more than a four (4) hour delay in MagiNet's response and all repairs shall be made as quickly as possible. If Hotel does not provide prompt access to the System to correct System failures once MagiNet has been notified by Hotel of such System defects, MagiNet will not be liable for any delays so incurred. 12.6. Any repairs or replacements to any equipment supplied by MagiNet made necessary by any negligent or willful act by Hotel or any of its guests, employees, contractors, servants, and agents, or force majeure events, will be undertaken by MagiNet at Hotel's expense. -15- August 22, 1995 12.7. Hotels shall not permit any person to tamper with or attempt to make repairs to any equipment supplied by MagiNet, except for the replacement of televisions and such other circumstances agreed upon by the Hotels. In emergencies, Hotels may carry out repairs in accordance with instructions given by MagiNet. 12.8. Each Hotel will be responsible for replacement of depleted batteries and for paying for replacement infrared remote control units in the event of theft, loss or damage in excess of twenty (20) units per year. Initial replacement cost is as set forth on Exhibit D, plus shipping, duties and taxes, and is subject to change upon written notice from MagiNet to Hotel, with an effective date at least thirty (30) days in advance of a change, in accordance with commercially reasonable and customary practices. 13. MOVIES ------ 13.1. It is understood and agreed that, except as otherwise provided below, MagiNet shall have absolute control and discretion in the selection of the movies it contracts for with the movie studios or their distributors and provides to Hotels (the "Movies"). 13.2. MagiNet shall provide a method whereby a guest will be able to electronically restrict persons from viewing any adult selections being offered in a Room. 13.3. When available from producing studios, the Content offered by MagiNet shall include first run Movies offered to Hotels that shall be no less current and offer no less variety of first run and other titles than those available at competing hotels in the relevant country. MagiNet shall consult with the Hotels on a regular basis to ensure the provision of a selection of titles properly suited to each Hotel's guest profile. Hotels and the Hyatt Parties may review the movies and other video materials being offered by MagiNet, and may object to Movies they feel violate the sensitivities of the guests at a particular Hotel, and any unresolved disputes will be adjudicated by the Advisory Board, pending which resolution the objectionable Movies shall not be offered at the Hotel. 13.4. MagiNet will be solely responsible for any royalty payable to Movie suppliers and any license fees for Movies made available on the System. 13.5. Each Hotel will be responsible for ensuring that access to the room(s) in which the central storage and transmission equipment for the System is located is restricted to persons accompanied by persons authorized by MagiNet to be present there except in cases of emergency. MagiNet shall authorize a sufficient number of persons employed by the Hotel for such purpose. Hotels will not authorize copying of any Movies and will undertake their best efforts to ensure that the Movies are exhibited in the Rooms only, and not in the public rooms and public areas (including lobbies, hallways, restaurants, bars, meeting rooms, etc.) of the Hotels. The Movies will not be exhibited other than in accordance with this Agreement. Each Hotel will use reasonable efforts to insure that only registered guests of the Hotel and their invitees may view the Movies. -16- August 22, 1995 13.6. Cassettes and other media that contain the Movies ("Cassettes") will be kept in a secure and locked area. Hotels will prevent unauthorized access to and use, exhibition or viewing of any Cassette by any person other than as set forth herein. Hotels will not permit any person to duplicate or make alterations of any kind to Cassettes. Hotels will promptly report to MagiNet any unauthorized use of the Cassettes as soon as a Hotel becomes aware of any such use. If a Hotel has videocassette recorders installed in the Rooms, the Hotel shall agree that MagiNet may, where required to do so as a result of its licensing agreements, as directed by the Hotel, either (i) disable the "record" function in such a way that does not permanently damage the videocassette equipment, but only to the extent required to comply with such restrictions, or (ii) disable the Movie function for such Rooms. 13.7. MagiNet shall be responsible to ensure that any of the transmissions on the System controlled by it do not violate any applicable laws, including those of the country in which each Hotel is located, including specifically any laws relating to copyright, pornography, and censorship of information or materials. 14. NEW TECHNOLOGIES ---------------- 14.1. MagiNet and GDG shall at all times offer to the Hyatt Parties and each Hotel the most advanced guest video services and features (and associated technologies) either of these Parties or its competitors offers to any other hotel. 14.2. MagiNet and GDG shall provide the Hyatt Parties with written notice of any new guest video services and features (and associated technologies) within thirty (30) days of the party's first knowledge of such development(s). 14.3. The Parties agree that the Advisory Board will periodically, and at least quarterly hold a meeting to review the guest video services and features (and associated technologies) currently available to hotel chains and hotels competitive with the Hotels and the services and features (and associated technologies) which may become available in the industry, whether from MagiNet, GDG or otherwise. 14.4. Should Hyatt determine that it is commercially necessary in order to maintain its competitive position in the marketplace for one or more services or features (and associated technologies), or a more advanced version of existing services or features (and associated technologies), to be added to the System, then GDG and/or MagiNet shall within nine (9) months of written notice from the Hyatt Parties of such determination (which shall be six (6) months in cases where such service or feature and associated technology is in use in the marketplace), implement the service or feature and associated technology in all future Hotel installations and in any Hotels then subject to Individual Agreements. The failure of MagiNet or GDG to comply with this provision shall be a default under this Agreement and shall be subject to the remedies set forth in section 26.3. hereof. The failure of MagiNet and/or GDG to comply with this provision shall also permit Hyatt and or Hotels to obtain from a third party those services -17- August 22, 1995 or features (and associated technologies) not provided by MagiNet or GDG, not withstanding the exclusivity provisions of section 4.3. hereof. 14.5. Should MagiNet or GDG add to the System a service or feature (and associated technology) requested by Hyatt or otherwise, such service or feature (and associated technology) will be implemented in such a way as not to prevent Hyatt from providing consistent guest services throughout its Hotels. The failure -18- August 22, 1995 of MagiNet and GDG to comply with this provision shall also permit Hyatt and/or Hotel to obtain any assistance from a third party necessary to provide such consistent service, notwithstanding the exclusivity provisions of section 4.3. hereof. 15. HOTEL FEES ---------- 15.1. Each Hotel will charge hotel guests for access to Movies and other pay per view or pay for service Content for which charges are assessed (the "Rental Fees"). The amount to be charged for Movies shall be set by MagiNet in consultation with and approved by each Hotel at the time of the execution of the Individual Agreements or, for other pay per view or pay for service Content, at the time the Content is made available. To the extent that the Hotel and MagiNet agree, such charges shall not commence until after a guest has been allowed to review the selection for five (5) minutes. In addition to the Rental Fee, each Hotel will collect from guests any taxes applicable to such receipts, and will pay those taxes to the appropriate government authorities. 15.2. From time to time, MagiNet may revise the Rental Fees after consultation with Hotels. Rental Fees shall be charged which are customary in each locale, and shall be increased annually in an amount at least equal to the increase in the local cost of living. MagiNet will notify each Hotel in writing of any new Rental Fee and the effective date at least thirty (30) days in advance of a revision. 15.3. In the event any Hotel guest disputes the amount of Rental Fees in a situation in which Hotel personnel are otherwise unaware of any System malfunction (herein referred to as a "Denial"), each Hotel may in its sole discretion credit the disputed amount to the guest's account provided it provides MagiNet's local representative with a copy of the credit voucher showing room number, date, time of day, and reason for the disputed charge. Hotel will use its best efforts to limit Denials to not more than five percent (5%) of gross Rental Fees per month from Rental Fee payments otherwise due for Denials actually credited to guests. MagiNet will provide training and/or materials to assist Hotels in these efforts, and the Advisory Board will provide suitable guidelines to achieve this objective. 15.4. The System will generate an accurate record (the "Access Record") of the access to the System by any guess, including a record of the access charges for each individual guest's bill or Room account, the types of access made, and any other reasonably recordable information that may be requested. The Access Record will not retain the names of guests. MagiNet and GDG will be responsible at their own cost for programming the System to enable it to provide the aforesaid data. The Access Record for each Hotel will be held in confidence by the personnel of each Hotel. MagiNet and the Hyatt Parties may review and use the Access Record for such purposes as they may reasonably deem appropriate. Each party will indemnify the other against any and all claims as a result of their improper use of such Access Record. -19- August 22, 1995 15.5. Hotels will submit a report (via telefax) to MagiNet on the first day of each month which details the previous month's gross Rental Fees and itemizes deductions for all Denials allowed. MagiNet shall invoice the Hotels for gross Rental Fees less Denials allowed, Hotel commissions payable under Exhibit D, and unreimbursed tax payments ("Net Rental Fees"), all based upon guest usage as reported by the relevant PMS accounting records during each calendar month, which information shall be accessible and reviewable during the month by MagiNet, the Hotels and the Hyatt Parties. Hotels shall hand post any invoices printed in hard form as a result of PMS downtime to accurately capture those buys in PMS records.- Both parties agree to mutually and amicably resolve any variances between their respective records of Rental Fees and Denials. 15.6. Each Hotel will pay to MagiNet or the designated subsidiary or distributor or other designated party within a reasonable time as established in the Individual Agreement the Net Rental Fees invoiced by MagiNet as provided in Section 15.5. The payment transmission will also specify the occupancy rate for the month. 15.7. Each Hotel will keep current, complete and accurate records of occupancy rates and all Net Rental Fees and other amounts due to MagiNet pursuant to this Agreement. Throughout the duration of this Agreement, each Hotel's books and records pertinent to the Rental Fees, Denials and Net Rental Fees for any month will be open to inspection and reproduction by MagiNet and, if necessary, to an audit by a mutually agreed upon certified public accountant as an authorized representative of MagiNet upon reasonable advance written notice to Hotel. No. such records need to be retained beyond one year. MagiNet's right to inspect and audit the books and records of Hotel will not extend beyond one year from the expiration of its Individual Agreement. If any audit by MagiNet discloses any non- payment or underpayment of any amount payable to MagiNet, the audited Hotel will immediately pay to MagiNet any deficiency, plus the interest charges established in the Individual Agreement. If the deficiency is in excess of fifteen percent (15%) of the actual amount payable to MagiNet for the period for which the deficiency occurred, the audited Hotel will reimburse MagiNet for all costs incurred by MagiNet in conducting the audit. 16. THIRD PARTY CONTENT ------------------- 16.1. The Parties intend to market advertising and merchandising system capacity for the System to third parties. All such Content, apart from that defined as Hyatt Content shall be known as "Third Party Content". GDG, the Hyatt Parties and MagiNet may solicit and enter into agreements to provide third parties with space for advertising and merchandising through the System for all Hotels. 16.2. A "Key Account" is a third party advertiser or merchandiser that is specifically reserved to Hyatt Parties, or which falls within an identified category of entities and persons about whom no Content is to be included on the System, or who are -20- August 22, 1995 otherwise not appropriate for the System, all of which is to be determined at the Hyatt Parties' sole discretion. Such Key Accounts will be identified by the Advisory Board for a decision by the Hyatt Parties. 16.3. The Parties shall develop guidelines for the marketing of advertising and merchandising system capacity for the System through the Advisory Board. The Hyatt Parties shall have exclusive right to accept or reject any specific Third Party Content, and to control how and who makes any contact with a prospective marketer of products or services. Each prospective customer shall be identified prior to any approach being made by either MagiNet or GDG by providing to the Advisory Board: (i) the name of such customer, (ii) the name of the contact person at such customer, (iii) the individual unit for which the contact person has buying authority, and (iv) if applicable, an indication that such customer constitutes a Key Account, or that a determination with respect to Key Account status is pending. 16.4. GDG and its affiliates will offer to provide the production services for Hyatt Content and for Third Party Content but the Hyatt Parties and third parties are not obligated to use GDG's services. Any production services provided to third parties shall be on commercially reasonable terms to be mutually agreed upon between GDG and such third party. Production services provided to the Hyatt Parties shah be for the lowest fees offered to other customers of similar services. 16.5. Each party shall fully cooperate with each other party hereto, and any other person or entity involved in creating Third Party Content, in providing format information useful in the production of Third Party Content and in implementing any technical interfaces necessary to enable display of Third Party Content on the System. 16.6. For any Third Party Content utilizing the System at a Hotel, the Hyatt Parties and the Hotels shall be entitled to retain [***] and. GDG and MagiNet shall be entitled to retain [***] of Net Content Revenues actually paid to one of the Parties and the Hotels hereto ("Content Commission"). The precise methods by which such payments are to be made, and the calculations of appropriate expenses to be charged for soliciting and obtaining Third Party Content prior to any distribution to the other parties, shall be determined by the Advisory Board. 16.7. The Parties agree to make and maintain complete books, records and accounts regarding sales of and expenses relating to Third Party Content. Each of the Hyatt Parties, GDG and MagiNet shall have the right to examine such books, records and accounts during the other party's normal business hours once annually to verify the reports on Content Commission payments due. If any such examination discloses a shortfall or overpayment., the appropriate party shall promptly pay the amount of such shortfall or refund such overpayment. 16.8. "Net Content Revenue" shall mean all revenues or other consideration received -21- [***] 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. August 22, 1995 by any of the Parties and the Hotels from advertisers, merchandisers, hotel guests and others from the transmission of Third Party Content over the System, less allowable Denials, applicable unreimbursed tax payments, and any production costs, development costs, marketing costs or other expenditures which have been approved for reimbursement by the Advisory Board. 17. INTERACTIVE PRODUCTS AND SERVICES --------------------------------- 17.1. The Parties intend to develop and otherwise obtain interactive guest video products and services including games ("Interactive Services"). 17.2. The Parties shall develop and otherwise solicit and obtain Interactive Services for the System through the Advisory Board. The Hyatt Parties shall have exclusive right to accept or reject any specific Interactive Services. 17.3. GDG and its affiliates will offer to provide the production services for Hyatt Interactive Services and for Interactive Services but the Hyatt Parties and third parties are not obligated to use GDG's services. Any production services provided to third parties shall be on commercially reasonable terms to be mutually agreed upon between GDG and such third party. Production services provided to the Hyatt Parties shall be for the lowest fees offered to other customers of similar services. 17.4. Each party shall fully cooperate with each other party hereto, and any other person or entity involved in creating Interactive Services, in providing format information useful in the production of Interactive Services and in implementing any technical interfaces necessary to enable display of Interactive Services on the System. 17.5. For any Interactive Services utilizing the System at a Hotel, the Hyatt Parties and the Hotels shall be entitled to retain [***] and GDG and MagiNet shall be entitled to retain [***] of Net Interactive Services Revenues actually paid to one of the Parties and the Hotels hereto ("Interactive Commission"). The precise methods by which such payments are to be made, and the calculations of appropriate expenses to be charged for soliciting and obtaining and developing Interactive Services prior to any distribution to the other parties, shall be determined by the Advisory Board. 17.6. The Parties agree to make and maintain complete books, records and accounts regarding sales of and expenses relating to Interactive Services. Each of the Hyatt Parties, GDG and MagiNet shall have the right to examine such books, records and accounts during the other party's normal business hours once annually to verify the reports on Interactive Commission payments due. If any such examination discloses a shortfall or overpayment, the appropriate party shall promptly pay the amount of such shortfall or refund such overpayment. 17.7. "Net Interactive Services Revenues" shall mean all revenues or other consideration received by any of the Parties and the Hotels from interactive -22- [***] 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. August 22, 1995 services providers, hotel guests and others from the provision of Interactive Services over the System, less allowable denials, applicable unreimbursed tax payments, and any production costs, development costs, marketing costs or other expenditures which have been approved for reimbursement by the Advisory Board. 18. REPRESENTATIONS AND WARRANTIES OF HOTELS ---------------------------------------- 18.1. Each Hotel shall represent and warrant as follows with MagiNet that throughout the duration of its Individual Agreement: 18.1.1. The Hotel warrants and represents that it has full legal power and authority to enter into the Individual Agreement and to perform all of its obligations thereunder. The Hotel shall further warrant and represent that all necessary corporate action has been taken to authorize it to enter into the Individual Agreement and perform its obligations thereunder. 18.1.2. The Hotel will comply, and will ensure that performance of its obligations under the Individual Agreement complies, with all applicable laws, ordinances, rules, regulations, orders, licenses, permits or other requirements now or hereafter in effect, of any governmental authority. Without limiting the generality of the foregoing, to the extent any filing with, or any license, approval or other agreement of, any applicable authority is required for performance of -any of Hotel's obligations, Hotel will file the appropriate documents and will maintain such documents on file, which MagiNet may inspect upon demand. 19. REPRESENTATIONS AND WARRANTIES OF PARTIES ----------------------------------------- 19.1. Each of the Hyatt Parties, MagiNet and GDG represent and warrant to each other party on a continuing basis that: 19.1.1. It has full legal power and authority to enter into this Agreement and to perform all of its obligations hereunder and all necessary corporate action has been taken to authorize it to enter into this Agreement and perform its obligations hereunder. 19.1.2. It will comply, and will ensure that performance of its obligations hereunder complies, with all applicable laws, ordinances, rules, regulations, orders, licenses, permits or other requirements now or hereafter in effect, of any governmental authority. 19.2. Each of MagiNet and GDG separately represents and warrants to the Hyatt Parties on a continuing basis that: -23- August 22, 1995 19.2.1. The GDG Technology was developed, and is owned or properly licensed, exclusively by GDG, and will be owned or licensed exclusively by GDG as long as the Master Agreement is in effect, except for licenses granted to MagiNet and other licensees, or except as permitted under Section 30.3. No person other than MagiNet, GDG or GDG's licensees or GDG's licensers possesses any rights to any technology that has been or would otherwise be considered GDG Technology, nor will have any such rights as long as the Master Agreement is in effect. 19.2.2. The publication or dissemination over the System of Content other than Hyatt Content which is supplied by MagiNet or GDG under this Agreement will not infringe any copyright or other intellectual property rights of any person and the Hyatt Parties will not be obliged to pay as a result of the operation of the System under this Agreement any license fees, royalties or other payments, nor will Hotels be obligated to make such payments over and above the Rental Fees payable by Hotels to MagiNet. 19.2.3. The value received under this Master Agreement is at least equivalent to the best or better value provided to any similar customer under similar terms and conditions. 19.2.4. The System and MATVs and all portions thereof shall be free of material defects and operate in all material respects in conformance with the Technical Requirements in Exhibit A. 19.2.5. MagiNet and/or GDG have full ownership or authority to provide all hardware, software, transmissions and services contemplated by this Agreement. 19.2.6. MagiNet has or can obtain all necessary licenses, government approvals, and meet all other technical standards and legal requirements in order to provide the hardware, software, transmissions and services contemplated by this Agreement. 19.2.7. MagiNet and GDG have not and will not place any encumbrances on the software and hardware being provided pursuant to this Agreement, except in connection with an assignment permitted under Section 30.3. 19.2.8. MagiNet and GDG have full approval and support from their related persons and entities so that MagiNet and GDG will obtain the full cooperation of all necessary related parties and contracted third parties to carry out the tasks contemplated in this Agreement. 19.2.9. There are no existing contracts to which either MagiNet or GDG, -24- August 22, 1995 or any party related thereto, is a party that will be in conflict with this Agreement. 20. CONFIDENTIAL INFORMATION ------------------------ 20.1. The Parties recognize that they may come into contact with sensitive business and proprietary information regarding each other and third parties. By reason of certain provisions in the Agreement, the Parties are required to provide each other with access to such information, including information regarding software operation and Hotel customer information. 20.2. The Parties agree to take such steps as are reasonably necessary in order to protect Confidential Information from disclosure. Such actions shall include (1) providing the information to personnel on a need-to-know basis, and (2) the retention of all non-public information regarding software on machines and in a repository to which the general public does not have access. 20.3. The Parties will make reasonable efforts to identify the categories of information considered potentially confidential. The identification of such information is not deemed to be an admission by either party that such information is in fact confidential. 20.4. The Parties shall make a reasonable effort to identify all confidential information by marking the information as "Confidential." However, failure to mark information "Confidential" shall not preclude any party from asserting that the information is confidential. All confidential information of a party shall 'be returned to it upon termination of this Agreement. 20.5. Breach of confidentiality obligations shall permit the other party to seek relief in the first instance before any court of competent jurisdiction for the further protection of such information. This provision shall not affect the requirement that the Parties engage in arbitration of any dispute, and any court action taken shall be considered in aid of arbitration and shall terminate upon the designation of an arbitrator who may change any ruling made by a court in this connection. 20.6. All information pertaining to specific guests, groups of guests or all guests who use Hotels shall be treated as confidential. 21. INDEMNIFICATION: GUARANTY ------------------------- 21.1. (a) MagiNet agrees, at its own expense, to defend or at its option to settle, any claim, suit or proceeding brought against Hyatt Parties or Hotels including all affiliated companies of the foregoing entities and their respective officers, directors, employees and agents, for infringement of any third party's copyright, patents, or other Intellectual Property rights arising from Hyatt Parties' or Hotels use of the System as permitted in this Agreement,, and to indemnify the foregoing persons and entities against any court awarded damages and costs (including reasonable attorneys' fees) for such infringement. MagiNet shall be relieved of the foregoing obligations unless Hyatt Parties or the applicable Hotel -25- August 22, 1995 notifies MagiNet promptly in writing of such claim, suit or proceeding and gives MagiNet authority to proceed as contemplated herein, and, at MagiNet's expense (except for the value of the time of Hyatt Parties or Hotel employees), gives MagiNet proper and full information and reasonable assistance to settle and/or defend any such claim, suite or proceeding. MagiNet shall not be liable for any costs or expenses incurred without its prior written authorization. (b) In the event that the System is held, or in MagiNet's reasonable opinion may be held, to constitute such an infringement, MagiNet at its option and expense, may do one or more of the following: (i) obtain for Hyatt Parties or Hotels, as applicable, the right to continue to use and distribute the infringing material as contemplated herein, (ii) modify such infringing material so that it becomes noninfringing, but without materially altering the functionality of such material, and/or (iii) replace the infringing material with functionally equivalent noninfringing products. (c) Notwithstanding the provisions of clauses (a) and (b) above, MagiNet assumes no liability for infringement claims arising from. (i) Content not developed by, MagiNet, (ii) the combination of the System with other products not provided by MagiNet if such infringement would not have occurred but for such combination, (iii) the modification of the System unless such modification was made or authorized by MagiNet, when such infringement would not have occurred but for such modifications, or (iv) specifications, materials, products or Content provided solely by Hyatt Parties, Hotels or GDG to MagiNet hereunder. (d) The foregoing provisions of this Section 21.1 state the entire liability and obligation of MagiNet and the exclusive remedy of Hyatt Parties or Hotels with respect to any alleged or actual infringement of patents, copyrights, trade secrets, or other Intellectual Property or proprietary rights by the System. 21.2. (a) GDG agrees, at its own expense, to defend or at its option to settle, any claim, suit or proceeding brought against Hyatt Parties or Hotels including all affiliated companies of the foregoing entities and their respective officers, directors employees and agents, for infringement of any third party's copyright, patents or other Intellectual Property rights arising from Hyatt Panics' or Hotels use of the GDG Technology as permitted in this Agreement, and to indemnify the foregoing persons and entities against any court awarded damages and costs (including reasonable attorneys' fees) for such infringement. GDG shall be relieved of the foregoing obligations unless Hyatt Parties or the applicable Hotel notifies GDG promptly in writing of such claim, suit or proceeding and gives GDG authority to proceed as contemplated herein, and, at GDG's expense (except for the value of the time of Hyatt Parties or Hotel employees), gives GDG proper and full information and reasonable assistance to settle and/or defend any such claim, suit or proceeding. GDG shall not be liable for any costs or expenses incurred without its prior written authorization. (b) In the event that any GDG Technology is held, or in GDG's reasonable -26- August 22, 1995 opinion may be held, ton constitute such an infringement, GDG, at its option and expense, may do one or more of the following: (i) obtain for Hyatt Parties or Hotels, as applicable, the right to continue to use and distribute the infringing material as contemplated herein, (ii) modify such infringing material so that it becomes non- infringing, but without materially altering the functionality of such material, and/or (iii) replace the infringing material with functionally equivalent non-infringing products. (c) Notwithstanding the provisions of clauses (a) and (b) above, GDG assumes no liability for infringement claims arising from (i) combination of the GDG Technology with other products not provided by GDG if such infringement would not have occurred but for such combination, or (ii) the modification of such GDG Technology unless such modification was made or authorized by GDG, when such infringement would not have occurred but for such modifications, or (iii) specifications, materials or products provided solely by Hyatt Parties, Hotels or MagiNet to GDG hereunder. (d) The foregoing provisions of this Section 21.2 state the entire liability and obligation of GDG and the exclusive remedy of Hyatt Parties or Hotels with respect to any alleged or actual infringement of patents, copyrights, trade secrets, or other Intellectual Property or proprietary rights by the GDG Technology. 21.3. MagiNet Corporation, the sole shareholder of MagiNet, shall provide a full and completely binding guarantee of MagiNet's performance hereunder together with a formal representation and warranty letter acceptable to the Hyatt Parties respecting its license rights to the GDG Technology and related source code (collectively, the "MagiNet Guarantee"). 22. MARKETING AND PROMOTION. ----------------------- 22.1. Any marketing and promotion that occurs with respect to the System in connection with the Hyatt Parties or the Hotels shall be first approved by the Hyatt Parties or their designee. 22.2. No party is or shall act as the agent for any other party, and no statement may be made that can be attributable to a party, or any of its affiliated or related companies or entities, or any Hotel, without first obtaining such entity's permission for the statement. 22.3. The Parties agree to cooperate with each other to promote the use of the System. -27- August 22, 1995 22.4. Except as required by MagiNet and GDG licensing agreements with others, nothing herein may be used by MagiNet and GDG to limit the Hotels or the Hyatt Parties or any entity affiliated with the Hyatt Parties in their promotion of any Content whatsoever, which promotion shall be entirely within the Hyatt Parties and the Hotels' reasonable discretion. 23. TRAINING AND CONSULTATION ------------------------- 23.1. MagiNet shall provide in each country at least one telephone number that can be called to obtain immediate assistance on a twenty-four (24) hour basis. 23.2. MagiNet shall designate at least one entity within each country that shall be responsible for maintenance of the System, which maintenance shall include periodic examinations (as advised by remote monitoring procedures called for in Exhibit A) of the machines used to ensure that they are all in proper working condition. 2 3.3 To enable each Hotel to generate suitable promotional material related to the use of the System and to enable personnel of each Hotel to advise and encourage guests regarding their use of the System, MagiNet will provide a one-time training course on the use and operation of the System for as many employees as each Hotel deems desirable at no charge. GDG and MagiNet shall also, at no charge, train up to ten (10) individuals from the Hyatt Parties once per year in the use and operation of the System, and one person with each of the Hyatt Parties in the use of the off-site monitoring technology for the System. Such training shall take place within sixty (60) days of the first installation done under this Agreement. 23.4. Hotels will provide accommodations for MagiNet training personnel at the best rate offered to any customer, and shall offer discounted or complimentary rooms if consistent with their policies. In addition, MagiNet and GDG personnel will be reasonably available at no charge for telephone consultation to personnel of Hotels to provide further assistance regarding use and operation of the Systems. 24. ACCOMMODATIONS -------------- 24.1. Each Hotel shall agree to provide to visiting MagiNet and GDG employees present for Hotel business during the term of the Individual Agreement accommodations at the best rate offered to any customer and shall offer discounted or complimentary rooms if consistent with their policies. -28- August 22, 1995 25. PIRACY PROTECTION ----------------- 25.1. Each Hotel shall be required insofar as is commercially reasonable to notify MagiNet of any video recording and/or playback devices that are provided by the Hotel to its guests. 26. SUSPENSION AND DEFAULT ---------------------- 26.1. It shall be an event of default if (a) any-party or designated party acting on their behalf (i) breaches performance of any material term, condition, representation or warranty contained in this Agreement or any Individual Agreement and/or any Related Hyatt Agreement, and fails to cure, correct or remedy such breach or default within sixty (60) days after receipt of a written notice thereof, (ii) is adjudicated bankrupt or petitions for relief under any bankruptcy, reorganization receivership, liquidation, compromise arrangement or moratorium statute, (iii) makes an assignment for the benefit of its creditors, or (iv) petitions for the appointment of a receiver, liquidator, trustee or custodian for all or part of its assets; (b) all or any portion of the MagiNet Guarantees are revoked or terminated or otherwise fail to be of continuing force and effect; or (c) if MagiNet Corporation is adjudicated bankrupt or petitions for relief from or makes an assignment in favor of its creditors. 26.2. Some portion or all of this Agreement may be suspended by any entity signatory to or bound by this Agreement that is a part of the Hyatt Parties upon sending written notice of the destruction or renovation of Hotels, or the occurrence of any force majeure events as set forth in section 27. Any Individual Agreement may be suspended or terminated in part or in whole, at the Hyatt Parties' or each Hotel's sole option, due to any closure of any, portion of the Hotel(s) involved, temporary cessation of business, termination of any other agreement between the Hotel(s) and the Hyatt Parties, and any force majeure events set forth in section 27 below. For any suspension that extends beyond ninety (90) days, MagiNet may, at its option, remove the System until the cause of the suspension is resolved. 26.3. If any of the events of default set out in section 26.1 above occur, the harmed party not in default may exercise any or all of the following remedies: (i) cancel and/or terminate any and all Individual Agreements, (ii) cancel and/or terminate the Master Agreement, (iii) undertake either steps (i) and/or (ii) while retaining the System in place (subject to continuance of all other material terms and conditions herein and until a replacement vendor can be selected in an orderly transition to that vendor's technology), (iv) obtain injunctive and other equitable -29- August 22, 1995 relief, and (v) obtain such damages and other rights and remedies as the party not in default may have at law, provided that this ------------- provision shall not allow MagiNet or GDG to exercise such remedies against the Hyatt Parties or the Hotels in the event of a default by either MagiNet or GDG. The remaining nonbreaching Parties shall negotiate in good faith to determine how to proceed absent the terminated party. 27. FORCE MAJEURE ------------- 27.1. Where a party is unable, wholly or in part, by reason of Force Majeure, to carry out any obligations under this Agreement and that party: (i) gives the affected party prompt notice of that Force Majeure with reasonably full particulars and, insofar as known, the probable extent to which it will be unable to perform or be delayed in performing that obligation; and (ii) uses all reasonable efforts to remove that Force Majeure as quickly as possible; then that obligation is suspended insofar as it is affected by the continuance of that Force Majeure provided that this section will not operate to relieve any party of an obligation to pay money. 27.2. For the purposes of this Agreement, "Force Majeure" means: (i) an act of God, strike, lockout or other interference, (ii) war declared or undeclared, blockade, disturbance, lightning, fire, earthquake, storm, flood, or explosion, (iii) governmental or quasi-governmental restraint, expropriation, prohibition, intervention, direction or embargo (iv) unavailability or delay in availability of equipment or transport not due to any action or inaction on behalf of the affected party,) (v) unavailability or delay in obtaining governmental or quasigovernmental approvals, consents, permits, licenses, authorities or allocations and (vi) any other cause whether of the kind specifically enumerated in this section or otherwise which is not reasonably within the control of the party affected; and "all reasonable efforts" does not require the settlement of strikes, lockouts or other labor disputes, or claims or demands by any government or quasi-government authority on terms contrary to the reasonable business judgment of the party affected. 27.3. In the event any Force Majeure prevents performance under this Agreement by either party which continues in existence for more than thirty (30) days, the Parties will meet in good faith to discuss the situation and to make all reasonable efforts to achieve a mutually satisfactory resolution of the problem so that Force Majeure no longer prevents performance under this Agreement, provided that the Hyatt Parties shall have the option to terminate any Individual Agreement for any Force Majeure event that lasts longer than one hundred and eighty (180) days, and to terminate the Master Agreement if such extended Force Majeure prevents performance at more than 25% of the Hotels. -30- August 22, 1995 27.4. In the event performance by any Hotel is prevented due to Force Majeure for a period of one hundred and twenty (120) days or more during any twelve (12) month period, MagiNet will be entitled to remove the System from such Hotel until performance is no longer prevented by Force Majeure, or earlier as permitted under Section 26.2. 28. DISPUTES -------- 28.1. The Parties hereby agree that any and all disputes arising under or in any way connected or related to this Agreement, and any subject matters covered by this Agreement, including the Intellectual Property, shall be finally adjudicated and resolved through final and binding arbitration. 28.2. The Packs shall provide each other with written notice of any dispute that arises and is deemed to be one that one or more Parties wishes to have resolved through arbitration. 28.3. The Packs shall wait for fifteen days subsequent to receipt of notice to take any action, during which time the Parties shall meet together in an effort to resolve the dispute. 28.4. Should no resolution be achieved within the fifteen day waiting period, then either party may submit the matter to the American Arbitration Association ("AAA") for arbitration in accordance with the rules of commercial arbitration then in effect. 28.5. The arbitration shall be tried in Chicago, Illinois, before a panel of three arbitrators, who shall be selected in accordance with the AAA Commercial Rules if not picked by agreement of the Parties within the fifteen days discussed above. 28.6. The arbitrators shall first decide if there exists a bona fide dispute between the parties capable of resolution in arbitration. 28.7. Interim court relief may be sought at any time by any party, and any request for interim relief shall not be considered a bar to arbitration, nor limit the power of the arbitrator to change any interim relief awarded during the course of the arbitration. 29. RECOGNITION OF AGENCY. ---------------------- 29.1. MagiNet and GDG recognize that the Hyatt Parties act as agents for the owners of the Hotels, and that any action that is to be undertaken by the Hyatt Parties is one that is on behalf of such owners. MagiNet and GDG recognize and agree that the Hyatt Parties' actions with respect to any Hotel are therefore only as agent for such owners. -31- August 22, 1995 30. GENERAL TERMS ------------- 30.1. No person has, or as a result of the transactions contemplated hereby will have, any right or valid claim against any of the Parties or the System for any commission, fee or other compensation as a finder or broker, or in any similar capacity, relating to the transactions contemplated herein. 30.2. This Agreement will be governed by the laws of the State of California without reference to its conflict of law principles. Each Individual Agreement shall also be governed by the laws of the State of California except to the extent that the laws of the country in which the Hotel is located override such governing law provision. 30.3. Except as otherwise set forth herein, the provisions hereof will be binding upon, and will inure to the benefit of, the respective successors and assigns of the parties hereto. Each of the Hyatt Parties shall have the right to assign this agreement to any of its affiliates, subsidiaries or a parent company. MagiNet shall have the right to assign this Agreement and any Individual Agreement to a bank or other financial institution as collateral for a loan (provided that such institutions agree to abide by the terms of this Agreement and the Individual Agreements) and to assign this Agreement and any Individual Agreement to an entity acquiring all or substantially all of MagiNet's assets or voting securities. Notwithstanding any such assignment by MagiNet, none of MagiNet's property installed in a Hotel shall be removed therefrom prior to the Hyatt Parties' or Hotel's uncured default or termination of this Agreement or the Individual Agreement. GDG may assign this Agreement to an entity acquiring all or substantially all of its assets or voting securities. 30.4. This Agreement may be modified or amended only by a written agreement signed by all Parties. No waiver by any party of any breach or default hereunder will be construed as a waiver of any precedent or subsequent breach or default. 30.5. This Agreement sets forth the entire agreement and understanding of the Parties relating to the subject matter hereof, and merges and supersedes all prior discussions and understanding between the Parties related thereto, whether written or oral. 30.6. In the event that better value for the Activities contemplated herein are offered by MagiNet or GDG to any similar hotel chain or hotel as the Hyatt Parties and the Hotels, the Hyatt Parties and the Hotels will be offered all the same terms and condition:; and any less favorable payments made or receipts obtained subsequent to their, being contracted with another customer but prior to the effective date of the change in the terms in this Master Agreement and the Individual Agreements shall be reimbursed to or for the Hyatt Parties and the -32- August 22, 1995 Hotels. For purposes of this paragraph "value" shall mean the value of (i) all fees, allowances and commissions, (ii) A equipment, OH) all software, software licenses and/or other Intellectual Property rights, (iv) 'all services including installation, maintenance, repair and replacement and (v) all cost savings or other benefits provided to the Hotels, their parent companies or affiliates. IN WITNESS WHEREOF, this Agreement is entered into by the Parties hereto this 15th day of September 1995. MAGINET INTERNATIONAL CORP. HYATT INTERNATIONAL-ASIA PACIFIC LIMITED By: /s/ R. R. Craeger By: /s/ Authorized signature Title: President Director GUESTSERVE DEVELOPMENT HYATT CHAIN SERVICES LIMITED GROUP By: /s/ Philip S. Knudsen By: /s/ unreadable Title: CFO/Director Title: DIRECTOR -33- August 22, 1995 EXHIBIT A TECHNICAL REQUIREMENT --------------------- -34- Exhibit "A" - Technical Requirements This exhibit describes the technical requirements for the hardware, software, Content, and services to be provided under this Agreement. 1.0 MINIMUM QUALITY & PERFORMANCE STANDARDS --------------------------------------- At installation, the System, WTV and televisions will meet the following standards. 1.1 VIDEO QUALITY Video images transmitted and displayed across the System, MATV, and a good quality brand new twenty-five inch (25") television set(provided by the hotel for quality testing) must be observed to be as good as the same images when the image source is directly connected to the television set. The video image source for quality tests shall be a full action, color movie on a new, unused VHS tape provided by a major recording studio played back on a brand new VHS tape player connected directly to the television with A/V connectors. When compared to the same movie provided as part of the Content across the System, MATV, and television set, there shall be no noticeable degradation in resolution, discoloration, focus, or brightness, nor multiple Wages (ghosting), artifacting, or other negative differences in image quality. 1.2 AUDIO QUALITY Audio must meet the same quality and testing standard as for video images described above, and must be clear, undistorted, and in perfect synchrony with the video image. In addition, audio quality shall meet or exceed the following standards: 1. Audio Signal Level-8dBmV 2. Output Impedance 600 ohm 3 Signal to Noise Ratio (weighted in SP Mode), more than 38 dB. 4. Wow and Flutter (audio on VHS in SP mode), less than 0.2 WRMS 5. Frequency Response (Ref to I Khz SP mode), 100 Hz - 15000 Hz (10 dB down) 6. Interactive programming shall be accompanied by CD quality audio and/or by digitally synthesized voice software. Digitized voice is required to be 8 bit technology or greater to conform to highest standard prevailing at time of installation. Audio Frequency range is required to be at least I 00 to 15000 Hz, without perceivable distortion at normal listening levels (less than 1% THD). Page 1 of 25 Exhibit A Technical Requirements. 1.3 RESPONSE MINIMUM REQUIREMENTS 1. The maximum delay permitted between the guest executing a keystroke on the remote control, and the System, MATV and television responding, shall be five (5) seconds for Movies or Hotel Services, unless response time is influenced by input from 3rd party interfaces. 2. The System, MATV, and televisions must allow simultaneous access by at least 1.5% of available rooms at any time, and the minimum number of interactive ports shall be 4. 3. At all times, all guests shall have access to the System, MATV, and televisions within 60 seconds of selecting or interacting with any Content. Guests denied immediate access shall be notified of the delay by a screen message. 4. Response delays caused by equipment or Content not under the control of Maginet and GDG lasting longer than five(5) seconds, will trigger an appropriate intermediate screen message. It must be possible to place text, graphics and sound on intermediate screens for notification purposes or for advertising. 5 . The delay between a guest pressing the final key to make a video on demand selection and the feature appearing on the screen shall not exceed 10 seconds. 6. The System, MATV, and televisions shall have imperceptible delays in response to video game control devices controlling interactive video game Content. 1.4 RELIABILITY Equipment supplied under the Agreement shall have a mean time between failure of not less than three (3) years. 1.5 MANUALS AND DOCUMENTATION Manuals and Documentation supplied to each distributor at initial installation shall consist of at minimum: 1. Manufacturers product documentation and written performance specifications for each piece of equipment supplied under the Agreement. 2. Operating and Repair manuals for each component of the System, including both hardware and software. 3. Trouble-shooting diagnostic programs and guides for each component of the System, including both hardware and software. Page 2 of 25 Exhibit "A" Technical Requirements 4. A simple user manual describing the integrated operation of the System in easily understood terms (the System Manual), will be provided for each hotel. 5. A Tool Kit manual describing the operation of the Tool Kit will be provided to designated Hyatt Parties. 6. A detailed interface protocol manual and source code examples of interfaces already developed for the System. Interface protocols for both connections to external systems, and interface protocols for intra-System connections -------- ------------------------ (interactive controls) must be provided, to designated Hyatt Parties. 1.6 SYSTEM HARDWARE REQUIREMENTS The System hardware at initial installation shall include at minimum the following: 1. A Pentium 90 Mhz Interactive server with 32 MB RAM and I GB hard drive shall be the minimum platform for the interactive server. 2. External magnetic storage and/or CDi and/or CD ROM or other system as required to deliver Content. 3. A high speed modern connection to the System for remote diagnostic testing, downloading of Content, etc. 4. A PC work station suitable for operation of the Graphics generator for the exclusive use of the Hotel to update hotel related Content for use on the System. 5. The above work station have a printer, and be connected to the System and located at the Hotel's direction for the creation and printing of guest charges for use of System Content in the event of failure of the PMS or interfaces to the PMS. 6. Two-way communication protocol via MATV between Guest room Terminal and interactive file server. 7. In room terminal, with standardized remote control and channel numbering plan. 8. VHS tape players as required operating within the following performance specifications: a. Luminance Level: 1.0 +/- 30% Vp-p for machine to machine operation at 75ohm terminated composite video of 140 IRE units source Paged 3 of 25 Exhibit "A" Technical Requirements b. Chrominance Level: 0.63 +/- 30% Vp-p for machine to machine operation at 75ohm terminated composite video of 1.40 IRE units source c. Horizontal resolution: More than 360 lines, or as required for prevailing TV standards d. Frequency Response 2 Mhz - 10 dB; e. Signal to Noise Ratio (weighted) more than 43 dB in SP mode, more than 41 dB in other modes, using Luminance by Rohde & Schwartz noise meter f. Tape transport Speed: SP mode 33.35 mm/s +/-0.5% g. Rewind Speed: SP mode for 120 minute tape less than 7 min. h. Tape load Speed: Less than 5 seconds 9. All other equipment as required to make up the complete System. 1.7 SYSTEM SOFTWARE REQUIREMENTS The System software at initial installation shall include at minimum the following: 1. A "Toolkit" consisting of GDG's software which when combined with commercially available software applications operating in a windows environment, and packaged with a set of instructions, appropriate interfaces, help screens and telephone support. will be all that is required for the Hyatt Parties, Hotels, and authorized third parties to develop content from multimedia sources, and set up interactive sequences for use on the system for generating revenue or obtaining information. A sub-section of the Toolkit, called Graphics Generator shall be a desk top broadcasting application, offering similar features and graphics capability as a product called Catview. The application shall be provided to hotels not using the full Toolkit to enable them to make minor modifications to interactive programming, and to produce basic hotel information screens that have similar text and graphics as the interactive screens. 2. Interactive Component This software shall enable guests to call up different screens from a selection of screen options so that an interactive program results. This interactive application and necessary programming will form the basis for making video on demand selections accessing hotel services, shopping, advertising, games and her revenue generating services defined within the exhibit. 3. Appropriate communications software to support item 1.6.3. Page 4 of 25 Exhibit "A" Technical Requirements 4. A statistical information application sufficient to capture, manipulate, and report on the following System usage and performance data. a. Number of guests denied access to selected movies, including room number, date, time, and the duration of the denial. b. Number of guests denied access to Hotel Services, Hyatt Interactive Content, or Interactive Content, including the room number, date, time, and duration of the denial. C. Room numbers where video on demand features were viewed, and the time and duration of viewing session. d. Room numbers of those rooms accessing the interactive guest services, the time they spent browsing, and details of all selections made on the system, e. Exception reports, the content of which is to be developed; including records of when the system was down, when dial up connections were made, their duration and a list of individual rooms that were out of order. f. Guest survey results. g. Viewing ratings of interactive content for marketing analysis purposes by Hyatt and authorized parties using the system for such purposes. The detailed requirements of these rating reports are to be developed, but they shall include the number of guests viewing of each interactive content package, the time each viewer browsed, and any sales made as a result. 1.8 MATV REQUIREMENTS The MATV in each existing Hotel or Hotel currently under construction and where MATV has already been installed as of date of master agreement, shall be upgraded to meet or exceed the following specifications. MATV systems will be provided by the Hotel to meet the following specifications in all new Hotels (as listed in Exhibit C). All equipment shall meet type and safety approvals and radiation requirements. as required in each country. All installations shall be made according to national and local electrical codes. Standard for -signal strength measurement shall be a calibrated field strength meter. The MATV shall be capable of concurrently carrying all Content over the MATV network, and at minimum will meet the following channel capacities and broadcast standards. a. A minimum of 77 channels for NTSC and 60 channels for PAL/SECAM. b. Operation in compliance with local broadcast standards (NTSC, PAL or SECAM) and/or as required for the installed TV sets. Page 5 of 25 Exhibit "A" Technical Requirements 1.8.1 MATV REQUIREMENTS - HEAD-END The MATV head-end shall meet or exceed the following specifications: a. Single channel processors with AGC and aural carrier reduction will be used to process each off-air signal. Pre-amplifiers will be used, where necessary, to achieve an input carrier level of sufficient amplitude to be within the range of the AGC in the channel processor. i. The output of individual strip amplifiers, modulators, or channel processors will be combined using a methodology which will provide a minimum of twenty (20) dB isolation between individual carriers. ii. Items providing less than twenty five (25) dB of isolation will not be used in the head-end environment to combine signals, b. A Broadband Amplifier having a band width of 5-550 MHZ, or greater, and equipped with SubSplit Return will be used to amplify the combined output. The amplifier will be designed for two-way compatibility using sub-split return. The forward direction designed for 54 to 550 MHZ or greater and the return designed for 5 to 30 MHZ. The forward direction is to include both gain and tilt controls. c. UHF to VHF converters and VHF to VHF converters will be completely solid- state with a self-contained power supply. Input and output impedance shall be 75ohms. The frequency of the output will be crystal controlled and will be within + .005% of the desired output frequency for both - components. d. All passive equipment shall not have less than 2OdB port-to-port isolation and shall be capable of operating in a band width of 5-550 Mhz. e. Antennas will be selected and installed so as to produce the best picture obtainable. Any local government permits required for antenna installation will be obtained prior to actual installations of the antennas. Antennas and masts will be constructed and installed so as to withstand 100 mph winds. All Antennas used will have an adapted impedance of 75 ohms and weather boots will be used to protect all outdoor antenna connections. f. When antennas are providing the signal source for "off-the-air" channels. Picture quality will be equal to or better than the picture quality available from local cable TV sources, as appropriate or applicable. At minimum, local VHF and UHF channels required by each hotel will be available from the MATV. UHF channels must be converted to VHF. Closed caption service at the TV must be provided for each of the three principal network channels, given programming availability as provided by network sources. Page 6 of 25 Exhibit "A" Technical Requirements g. Metal Cabinets designed for 19" rack mounted equipment will be used to enclose the head-end active equipment. Suitable AC power outlets be installed in the cabinet for the equipment powering, including two additional outlets for maintenance equipment. h. Pads, cable and other miscellaneous equipment will be supplied and installed to make an operating head-end that meets all of the specifications as outlined. All cable used in the head-end equipment rack will be of Tri or Quad Shield design and will provide a minimum of 100 percent shielding from radiation and signal ingress or such other cable as to meet MATV standards of performance established herein. i. Maximum output after combining shall not exceed: i. 45dB Maximum highest frequency ii. 40dB Minimum lowest frequency iii. 6dB maximum amplifier tilt. j. Cross modulation shall be less than minus 60dB. k. Visual carrier to spurious signal response shall be greater than 50 db. Cross modulation shall be greater than 51 db. l. Visual/aural carrier ratio on any channel will be 15 dBmV to 17 dBmV m. Carrier to noise shall be no less than 41db, 43dB optimum. n. Visual carrier levels shall differ by no more than 12dB through the band width (50-550 MHz). o. Visual carrier level stability shall vary no more than 10dB over any 24 hour period. p. Hum modulation shall be less than 2%. q. Second Order (spurious beats) shall be 50dB below the visual carrier. r. Frequency response shall be N/10+1. s. Adjacent channel visual carrier shall differ by no more than 3 dB. t. Amplitude response within any single TV channel (visual carrier to aural carrier) will be flat (+/-2Bb) Page 7 of 25 Exhibit "A" Technical Requirements 1.8.2 MATV REQUIREMENTS- CABLE PLANT The cable plant shall meet or exceed the following specifications: a. Frequency Response of the system (excluding amplifiers) will pass 5 Mhz to 550 Mhz. Amplitude response Or this spectrum will be + 4 dB with - respect to the line represented by normal cable tilt. The system will be designed as two-way capable, i.e. sub-split return. b. Visual Carrier Level in each room will be no less than 2 dBmV on any single channel of the system. i. The maximum allowable variance between any two adjacent channels will be 2 dBmV. ii. The maximum allowable variance between any two non- adjacent channels will be 12 dBmV at 550 Mhz or 3 dB per 100 Mhz of band width. c. Room to Room isolation will be greater than 20 dB. isolation values of all devices separating any two given rooms will be used for the purpose of this calculation, as well as the structural return loss of all interconnecting cabling. d. Visual carrier-to-noise ratio on any channel (3 MHz bandwidth) will be at least 42 dB at any TV outlet for broadcast signal source of carrier to noise ration better than 56 dB. e. The visual carrier to coherent noise ratio (inter-modulation) will be greater than 46 dB, for the same signal source as in d. f. Reflections ingressing MATV distribution system, which may cause ghosts and shadows within the system, will be more than 40 dB below the respective picture carrier. g. Taps, splitters, and other passive equipment will be of the totally shielded type, using a sealed metal or aluminum case, so as to minimize radiation and ingress. All connections will be "F" for NTSC, or EEC for PAL type connectors. i. Taps used will be designed to pass 5 MHz to 550 MHz, or greater. ii: Splitters will be designed to pass 5 MHz to 550 MHz, or greater. iii. Where the last tap on the riser is not a terminated tap, 75 ohm terminations will be used to terminate the end of all riser lines at the through port output. h. Coaxial cable shall be of 75 ohm impedance with a return loss of 20 dB minimum from 5mhZ to 550 MHz. Cable construction will be solid copper or copper-clad steel center conductor and cellular polyethylene dielectric. Cables will be provided with two shields. The first shield shall consist of .002 inch double aluminum coated mylar or polypropylene tape with 1/8" overlap,, bonded to the dielectric. The second shield shall be a minimum of 60% coverage braid consisting of 34 AWG aluminum or tinned copper wire. The jacket shall be non-contaminating low temperature polyvinyl chloride cable having an effective shielding of 67% or greater will be utilized outside of all conduits. Page 8 of 25 Exhibit "A" Technical Requirements i. Cable sizes used in the system can be either RG-6 or RG-11. The RG-11 size is used for longer trunk lines and the RG-6 size is used for shorter feeder lines. Where conservation amplifiers will have their maximum full gain derated by a minimum of three dB. Further doubling of the cascade will result in additional gain reductions of three dB, each time the cascade is doubled. j. Cross modulation shall not exceed minus 57dB from any distribution amplifier with 77 channel loading. k. All new distribution feeder cable shall be .500 or RG- 11 cable only. l. No distribution (feeder) line shall feed in excess 550 television sets, or per limitations imposed on the system by segmentation. m. All distribution (feeder) lines shall begin at the head-end and end at a central distribution location. No riser can be fed by a distribution line. n. All risers must originate at a central distribution location. If risers must be extended, RG-56 cable with 90% shielding will be used from the splice to the central distribution location. o. All risers shall be identified to the rooms they feed. p. All jumper cables from the wall plates to the televisions shall be replaced as necessary with RG-6 or RG-59 foam cable, with ferrule type connectors. q. Sub-band return loss shall not exceed 40dB 1.8.3 MATV REQUIREMENTS - IN ROOM TAPS a. For in room directional tap outlets, all signal levels shall be 5-15dB (and typically at 5dB) from 40 to 550 MHz. b. Cross modulation shall be less than minus 57dB. C. Carrier to noise shall be 41 dB. d. Adjacent channel visual carrier levels shall differ by no more than 3dB. e. Visual carrier levels shall differ by no more than 12dB through the bandwidth (50-550 MHz). f. Visual carrier level stability shall vary no more than 10dB in any 24 hour period. Page 9 of 25 Exhibit "A" Technical Requirements 1.9 TELEVISION REQUIREMENTS New Hotels (as listed in Exhibit B) will provide television sets meeting the following specifications. Maginet and GDG will make best efforts to ensure that the System, MATV, and television sets in existing Hotels or Hotels currently under construction operate as though the television sets met these specifications. Maginet and GDG will provide all required remote controls for all Hotels. a. 20 to 27 inch screens, at Hyatt's option. b. "Smart Plug" compatibility to accommodate the requirements of the interactive system c. Closed caption capable d. Stereo sound e. Channel labeling f. Sleep timer g. Clone programming h. Non-volatile memory i. 100+ channel capacity j. Remote interface connector k. TV's will be capable of no fewer than 400 scan lines of resolution. l. Teletext compatible m. Multisystem where required or appropriate n. All television sets will be provided with full function infra red remote controls with the following minimum functions 1. Power on/off button 2. Pay TV button 3. Free TV button 4. Hotel Services & Information button 5. Interactive services button 6. Channel up and channel down buttons Page 10 of 25 Exhibit "A" Technical Requirements 7. Volume up and down buttons 8. Mute button 9. Numeric Channel control keyboard 1.10 SPACE REQUIREMENTS Maginet, GDG, the Hotels, and the Hyatt parties shall work together to coordinate the space requirements for installations in each Hotel prior to beginning installation work in each hotel. Each Hotel shall provide the agreed upon space requirements. Each Hotel shall provide at minimum, sufficient space to house the equipment and accommodate a minimum of two people in an appropriate working environment (the "control room"). Typical space requirements will include the following: a. One(1), line conditioned, dedicated, 30 amp AC circuit with provisions for 6 duplex outlets (as determined by the computer rack locations). b. Two standard 30 amp, AC circuits with provisions for 3 duplex outlets (as determined by the work counter location). c. The space shall have sufficient air conditioning to maintain a constant temperature of between 68 degrees and 72 degrees fahrenheit at 40% relative humidity. d. The control room shall have sufficient telephone fines (both outside direct and in-house) and telephone instruments. e. Cable paths (ie: conduit, plenum, etc.) shall be provided from: i. the control room to the head-end. ii. the control room to the PMS. iii. the control room to the PBX. iv. the control room to the front desk. v. if additional services are supplied, needed path must be provided, ie: food & beverage. Page 11 of 25 Exhibit "A" Technical Requirements 2.0 CONTENT ------- At installation, the Content will meet the following standards. 2.1 LANGUAGES Maginet and DG shall provide Movie instructions/access, Hotel Services, and Hyatt Interactive Content in at minimum the three(3) languages listed on Exhibit "C" for each Hotel installation. Language requirements must be confirmed by the hotel before final installation. All language options shall be ready for the first installation requiring that language according to the installation dates listed in Exhibit "C". A guest's preferred language will be selected from a list of the available options in the hotel property management system (PMS). Language choice will be set by the front office clerk when a guest checks in, so that Hotel Services, Hyatt Interactive Content and Movie selections will appear on the TV in the guest's preferred language. On check-out, the default language shall be re-set automatically to the default language selected by the Hotel. 2.2 FREE-TO-GUEST CONTENT The System, MATV, and televisions shall deliver up to Twenty (20) free-to-guest channels at the Hotels option, to include any combination of the sources fisted below. Free-to-guest channel sources shall be selected and approved by the Hotel at Hotel's expense from provider of choice, prior to final installation. Free to guest programming shall be available at all public area and back of house MATV points throughout the hotel. GDG and Maginet shall make best efforts to optimize signals from free-to-guest sources, and program them according to the standard channel numbering sequence. These sources and their processing equipment will by provided by Hotel or Hotel's third party contractor. Free-to-guest Sources a. Satellite programming b. Local Broadcast TV c. Local Cable TV d. In house Video programs e. Guest-room background Music Access free-to-guest channels must be possible using the remote control and on screen menus. Channel numbering shall be standardized to the extent that is practical throughout all of the Hotels. Free to guest programming shall include wherever possible, CNN and other international news and sport satellite and cable programming and a representative selection of local broadcast TV. In house video sources include VHS playback, live camera inputs, and desk top broadcast programming Page 12 of 25 Exhibit "A" Technical Requirements 2.3 MOVIES 1. Quantity The minimum number of movie selections simultaneously available from the System at installation shall be as shown in the table below.
Number of Guest- Video on Demand Scheduled Movies rooms Movies less than 250 24 3 250 to 550 36 3 Over 551 Additional 12 for 3 each 250 rooms
2. Quality Minimum requirements for movie programming to be provided by Maginet at each hotel shall be defined by the following criteria: a. Number of copies of each title and title selections shall be established by Maginet based on the latest movie title release window provided by the studios for the given regions. Hyatt International and the hotels will review these selections for quality assurance purposes. The frequency of such reviews shall be at quarterly intervals during the first year of operation, and as required after that. The objective will be to maximize revenue, maintain programming and system delivery quality standards and keep up with the competition. b. Maginet shall update titles such that at least four (4) "blockbuster" selections arc available in every hotel. A blockbuster title is considered to be a movie that is released within the same theatrical release window or that immediately following those movies shown on the major international airlines. Where the above criteria cannot be met because of censorship, or limitations imposed by the recording studios, each hotel must have at least four (4) of the latest release titles that are available in that country at competing international hotels, irrespective of which system they are using. c. Other video program content shall be such that it remains generally equivalent to those titles offered by competing hotels, regardless of their supplier, providing their programming is legal. Foreign language and ethnic programming are also required, where it is offered by competing hotels and/or where it can increase the revenue generating potential of the system. Page 13 of 25 Exhibit "A" Technical Requirements 2.4 HOTEL AND HYATT INTERACTIVE CONTENT MagiNet and GDG shall develop and produce a standard if Hyatt User Interface package for use by each Hotel as the basis for the Hotel Services Content delivery in the Hotel. Each Hotel will be responsible For the development and production of hotel specific elements of the Hyatt User Interface, and Maginet and GDG will be responsible Or the coordination and incorporation of these hotel specific elements into the Hyatt User Interface. Hotel Services Content at initial installation shall include at minimum: a. Guest Folio Review & Video Check-out b. Guest-room compendium / hotel services directory minimum twenty screens and/or images each. c. Worldwide Hyatt Hotels Video Directory with capacity for at least five interactive screens or images per property, callback prompt, and reservations office notification. d. Room Service Menu Ordering. e. Food & Beverage outlet menu review. f. Message Center Display (Notification on voice mail and display message information on PMS). g. Guest Welcome channel. h. Interactive Guest Survey report format and delivery to appropriate application interface and/or printer. i. Interactive event information screens for groups, tours, meetings., etc. j. Airline departure and arrival information for those airport hotel locations identified in exhibit "C", where such database information is available and provided by the hotel. k. Standard formats and interactive tree/branches structures ready for interactive content input. Hyatt parties will be responsible for the development and production expense of Hyatt Parties Content. Page 14 of 25 Exhibit "A" Technical Requirements 2.5 INTERACTIVE PRODUCTS AND SERVICES FOR THIRD PARTY USE MagiNet and GDG shall develop and produce a standard interface package for use on the System as the basis for the Interactive Services delivery in the Hotels. The standard interface package shall be available at initial system installation, and shall include standard means for authorized parties to interact with the guest and the System in one or more of the following ways: a. Receive notification from a guest requiring callback b. Disseminate or collect information c. Post charges for goods and services delivered Interactive applications that must be supported by the system include Shopping, Video Games, Advertising 2.6 INTERFACES Maginet and GDG shall develop and implement interfaces between the System and the following Hyatt systems.
SYSTEM REQUIRED FUNCTIONALITY PRODUCTS Property --Guest Preferred Language Fidelio, Maxial, Management --Guest Folio Review/Check-out and CLS System --Bill posting for movies and interactive services --Message Center screen, including information, hard copy messages, voice and fax notification --Other service required within PMS capabilities Point of Sale --Room Service menu selection and bill Micros, Maxial, System posting CLS and Squirrel Voice Mail --On screen voice mail message waiting TMS VoiceLink, System indication Nortel HVS
Maginet and GDG are not responsible for limitations that result from deficiencies in other systems but shall make their best efforts to minimize the impact of such deficiencies. Page 15 of 25 Exhibit "A" Technical Requirements 3.0 OPERATING AND MAINTENANCE PERFORMANCE STANDARDS ----------------------------------------------- The services specified below shall be provided as required: 3.1 INSTALLATION SERVICES Maginet and GDG are required to design and supply and Maginet is required to install and set up the complete system as described in this agreement as required for the hotel without cost to the hotel . These services are to include, as needed, upgrade to existing MATV system, and cabling where it effects system segmentation. 3.2 ON LINE SERVICES This network is required for, but not limited to, monitoring remote system and equipment. performance, distributing media, collecting system usage statistics, diagnosing system problems and providing on line support, assistance and repair. The network shall allow two-way real time communication between systems and any one of the locations Maginet's local office is required to dial in to the system every 24 hours to verify defects. 3.3 CENTRAL TECHNICAL SUPPORT SERVICES Maginet and GDG are required to maintain a qualified technician on call 24 hours per day 365 days per year to provide second line support for the local offices and the installed systems; and to distribute expedited content upgrade. 3.4 LOCAL FIELD SERVICES Maginet are required to maintain local field services to provide first line support to each site. The local field services shall be equipped with the appropriate facilities (space, tools, equipment and expertise) to carry out all service requirements for all systems located in the field service facility's territory. Each Field Service Facility is required to maintain a technician on 24 hour call, who shall be provided with second he support via modem and phone from the central technical support facility mentioned in 3.3. Maginet and GDG will be responsible for maintaining hardware, software and training resources in their field offices to the latest specification. 3.5 SYSTEM UPGRADE SERVICES The System shall be upgraded by Maginet to meet the minimum criteria as defined below: 1. In order to add more capacity to the system if the statistical information application described in 1.7.4 indicates that the following conditions have been reached: i. Video on demand The number of simultaneous video on demand channels shall be increased by a minimum of 12 outputs when the daily requests for movies on demand exceed the installed number of outputs by 12 or more, on 90 days out of a consecutive period of 365 days. Page 16 of 25 Exhibit "A" Technical Requirements ii Interactive services The number of guests denied immediate access to the system, exceeds two percent (2%) of the available rooms on 30 days within a consecutive period of 90 days. Immediate access is access within 5 seconds of hitting the appropriate remote control button. 2. To provide features and functionality that are offered at competing hotels, to comply with section 14. of the master agreement and section 6 of this exhibit. 3. To add hardware and software enhancements in order to maintain all the installed systems to the latest current standard. Such upgrades shall take place on an annual basis, according to a software release schedule to be posted by Maginet and GDG. 4. As required to rectify software problems. 3.6 CONTENT UPGRADE SERVICES Maginet and GDG shall coordinate and deliver all content for use on the system to meet the following requirements: 1. Bulk Content Update Service Generally, System Content is required to be comprehensively updated every month, according to a publicized schedule to be produced by Maginet and made available to GDG, Hyatt parties and authorized parties. Deadlines no more than 7 days prior to shipment must be established for content submissions. AU content packages shall be installed in hotels by midnight on the publicized scheduled day. Content update is to take place with minimum effect on Guest Access to the system. 2. Interim Update Services Interim content upgrade services must be provided to any or all hotels to cover the following requirements: a. On-line Interactive Content upgradeIt must be possible to download interactive files from Toolkits to installed systems so that content update can be completed and on line within 15 minutes, and without taking the System off-line. b. Defective Content ReplacementContent where the video quality deteriorates below the standards established within this exhibit shall be replaced, within the time limits set for unscheduled maintenance services (standard service) within this section. Page 17 of 25 Exhibit "A" Technical Requirements C. Incorrect Content Replacement Where video content is incorrect, such that it effects the image of Hyatt, or is misrepresentative, offensive, or effects revenue, or for other reasons deemed important by authorized parties using the system, the offering content shall be removed within the time limits set for unscheduled maintenance services (critical component failure) within this section. 3.7 SERVICE AND MAINTENANCE STANDARDS CRITERIA Equipment manufacturers' repair manuals and specifications are to be furnished as a reference to be used by all parties to establish standards for maintenance practices and operating tolerances. Maginet and GDG shall repair or replace components as needed to maintain consistency with the minimum criteria defined in section 1.1. Critical equipment no longer meeting manufacturers performance specifications, or as required under the requirements to keep current with technology in the master agreement, is to be replaced as part of the ongoing maintenance- and upgrade procedure. Maginet and GDG shall be responsible for ensuring that field services facilities are capable of carrying out work to the above standards. 3.8 PREVENTIVE MAINTENANCE SERVICES Maginet and GDG shall develop a preventive maintenance program for use by field offices, and this shall be provided to the hotels who will provide notification of non compliance to Hyatt parties. This program is to include MATV system performance monitoring on a twice annual basis, and as required to maintain standards. 3.9 UNSCHEDULED MAINTENANCE Field response time for replacement following critical component failure must be within four hours. Standard service must be provided within 24 hours of a non critical fault being reported. Emergency service must be provided 365 days per year / 24 hour per day basis. Standard service must be provided on a five (or six days where local working practices dictate) per week eight hours per day basis. On line support as well as live first and second line phone support must be guaranteed as available at each hotel. The local representative provides first line support for the hotels, while the US office will provide second line support. 3.10 PARTS REPLACEMENT SERVICE 1. On Site ------- Maginet shall provide adequate spare parts on-site at each hotel to facilitate change out of basic components by the hotel engineering staff, which includes in room devices (begin with 5% stock) and other site replaceable items Computer cables, connectors, etc.( begin with at least 2% stock). Page 18 of 25 Exhibit "A" Technical Requirements 2. At Field Services Facility. -------------------------- Details of the minimum spare parts inventory must be provided to show that inventory levels are being held at 2% of the installed levels in that location, except where demand for parts is greater, in which case stock must be maintained at five (5) percent of installed inventory. Maginet shall adjust spare parts inventory to sustain the levels of service identified throughout this section. 3.11 SERVICE HISTORY LOG The local field services facility shall hold a detailed service history containing all records pertaining to the system 3.12 LIMITATION OF TECHNICAL ASSISTANCE RENDERED BY THE HOTEL The technical responsibility for the hotels shall be limited to the following actions to be carried out by the engineering department and those hotel employees monitoring the system: 1. Removing and replacing defective in-room components and handing them over to Maginet and GDG's field staff during site visits 2. Reporting problems observed on the MATV system to Maginet's agents. Hotel will not be responsible for any matters relating to other aspects of the interactive services, but will cooperate fully with the vendors and his agent to maximize system performance and revenue. Page 19 of 25 Exhibit "A" Technical Requirements 4.0 New Technology Performance and Development Standards ---------------------------------------------------- 4.1 GENERAL REQUIREMENTS 1.Hardware -------- The system and components are to be designed such that they can be upgraded to adapt to developing technologies. As a minimum it must be possible to retrofit to already installed systems those items listed under section four of this exhibit to comply with the terms of the master agreement. 2.Software -------- Maginet and GDG will be responsible for keeping all sites in a region current with the latest software release. These details will be agreed between Hyatt International and Maginet and GDG. Generally software upgrades shall be expected and installed in all sites on an annual basis, except where required sooner to correct observed software problems that adversely effect the system performance, Hyatt's Image and/or revenue generating capacity. 3.Future Development ------------------ Hyatt International is committed to developing a global marketing communications database. Maginet and GDG shall commit to establish and maintain compatibility with these requirements and to cooperate with Hyatt International, Regency Systems Solutions and other software vendors and consultants on an ongoing basis to further develop this concept under the terms of the master agreement. 4.2 SPECIFIC UPGRADE REQUIREMENTS 1. December 31, 1995 Release ------------------------- The following items are not yet incorporated into the Maginet GDG platform at this time, but already offered in some markets by the competition. It has therefore been agreed that they will be incorporated into the installations to be completed after January 1996, and provided as an upgrade to those installations completed before that date, by January 1, 1997. Installations shall be upgraded to incorporate the following by December 31 1995. a. Access to nationally available teletext where available. b. Video games from one of the market leaders in this field. The current generation of products from either Sega, Nintendo, 3DO or approved alternative are to be provided. It shall be possible to charge for games on a unit time or number of plays basis. c. In-room terminals that can be tuned from a central location, that they bypass the TV tuning device where A/V outputs are provided in the TV sets. They shall also be concealed with a sensor no larger that 30 mm high x 50 mm long x 30 mm deep will be visible from the guest room. Page 20 of 25 Exhibit "A" Technical Requirements d. Hotel information channels which can be set up for arid accessed by all guests or by particular groups which can be individually addressed by the hotel staff except as limited by the PMS 2. July 31, 1996 Release --------------------- The following advanced interface requirements are already provided in some markets and are required at the latest to be implemented in new installations by July 31,1996 and retrofitted where required in existing hotels by July 31, 1997 Hyatt Parties will identify a preferred solution, or present a similar system installed at a competing hotel and will make best efforts to obtain interface protocol, for use by Maginet and/or GDG to develop the required interface. Maginet & GDG shall deliver the required interface, to comply with section 14 of the master agreement. a. Advanced Interface Development Requirements that shall be installed by Maginet/GDG are: i. Interface to fax server -and in-room printer/scanner interfaces for the in room terminal. ii. Assistance in developing means to post minibar charges using MATV network. iii. Interface to allow access to voicemail system features, via TV remote as well as telephone. iv. Interface to Screen format application for collecting data entered via remote control, such as maintenance information and room status update and similar applications. v. Interface to remote printer or application associated with the Hyatt Reservations network. b. Other Screen captures will be developed according to requirements Selected Internet screens, Public information system like teletext, Minitel and Airline Information Systems on line hotel signage systems, and similar applications will be required to be captured and displayed on the hotel Page 21 of 25 Exhibit "A" Technical Requirements 5.0 TECHNOLOGY(FUTURE) Below is an indication of technology that is known to be under development. These are items that may be required as upgrades to installations to comply with section 14 of the Master Agreement and section 6 of this exhibit. Upgrades may also be required for services that may be offered at competing hotels, but that are not yet identified at this time or listed below. 5.1 Movie & interactive content in compressed digital format, such as MPEG 2, when use of such a format is made available. This may include head end upgrade to incorporate digital MATV signal delivery to the guest rooms to the extent permitted by the MATV systems in each hotel. 5.2 Satellite, frame relay, ISDN, ATM and/or other advanced networking methods that would enable on line downloading of movie & Reactive content, in those areas where it becomes the accepted norm 5.3 Increasing simultaneous access to pay video and interactive services as demand for them increases and as technology facilitates increased bandwidth. 5.4 Incorporation of newly developed broadcast and video standards as and when adopted by the multimedia and television industries. examples include but are not limited to HDTV, advanced digital video formats up to and beyond MPEG 2, Studio movie master formats, such as Do, updated operating systems such as Windows NT. 5.5 Upgrading System communication protocol to take advantage of Increased bandwidth and the switching capability offered by advanced networks. Examples include fast ethernet and ATM. 5.6 Provide full motion video for interactive services content. 5.7 Provision to accommodate increased number of viewing channels as MTV technology updates dictate. 5.8 Use of the pay TV gateway to charge for programming provided by third parties like satellite, and cable TV providers to increase revenue for Maginet, GDG and the hotel for example. 5.9 Cooperative development of other interfaces on an as need basis, this is to include full interface with the Hyatt Spirit Reservations system including on screen reservations, using the interactive system. 5.10 Provide interface with hotel fax server software to enable faxes to be displayed on screen; and the option to print them on a printer located in the guest rooms. Print outs of coupons and folios will also be required. 5.11 To keep Hyatt International Technical Services abreast of the latest industry trends to give them the opportunity to update MATV system specifications in new projects, so as to be ready for the above. 5.12 Interface with and communication between on-line hotel and signage systems, as any be installed in the hotels 5.13 Multi-media interface with voicemail system to duplicate phone and voicemail capability via MATV system, for link to video-teleconferencing facilities. 5.14 Upgrade head-end to provide Stereo Audio delivery 5.15 Development of more foreign Language Content, especially Malaysian, Indonesian and other Asian languages. Page 22 of 25 Exhibit "A" Technical Requirements 6.0 Competitive Standards ---------------------- 6.1 GENERAL STANDARDS The master agreement requires that Maginet shall keep the system up to date to ensure that installed systems have the features and functionality built in to the latest Systems, or systems provided by a competitor. 6.2 KEY SYSTEM PERFORMANCE PARAMETERS The following are key features and functions defined in the minimum technical specification, that if improved upon by a competitor would render the System inferior, whereby Maginet and GDG would be required to modify the system to deliver the same or better features and functionality, under the terms of the master agreement : 6.2.1 VIDEO & AUDIO QUALITY In cases where competing hotels offer observably better video quality than VHS, then the system video and audio shall be upgraded to match that level of quality. In cases where it is difficult to quantify improvements to video quality, the following criteria will be used to establish the acceptable minimum quality: Video images transmitted and displayed across the System, MATV, and a good quality brand new twenty-five inch (25") television set must be observed to be as good as the same images when the image source is directly connected to the television set. The video image source for quality tests shall be a full action, color movie on a new, unused S-VHS tape provided by a major recording studio played back on a brand new S-VHS tape player connected directly to the television with AV connectors. When compared to the same movie provided as part of the Content across the System, MATV, and television set, there shall be no noticeable degradation in resolution, discoloration, focus, or brightness, nor multiple images (ghosting), artifacting, or other negative differences in image quality. 6.2.2 ADDED SYSTEM FEATURES & FUNCTIONALITY When a competing hotel offers features and functionality that it is determined by the Advisory Board provide the competing hotel with a competitive advantage, then Maginet and GDG shall implement equivalent or alternative technology to ensure that the System delivers those additional features and functionality enjoyed by the competing hotel; where those features and functionalities improve revenue from the system or are perceived as an incentive for guests to stay at the competing hotel. Page 23 of 25 Exhibit "A" Technical Requirements. 6.2.3 COMPETITIVE RATES If a competing hotel is able to offer lower rates for movies and services of an equivalent quality, Maginet and GDG shall take whatever steps necessary, including employing new or alternative technologies to lower operating costs such that Hyatt Parties can match such rates, without effecting Hyatt Profitability. 6.2.4 GREATER CONTENT VARIETY. If a competing hotel generates higher revenues by offering a greater variety of interactive or video on demand content, of equivalent quality, Maginet shall increase programming and system capacity to match the usage rates enjoyed by the competing hotel. 6.2.5 GREATER SIMULTANEOUS SYSTEM ACCESS If a competing hotel generates higher revenues by offering a greater number of simultaneous outputs to deliver the content, Maginet shall increase programming and system capacity to match the usage rates enjoyed by the competing hotel. 6.2.6 VENDOR PREFERENCE If a competing hotel offers better revenues and/or improved features such that the revenue generating potential of the system is greater, Maginet and GDG shall employ similar or alternative technology, to ensure that the System remains competitive in this sector of its revenue generating capability. 6.3 ALTERNATIVE TECHNOLOGY - SYSTEM OBSOLESCENCE If a competing hotel offers alternative technology that substantially improves revenue and/or offers features and benefits that are determined to be an incentive for guests to stay at the competing hotel, then Maginet and GDG shall provide similar or alternative technology so that System delivers features and functions that would not be perceived as inferior or outdated by guests and vendors using the system, when compared with the competition. 6.4 DIGITAL HARDWARE PERFORMANCE CRITERIA In cases where such technology involves digital video delivery, the following criteria is intended to set a minimum standard, in cases where it is not possible to define the system used by the competition: a. Movies will be delivered to the viewer at 400 lines of resolution or better, with color clarity and definition superior to the current vendor's VHS product. b. Transmission of movie signals will be sufficient to provide "flicker free" video images. C. The units shall be capable of providing simultaneous access to any or all of the available number of ports on the system. d. It must be possible to pause and rewind for a total of 15 minutes of the movie showing time, using the remote control (subject to studio consent). Page 24 of 25 Exhibit "A Technical Requirements. e. Additionally it shall meet or exceed other performance criteria indicated below as applicable to video tape based systems, where not specified under this section and as required to comply with the requirements of the master agreement. 6.5 DELIVERY CRITERIA FOR SYSTEM UPDATE To comply with the terms within the master agreement, Maginet shall deliver the system upgrade within nine months of written notice from Hyatt Parties that the competitor's advantage was determined to exist. Page 25 of 25 August 22, 1995 EXHIBIT B FORM OF INDIVIDUAL AGREEMENT, ----------------------------- -35- EXHIBIT B --------- Additional System Equipment: - ---------------------------- Provider will provide the hotel with a number of spare remote control units equal to five percent (5%) of the total number of TVs in the Hotel linked to the System. These units will remain the property of Provider and will be included within the definition of "System." Remote Control Replacement Cost: - -------------------------------- The fee for remote control replacement units shall be U.S. $20 for each replacement unit, plus applicable duties or fees. Movie Rental Fee: - ----------------- The Movie Rental Fee shall be for each access of a Program, subject to adjustment as provided in Section 6. Game Fee: - --------- The Came Fee shall be for each access of a Program; subject to adjustment as provided in Section 6. Hotel Commission: - ----------------- [***], subject to increase as provided in Section 4 (i), on Net Rental Fees from Movies and other pay video services, excepting Hyatt Content, Interactive Services and Third Party Content, for which commission rates shall be subsequently established by the Advisory Committee established pursuant to the Master Agreement. -20- (02/15/95) [***] Confidential treatment requested pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission. August 22, 1995 EXHIBIT C LIST OF CURRENT HOTELS ---------------------- -36- List of hotels and installation schedule [***] [***] Confidential treatment requested pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission. Exhibit C [***] [***] Confidential treatment requested pursuant to a request for confidential treatment filed with the Securities and Exchange Commmission. Omitted portions have been filed separately with the Commission. August 22, 1995 EXHIBIT D HOTEL FEES, COMMISSION, AND COST -------------------------------- Initial Rental Fee: (to be established in Individual Agreements in each country). Hotel Commission: [***] on Net Rental Fees from Movies and other pay video services, excepting Hyatt Content, Interactive Services and Third Party Content, for which commission rates shall be subsequently established. Remote Control Replacement Cost: US $20 for each replacement unit. *Subject to increase as provided in Section 11.9 of the Master Agreement. *** Confidential treatment requested pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission. -37- HOTEL GUEST SERVICES AGREEMENT This Hotel Guest Services Agreement, ("Agreement") between ______________, a Company duly incorporated in___________________,having its principal place of business at____________,and a [wholly-owned subsidiary/licensed distributor] of MagiNet International Corporation (hereinafter referred to as "Provider"), and the Hyatt __________ Hotel, having its principal place of business at_________ ("Hotel") , sets forth the terms for installation, operation and maintenance by Provider of an on-demand guest video system and related services in the Hotel. WHEREAS: (A) The Hotel operates a hotel for the lodging of guests in separate, private rooms and suites which are customarily available for overnight sleeping accommodations; (B) The Hotel wishes to enhance the guests' stay by giving them the opportunity to view pre-recorded entertainment programs and movies and standard off-air broadcast or cable television channels available to the Hotel without special equipment.. and other programming and interactive service offerings, conveniently in the privacy of their own rooms using an on-demand video system provided by MagiNet; (C) Hyatt International-Asia Pacific Limited ("Hyatt International"), Hyatt: Chain Services Limited ("Hyatt Chain"), Guestserve Development Group ("GDG"), and MagiNet International Corporation ("MagiNet") have entered into an exclusive Master Guest Video Services Agreement dated August 1995, (the "Master Agreement") whereby MagiNet, using on demand video and interactive services technology (of GDG ("GDG Technology") , has agreed to provide on-demand video services and interactive services pursuant to the terms therein and herein; Now, therefore the parties do hereby agree as follows: 1. ON-DEMAND VIDEO SERVICES SYSTEM (a) Provider shall, with the support of MagiNet and GDG, provide to the Hotel through the System (defined below) and the Hotel's video and audio transmission and receiving and antenna and wiring systems ("MATV") on-demand video and interactive services pursuant to the terms and conditions set forth in the Master Agreement and herein. All terms and provisions in the Master Agreement applicable to the parties hereto, including obligations of MagiNet and GDG to the Hotel thereunder, are hereby incorporated (02/15/95) into this Agreement by reference and made a part hereof. In the event of any conflicts between this Agreement and the Master Agreement, the Master Agreement shall control. (b) The Hotel is hereby fully licensed by Provider, GDG and MagiNet for as long as this Agreement is in effect to have the use of the GDG Technology, and any improvements thereon made by GDG, MagiNet and/or any third party acting under a license or contract from either on the terms provided herein. (c) The Hotel is hereby fully licensed by Provider, GDG and MagiNet to have and use a graphics generator (the "Graphics Generator") that enables the Hotel to update its own Hotel Content for display on the System through. the GDG Technology as provided in subsection (p) below. "Content" shall mean off-air activities, services and programming as provided hereunder and as may be agreed upon pursuant to the Master Agreement, This license covers all uses in the Hotel by any entities affiliated with Hyatt international (the "Hyatt Affiliates") throughout the duration of the Master Agreement and for such time thereafter as permitted by this Agreement. (d) "System" as referred to herein, shall include at least: (i) a module for each television set that can remotely control on demand requests made by guests from Hotel rooms ("Rooms") to central storage devices within the Hotel; (ii) a remote control and appropriate spares for each television in the Hotel; (iii) Content storage sufficient for the Content initially installed and a reasonable amount of expansion capability for additional Content that may be installed in the future; (iv) a front-desk personal computer monitor and printer; and (v) all necessary software, electronic, computer and switching equipment, including GDG Technology to permit the receipt, transmission, monitoring and on demand remotely controlled interactive guest operated in-room display of the Content. (e) Subject to the right of Hotel and its guests to use other non- competing video devices, cd players, computers, telefax machines, and similar devices in the Rooms, the Hotel will ensure that the System will be the sole and exclusive in-room pay per view guest video services system provided to their guests during the term of this Agreement (except as otherwise provided for herein, or in the Master Agreement). The Hotel will not either directly or indirectly solicit the installation of any video system in the Hotel which might directly compete with or cause transmission interference with the System. (f) Subject to paragraph (j) following, Provider shall develop, repair, purchase, build and install all hardware and software required to operate the System at its sole cost, including any MAIN' upgrades required for the System to perform according to specification, and shall install, operate and maintain the System -2- (02/15/95) and such MATV at the Hotel as provided herein. All required hardware and software and other equipment and specifications for the System and the MATV are specified and listed in Exhibit A hereto (the "Technical Requirements"). (g) Provider shall provide documentation to provide the reader with sufficient information so that the System can be operated without further consultation (the "System Manual"). Two (2) copies of each System Manual shall be provided for the Hotel. (h) One (1) copy of a manual that describes the Graphics Generator sufficiently to permit its use shall be provided to the Hotel (the "Graphics Generator Manual"). (i) System Manuals and Graphics Generator Manuals may be copied and printed in whole or in part by Hotel on an as needed basis. All Manuals shall be marked and treated by all parties as confidential. Notice of copying of each Manual shall, with best efforts, be given to Provider. (j) The System shall provide guests with the Content in as efficient and effective a manner as is reasonably and technically possible at the time the System is installed in each Hotel, and as further specified and described in the Technical Requirements. (k) The System shall accommodate, and Provider shall ensure the delivery of across the System and the MATV, to the extent reasonably and commercially possible, all Content that the Hotel determines in the future would benefit Hotel guests or Hotel staffs and would be economically viable to add to each Hotel's services. (l) The System will be multilingual, and shall permit displays and commando in at least three separate languages. The selected languages are preliminarily designated in English, Japanese, and the primary local language used in the country in which the Hotel is located. If Hotel desires a different set of languages it shall designate its selections by written notice to MagiNet on the date of execution of this Agreement and such notice shall become attached hereto as an Exhibit. Subsequent changes or additions to such languages shall be mutually agreed in accordance with Customer demand. (m) Provider shall at all times in the future ensure that the System and all other Hyatt International or Hyatt Chain contracted computer, reservations and information systems operated or used by the Hotel are interoperable, and will ensure that it takes no action(s) that could jeopardize such interoperability. (n) Provider understands and agrees that the System mustmeet or exceed all applicable Technical Requirements described in -3- (02/l5/95) Exhibit A. Provider shall provide sufficient spare equipment to minimize the effect of component failure on guest services and to enable rapid repair and replacement of defective components, including spare onverters and remote controls to enable Hotel staff to meet the short term needs of its guests if repair and/or replacement of components are required. (o) Each Hotel will ensure the safety and security of the System and all related property of Provider at all times while the System is installed in the Hotel, and will be liable for any loss or damage to the System resulting from willful misconduct on the part of Hotel's guests, employees or third parties (excepting third parties associated with MagiNet or GDG). (p) The Hotel shall have the right to utilize the System in the Hotel to display informercials, programs on other hotels and resorts, and similar advertising and merchandising of hospitality industry products and services offered by Hyatt International or any Hyatt Affiliates ("Hyatt Products"), including, Interactive Services (see below) and Hotel Services (see below) (collectively, "Hotel Content"), (q) Hotel Content shall not be directly competitive with any then currently available Content. (r) Except as specifically otherwise provided herein, all Content other than movies must first be approved by the Hotel prior to installation on the System, (s) "Hotel Services" shall mean those guest information and other services available now and in the future from the Hotels or Hyatt International and Hyatt Affiliates, including the development, storage and transmission of information about: (1) guest billings status, (2) minibar consumption and other charges, (3) hotel, transportation, and restaurant reservations, (4) guest marketing information for or on behalf or third parties, and (5) guest messaging systems and services. (t) Provider shall ensure that Hotel Services are available through the System, and can be accessed with no more delay than may, be experienced in order to obtain Interactive Services (defined below) from Provider, include such assistance as may be needed for the Hotel so that all Technical Requirements are met for the transmission of Hotel Services through the System. (u) "Interactive Services" shall mean all. interactive guest video products and services, including games, made available to the Hotel by Provider pursuant to the Master Agreement. (v) If Hotel requires Provider to provide services requiring the modification of hardware or software interfaces other than those on the System in order to implement future Hotel -4- (02/15/95) Services, then the Hotel shall be solely responsible for such costs. If Provider satisfies such requirements, then any direct costs for the alteration of existing interfaces solely for the purpose of providing future Hotel Services, and approved by the Hotel, shall be paid by Hotel. (w) After execution of this Agreement, Provider will perform at its expense a site evaluation at Hotel to determine whether any upgrading of the Hotel master television antenna system ("MATV") will be required. If such upgrading is required, this shall be provided and funded by MagiNet, as provided in Section 4(i). 2 TERM OF AGREEMENT (a) The term of this Agreement will begin on the Term Commencement Date as defined in Section 2 (b) below and will continue until the expiration or earlier termination of the Master Agreement (the "Term"). (b) Upon the installation of the System, Provider will test the System to ensure functionality as provided in Section 4(f). Upon the successful conclusion of such test, Provider and Hotel will sign a statement. acknowledging that the System is functional. Such statement will be attached hereto when completed as provided in Section 4(f), and the "Term Commencement Date" will be the date of such statement. 3. HOTEL FACILITIES. During the Term, Hotel shall provide a designated room for installation of the System; signal wiring and connections; electrical power and sockets; cooling facilities; and a secure location for all equipment comprising the System (collectively, the "Hotel Facilities"); all in accordance with the Technical Requirements. 4. INSTALLATION (a) Installation shall commence within ________( )days following execution of this Agreement. (b) Provider shall apply for and obtain all licenses, permits and other government approvals required to do work on Hotel's premises, and shall at all times comply with the applicable legal and regulatory requirements for such work. it shall be Provider's responsibility to handle all such requirements, and also its responsibility to pay for any legal expenses and fines incurred due to Provider's failure to comply with such requirements. (c) An interface with Hotel's PMS shall be completed during installation of the System. A front-desk personal computer -5- (02/15/95) and printer will be included as a part of the System for printing charges for each guest purchase or rental in case such interface fails at any time. Provider will ensure that the System will fully interface and integrate with the PMS. As a part of such integration, guest usage charges shall be automatically posted to each individual guest's bill, counts of access shall be available to the Hotel and other reporting will be permitted. Hotel will cooperate with Provider for the purpose of successfully implementing the interface, and shall undertake its best efforts to insure cooperation between Provider and each PMS software vendor used by the Hotel. All interface protocol installation or maintenance charges asserted by the PMS software vendor and agreed upon in advance by the Hotel will be paid for by Hotel. (d) Hotel will provide such access as may be reasonably requested by authorized personnel to enable complete installation of the System in the Hotel, including without limitation providing all Hotel Facilities, within a reasonable time to permit complete installation. Hotel will make reasonable efforts to provide Sufficient access to guest rooms for the purpose of equipment installation so that such installation is performed with a minimum of delay. During the installation process, Hotel will exercise best efforts to provide complimentary rooms for out of town members of the installation team. (e) Appropriate fully qualified personnel shall perform Provider's obligations hereunder in an efficient, courteous, effective and timely manner and all such personnel shall be bonded, trained and supervised in accordance with appropriate hospitality industry practices consistent with local practice and custom. All actions of any person acting for or on behalf of Provider shall be subject to the same rules and regulations, which will be made known to Provider, as are applicable to Hotel staff. All such persons shall wear identification badges, and shall be dressed in a proper fashion. (f) Upon completion of the installation, Provider will test and ensure that the System in each Hotel, and in all Rooms is fully functional without material defects and meets all applicable Technical Requirements. Upon the successful conclusion of such testing, Provider will deliver to the Hotel and the Hyatt Parties a written Certification (the "Certification"), that the System is fully functional and without material defects and meets all applicable Technical Requirements. Such Certifications will be attached to this Agreement as an exhibit. (g) At the time of installation, Provider shall train all employees deemed by Hotel to be appropriate in the use of the System. (h) Hotel will begin the process of billing guests for and generating revenue from the Content no later than the date of -6- (02/15/95) the Certification. (i) Hotel shall provide access to its MATV. Provider shall be responsible for all work required to and all costs incurred in upgrading the MATV as required for proper operation of the System, except that improvements required for in-wall cable and its installation in excess of $5,000 shall be paid by the Hotel. If these costs exceed [***] and Provider elects not to pay for such excess, then the Movie commission rate payable to the Hotel for the Movies shown at Hotels shall be increased by [***] for a period of three years. Nothing herein shall be deemed to allow or require Hotel to submit any records beyond those showing the actual costs of the purchase and installation. (j) The installation of the System and MATV upgrade shall not degrade the MATV, or impair the ordinary reception of broadcast programs (or other services on the MATV. Any MATV hardware and equipment owned by Hotel which has been disconnected as a result of the installation will be taken to Hotel designated storage locations by the installation personnel. 5. MAINTENANCE (a) Provider will promptly provide all maintenance, repairs and replacement of all software and hardware and other equipment necessary to ensure proper operation of the System and the related MATV in the Hotel, including satisfactory signal quality, and shall insure that a qualified person is available on a twenty-four (24) hour basis to receive service requests. MagiNet and GDG will provide backup support to Provider as necessary to ensure proper maintenance, repair and replacement occurs. Such maintenance and technical assistance will be provided free of charge, unless the maintenance is occasioned by a breach by Hotel of any of its obligations as set forth in this Agreement, or by unauthorized use, access, theft, negligence or damage caused by Hotel staff or third parties not under contract to Provider, MagiNet or GDG. Hotel staff shall be trained so that they can undertakeroutine maintenance as agreed upon by the Hotel and Provider. Provider shall not be obligated to maintain hardware already contracted by Hotel to a third party. (b) Hotel will, at the Hotel's expense, notify a person designated by Provider by telephone or by fax of any failure or degradation of any part of the System anywhere within the Hotel, including in any Room. (c) The Hotel will notify Provider as soon as is reasonably possible and upon Hotel's actual notice of any unauthorized use, access, theft, damage or malfunction of or to the System. (d) Each Hotel will allow authorized personnel of *** Confidential treatment requested pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission. -7- (02/15/95) Provider, MagiNet and GDG to have escorted access to the System at reasonable times in order to conduct routine maintenance, to observe and to monitor the System, to ensure suitable operating conditions, to implement improvements in the System, to conduct repairs, and to otherwise carry out Provider, s, MagiNet I s and GDG' s obligations set out in this Agreement and the Master Agreement. (e) In the event that any malfunction, nonconformity or other defect in the System is believed to exist by Hotel and notice of such defect is given, Provider shall promptly undertake best efforts to have the defect corrected and in no event shall there be more than a four (4) hour delay in Provider's response and all repairs shall be made as quickly as possible. If Hotel does not provide prompt access to the System to correct System failures once Provider has been notified by Hotel of such. System defects, Provider will not be liable for any delays so incurred. (f) Any repairs or replacements to any equipment supplied by Provider made necessary by any negligent or willful act by Hotel or any of its guests, employees, contractors, servants, and agents, or force majeure events, will be undertaken by Provider at Hotel's expense. (g) Hotel shall not permit any person to tamper with or attempt to make repairs to any equipment supplied by Provider. In emergencies, Hotel may carry out repairs in accordance with instructions given by Provider. (h) Each Hotel will be responsible for replacement of depleted batteries and for paying for replacement infrared remote control units in the event of theft, loss or damage in excess of twenty (20) units per year. Initial replacement cost is as set forth on Exhibit B, plus shipping, duties and taxes, and is subject to change upon written notice from Provider or MagiNet to Hotel, with an effective date at least thirty (30) days in advance of a change, in accordance with commercially reasonable and customary practices: 6. RENTAL FEE AND PAYMENT TERMS (a) Hotel will charge hotel guests for access to Movies and other pay per view and pay for service Content (collectively the "Programs") for which charges are assessed (the "Rental Fees") The amount to be charged for Movies shall be set by Provider in consultation. with and approved by Hotel at the time of the execution of the Agreement or, for other pay per view and pay for service Content, at the time the Content is made available. Such charges shall not commence until after a guest has been allowed to review the selection for an initial period to be mutually agreed by Hotel and Provider. In addition to the Rental Fee, Hotel will collect from guests any taxes applicable to such receipts, and will pay those taxes to the appropriate government authorities. -8- (02/15/9S) (b) From time to time, Provider may revise the Rental Fees after consultation with Hotel. Rental Fees shall be charged which are customary in each locale, and may be increased annually in an amount at least equal to the increase in the local cost of living. Provider will notify each Hotel in writing of any new Rental Fee and the effective date at least thirty (30) days in advance of a revision. (c) In the event any Hotel guest disputes the amount of Rental Fees in a situation in which Hotel personnel are otherwise unaware of any System malfunction (herein referred to as a "Denial"), Hotel may in its sole discretion credit the disputed amount to the guest's account provided it provides Provider with a copy of the credit voucher showing room number, date, time of day, and reason for the disputed charge. Hotel will use its best efforts to limit Denials to not more than five percent (5%) of gross Rental Fees per month. (d) The System will generate an accurate record (the "Access Record") of the access to the System by any guests, including a record of the access charges for each individual guest's bill or Room account, the types of access made, and any other reasonably recordable information that may be requested. The Access Record will not retain the names of guests Provider will be responsible at their own cost for programming the System to enable it to provide the aforesaid data. The Access Record for Hotel will be held in confidence by the personnel of Hotel. Provide and Hotel may review and use the Access Record for such purposes as they may reasonably deem appropriate. Each party will indemnify the other against any and all claims as a result of their improper use of such Access Record. (e) Hotel will submit a report (via telefax) to Provider on the first day of each month which details the previous month's gross Rental Fees and itemizes deductions for all Denials allowed. Provider shall invoice the Hotel for gross Rental Fees less Denials allowed, Hotel commissions payable under Exhibit B (which Exhibit shall be supplemented and amended from time to time as new Programs are added to the System) and unreimbursed tax payments ("Net Rental Fees"), all based upon guest usage as reported by the relevant PMS accounting records during each calendar month which information shall be accessible and reviewable during the month by Provider and Hotel. Hotel shall handpost any invoices printed in hard form as a result of PMS downtime to accurately capture those buys in PMS records. If Hotel's PMS report differs from the automatic record kept by the System, both parties agree to mutually and amicably resolve any variances between their respective records of Rental Fees and Denials. (f) Hotel will pay to Provider or the designated subsidiary or distributor or other designated party within ten (10) days, the Net Rental Fees invoiced by Provider as provided in -9- (02/15/95) paragraph (e) preceding. The payment transmission will also specify the occupancy rate for the month. (g) Hotel All keep current, complete and accurate records of occupancy rates and all Net Rental Fees and other amounts due to Provider pursuant to this Agreement. Throughout the duration of this Agreement, Hotel's book and records pertinent to the Rental Fees, Denials and Net Rental Fees for any month will be open to inspection and reproduction by Provider and, if necessary, to an audit by a mutually agreed upon certified public accountant as an authorized representative of Provider upon reasonable advance written notice to Hotel. No such records need to be retained beyond one year, Provider's right. to inspect and audit the books and records of Hotel will not extend beyond one year from the expiration of the Agreement, If any audit by Provider discloses any non-payment or underpayment of any amount payable to Provider, the Hotel will immediately pay to Provider any deficiency, plus interest charges at the rate of 1.5% per month or the maximum interest allowed by local law, whichever is less. If the deficiency is in excess of fifteen percent (15%) of the actual amount payable to Provider for the period for which the deficiency occurred, the Hotel will reimburse Provider for all costs incurred by Provider in conducting the audit. 7. PROGRAM TITLE SELECTIONS (a) It is understood and agreed that, except as otherwise provided below, Provider shall have absolute control and discretion in the selection of the movies it contracts for with the movie studios or their distributors and provides to Hotel (the "Movies"). (b) Provider shall provide a method whereby a guest will be able to electronically restrict persons from viewing any adult selections being offered in a Room. (c) When available from producing studios, the Content offered by Provider shall include first run Movies offered to Hotel that shall be no less current and offer no less variety of first run and other titles than those available at competing hotels in the country where the Hotel is located. Provider shall consult with the Hotel on a regular basis to ensure the provision of a selection of titles properly suited to each Hotel's guest profile. Hotels may review the movies and other video materials being offered by Provider, and may object to Movies it feels violate the sensitivities of the guests at a particular Hotel, and any unresolved disputes will be adjudicated by the Advisory Board established pursuant to the Master Agreement, pending which resolution the objectionable Movies shall not be offered at the Hotel. (d) Provider will be solely responsible for any royalty -10- (02/15/95) payable to Movie suppliers and any license fees for Movies made available on the System. (e) Each Hotel will be responsible for ensuring that access to the room(s) in which the central storage and transmission equipment for the System is located is restricted to persons accompanied by persons authorized by Provider to be present there except in cases of emergency. Provider shall authorize a sufficient number of persons employed by the Hotel for such purpose, Hotels will not authorize copying of any Movies and will undertake their best efforts to ensure that the Movies are exhibited in the Rooms only, and not in the public rooms and public areas (including lobbies, hallways, restaurants, bars, meeting rooms, etc.) of the Hotel. The Movies will not be exhibited other than in accordance with this Agreement. Hotel will use reasonable efforts to insure that only registered guests of the Hotel and their invitees may view the Movies. (f) Cassettes and other media that contain the Movies ("Cassettes") will be kept in a secure and locked area. Hotel will prevent unauthorized access to and use, exhibition or viewing of any Cassette by any person other than as set forth herein. Hotel will not permit any person to duplicate or make alterations of any kind to Cassettes. Hotel will promptly report to Provider any unauthorized use of the Cassettes as soon as a Hotel becomes aware of any such use. If Hotel has videocassette recorders installed in the Rooms, the Hotel shall agree that Provider may, where required to do so as a result-of its licensing agreements, as directed by the Hotel, either (i) disable the "record" function in such a way that does not permanently damage the videocassette equipment, but only to the extent required to comply with such restrictions, or (ii) disable the Movie function for such Rooms. (g) Provider shall be responsible to ensure that any of the transmissions on the System controlled by it do not violate any applicable laws, including those of the country in which Hotel is located; including specifically any laws relating to copyright, pornography, and censorship of information or materials. (h) Provider shall at all times offer to the Hotel the most advanced guest video services and features (and associated technologies) it or its competitors offers to any other hotel. 8. OWNERSHIP OF THE SYSTEM. (a) The parties agree that the System and all equipment, materials and engineering related thereto (excepting the MATO) and which are provided by Provider are the sole and exclusive property of Provider. (b) Hotel shall exercise best efforts to ensure the safety and security of the System and all related property of -11- (02/15/95) Provider at all times while the System is installed at the Hotel. Hotel will use its reasonable efforts to prevent any vandalism, theft, or damage of (or to any of the equipment supplied by Provider. (c) Hotel shall not allow, any lien, encumbrance, mortgage, claim or security interest to be attached to or be made against the System. The Hotel shall allow Provider to affix a notice or plaque to the System stating that the System is the sole and exclusive property of Provider and/or MagiNet. (d) Hotel shall allow authorized personnel of Provider, MagiNet or GDG, or their independent contractors to have access to the System at all times in order to conduct routine maintenance, observation and monitoring of the System, to ensure suitable operating conditions and to implement improvements in the system. Upon termination of this Agreement, Hotel will take all reasonable actions necessary to allow Provider to remove the System promptly and Provider shall remove the System no later than thirty (30) days after such termination and shall return the premises to their original condition, normal wear and tear excepted at no cost to Hotel. e) In the event the safety of the System is threatened due to earthquake, flood, fire, strike, civil disruption or similar causes, Provider shall be entitled to enter upon. the Hotel premises and to remove the System from danger upon reasonable notice to Hotel. (f) "Hotel Systems" shall mean those hardware and software systems other than the System used by Hyatt International and Hyatt Affiliates and the Hotel to deliver Content to guests in their rooms, including any transmitting devices and equipment, wiring, televisions, and cable or master antennae transmission systems, as well as all software and hardware used for Hotel's PMS and MATV. (g) Hotel Content, Hotel Systems, all signal boosters, wiring and faceplates, and any portions of the System that are permanently installed, or installed in such a way that the removal of that part would cause more than incidental wear and tear to the premises, and all other property at the Hotels apart from the System, shall be considered by the parties to be the sole and exclusive property of the Hotel (the "Hotel Property") . All Hotel Property shall be considered to be the property of the Hotel, irrespective of whether such information, materials, hardware and software systems are used on or developed by anyone related to MagiNet and/or GDG and/or any third parties. (h) The System and Content provided by Provider, MagiNet and/or GDG that is not Hotel Property shall be either the property of Provider, MagiNet or GDG or properly licensed to Provider, -12- (02/15/95) MagiNet or GDG by a third party. (I) Equipment comprising part of the System and owned by Provider will not be removed from Hotel for any purpose whatsoever during the term of the Agreement except for purposes of repair, and when removal is necessary to ensure safety of such equipment. 9. INSURANCE AND PROPERTY TAXES. (a) Provider will maintain general business risk insurance on the System at its expense. (b) Provider shall carry and maintain for installation, and any later work at the Hotel, worker's compensation insurance, or such other insurance as is required and or needed to pay for any actions of Provider's personnel and all such other personnel, in the amount of at least $1,000,000 combined single limit comprehensive general contractual liability insurance, and. at least $1,000,000 combined single limit vehicle liability insurance. Copies of all applicable policies and certificates of insurance shall be provided to the Hotel prior to commencement of any work on the premises of any Hotel. (c) Hotel shall include the System in any assessment of the real estate or personal property of the Hotel and pay such taxes as are assessed, to the extent required by law. (d) To the extent permitted under its existing insurance policies, Hotel shall include the System as part of its insured property and equipment. 10. PUBLICITY REGARDING THE SYSTEM. Hotel and the staff and the employees of the Hotel shall adequately publicize the existence of the System and access to the Programs 'for use by guests as determined by Hotel in its sole discretion. Hotel hereby acknowledges that the success of the System installed by Provider depends on the response of the Hotel's employees to guests, inquiries in a proper manner to encourage guests' use and enjoyment of the System. If Provider shall develop and provide to Hotel in-room or other advertising materials to encourage use of the System by guests of the Hotel, Hotel shall place such material in the Rooms or elsewhere at the Hotel, provided that Hotel Provider finds such materials to be suitable to the decorum of the Rooms. 11. TRAINING AND CONSULTATION. (a) To enable each Hotel to generate suitable promotional material related to the use of the System and to enable personnel of each Hotel to advise and encourage guests regarding -13- (02/15/95) their use of the System, Provider will provide a one-time training course on the use and operation of the System for as many employees as Hotel deems desirable at no charge. Such training shall take place within sixty (60) days of the installation done under this Agreement. (b) Hotel will exercise best efforts to provide complimentary accommodations for Provider training personnel. In addition, Provider, MagiNet and GDG personnel will be reasonably available at no charge for telephone consultation to personnel of Hotels to provide further assistance regarding use and operation' of the Systems, including an in-country telephone number staffed on a twenty-four hour basis. 12. CONFIDENTIALITY The parties agree that the functions and components of the System, facts regarding the equipment and materials related thereto, the manner of operation thereof and the terms of this Agreement, including without limitation Rental Fees payable hereunder, all constitute proprietary information of Provider. Hotel shall not permit any third party to have access to the System other than such of the Hotel's maintenance personnel as may be reasonably necessary to enable Hotel to provide the Hotel Facilities and otherwise as expressly permitted by Provider in writing. 13 REPRESENTATIONS AND COVENANTS The Parties represent, undertake and covenant with each other that throughout the duration of this Agreement: (a) Authority. The Parties warrant and represent that each has full legal --------- power and authority to enter into this Agreement and to perform all of its obligations hereunder and that this Agreement is within its authority and that all necessary corporate action has been taken to authorize it to enter into this Agreement and perform its obligations hereunder. (b) Compliance. Each party will comply, and will ensure that performance ---------- of its obligations hereunder complies, with all applicable laws, ordinances, rules, regulations, orders, licenses, permits or other requirements now or hereafter in effect, of any governmental authority. Without limiting the generality of the foregoing, to the extent any filing with, or any license, approval or other agreement of, any applicable authority is required for performance of any of the either party's obligations, such party will file the appropriate documents and will maintain such documents on file, which Provider may inspect upon demand. 14. DEFAULT -14- (02/15/95) (a) Default. Either Hotel or Provider shall be in default under this ------- Agreement if it (i) shall be adjudicated bankrupt or petition for relief under any bankruptcy, reorganization receivership, liquidation, compromise arrangement or moratorium statute, or (ii) shall petition for the appointment of a receiver, liquidation, compromise arrangement or moratorium statute, or (iii) shall petition for the appointment of a receiver, liquidator, trustee or custodian for all or part of its assets. (b) Notice of Non-performance. Hotel or Provider shall also be in default ------------------------- under this Agreement if it (or any associated or affiliated entity so required) should fail to perform or comply with any material obligation under this Agreement or under the Master Agreement intended to benefit either party and either (i) such failure is not remedied within sixty (60) days after receipt of notice from the other party of such failure or (ii) if such default is of a nature that it cannot, with due diligence and in good faith, be cured within sixty (60) days, the non-performing party fails to proceed promptly and with due diligence and in good faith to cure such failure of performance. In each instance the non-performing party shall be informed in writing by the other party of the circumstances of such non-performance. (c) Remedies. If any of the events of default set out in Section 14(a) or -------- (b) above should occur, the party not in default may exercise any or all of the following remedies: (i) cancel and terminate this Agreement (which termination for purposes of Section 6(b) shall become effective sixty (60) days after the original notice to the defaulting party of the failure to perform or comply) , (A) obtain injunctive and other equitable relief, and (ii) obtain such damages and other rights and remedies as the party not in default may have at law, and (iv) undertake either step(s) (i) and/or (ii) while retaining the System in place (subject to continuance of all other material terms and conditions herein and until a replacement vendor can be selected in an orderly transition to that vendor's technology). (d) Master Agreement. In the event the Master Agreement is terminated for ---------------- any reason Hotel shall have the option, exercisable within thirty (30) days, to terminate this Agreement, otherwise this Agreement shall continue in full force and effect according to the terms herein. Default under or termination of this Agreement shall not be considered a default for the purposes of the Master Agreement except as specifically provided therein. 15. MARKETING AND PROMOTION. (a) Any marketing and promotion that occurs with respect to the System in connection with the Hotel shall be first approved by the Hotel. -15- (02/15/95) (b) No party is or shall act as the agent for any other party, and no statement may be made that can be attributable to a party, or any of its affiliated or related companies or entities, without first obtaining such entity's permission for the statement. (c) The parties agree to cooperate with each other to promote the use of the System. 16. GENERAL TERMS (a) Provider shall indemnify and hold the Hotel, and all related entities and persons, including their affiliates, agents, officers, directors and employees, harmless from any and all actions, costs, losses, expenses and/or damages resulting from Provider's activities and the activities of any entity for which they have assumed responsibility hereunder, pursuant to or relating or incidental to this Agreement. Such indemnification shall specifically include any and all actions alleged to involve intellectual property and any other action of any kind. (b) Provider agrees to be fully responsible for all subcontractors who may be chosen for actions to be taken under this Agreement, including full indemnity for the actions of any subcontractor or any of the subcontractor's employees. (c) Hotel shall be required insofar as is commercially reasonable to notify Provider of any video recording and/or playback devices and related content that are provided by the Hotel to its guests. (d) Except as required by Provider, MagiNet or GDG licensing agreements with others, nothing herein may be used by Provider or MagiNet or GDG to limit the Hotel in their promotion of any Content whatsoever, which promotion shall be entirely within the Hotels' reasonable discretion. (e) This Hotel Agreement will be governed by the laws of......... (f) Except as otherwise set forth herein, the provisions hereof will be binding upon, and will inure to the benefit of, the respective successors and assigns of the parties hereto; provided that no assignment of this Agreement will be made by Provider without the express prior written consent of Hotel, such consent not to be unreasonably withheld. It is expressly understood that Provider may assign this Agreement without consent, specifically including: (i) an assignment by Provider to a creditor for debt financing purposes, provided that such creditor has agreed in writing to abide by the terms of this Agreement, and (ii) an assignment to a subsidiary or related entity of Provider, so long as Provider remains primarily liable. Notwithstanding any -16- (02/15/95) assignment, none of the System or other Provider property may be removed from the Hotel prior to the Hotel's uncured default or termination of this Agreement, free of any claims on the System. (g) This Agreement may be modified or amended only by a written agreement signed by both parties. No waiver by either party of any breach or default hereunder will be construed as a waiver of any precedent or subsequent breach or default. (h) This Agreement sets forth the entire agreement and understanding of the parties relating to the subject matter hereof, and merges and supersedes all prior discussions and understanding between the parties related thereto, whether written or oral. (i) Where a party is unable, wholly or in part, by reason of Force Majeure, to carry out any obligations under this Agreement and that party; (i) gives the affected party prompt notice of that Force Majeure with reasonably full particulars and, insofar as known, the probable extent to which it will be unable to perform or be delayed in performing that obligation; and (ii) uses all reasonable efforts to remove that Force Majeure as quickly as possible; then that obligation is; suspended insofar as it is affected by the continuance of that Force Majeure provided that this section will not operate to relieve any party of any obligation to pay money. In the event any Force Majeure prevents performance under this Agreement by either party which continues in existence for more than thirty (30) days, the parties will meet in good faith to discuss the situation and to make all reasonable efforts to achieve a mutually satisfactory resolution of the problem so that Force Majeure no longer prevents performance under this Agreement, provided that the Hotel shall have the option to terminate the Agreement for any Force Majeure event that last longer than one hundred and eighty (180) days. (j) Any and all disputes arising under or in any way connected or related to this Agreement, and any subject matters covered by this Agreement, shall be finally adjudicated and resolved through final and binding arbitration in _________, accordance with the Rules of Arbitration of the United Nations Commission on international Trade Law (UNCITRAL). Interim court relief may be sought at any time by any party, and any request for interim relief shall not be considered a bar to arbitration, nor limit the power of the arbitrator to change any interim relief awarded during the course of the arbitration. (k) In the event that materially better terms than those stated herein are offered by Provider to any similar hotel located in the same city as the Hotel, the Hotel will be offered all the same terms and conditions, and any less favorable payments made or receipts obtained subsequent to their being contracted with another customer but prior to the effective date of the change in the terms in this Agreement shall be reimbursed to or for the Hotel. -17- (02/15/95) (l) Subject to the provisions of this Agreement, all Intellectual Property owned by, the Hotel and any related entities shall be and remain the property of those entities. Provider, MagiNet and GDG and any related entities shall be provided the limited right to use and practice such Intellectual Property solely for the purpose Of ensuring that they can perform under this Agreement. (m) Subject to the provisions of this Agreement, all Intellectual Property of Provider, MagiNet and GDG and any related entities shall be and remain the property of those entities. The Hotel and any related entities shall be provided the limited right to use and practice such Intellectual Property solely for the purposes described in this Agreement. IN WITNESS WHEREOF, this Hotel Agreement is entered into by the parties hereto this.....day of......., 19... [PROVIDER) [HOTEL] By: By: Title: Title: -18- (02/15/95) EX-10.16 4 PLEDGE AGREEMENT BETWEEN REGISTRANT & BANK EXHIBIT 10.16 PLEDGE AGREEMENT between MAGINET CORPORATION, as Pledgor and THE CHASE MANHATTAN BANK, N.A., as Pledgee Dated as of August 15, 1995 TABLE OF CONTENTS -----------------
Section Page - ------- ----- SECTION 2. DEFINITIONS AND PRINCIPLES OF CONSTRUCTION..................2 SECTION 3. PLEDGE OF SECURITIES........................................3 SECTION 4. APPOINTMENT OF AGENTS; ENDORSEMENTS.........................6 SECTION 5. VOTING AND OTHER RIGHTS WHILE NO EVENT OF DEFAULT...........6 SECTION 6. DIVIDENDS AND OTHER DISTRIBUTIONS ..........................7 SECTION 7. REMEDIES IN CASE OF EVENT OF DEFAULT........................7 SECTION 8. APPLICATION OF PROCEEDS....................................10 SECTION 9. PURCHASERS OF PLEDGE COLLATERAL............................11 SECTION 10. FURTHER ASSURANCES.........................................11 SECTION 12. TRANSFER BY THE PLEDGOR....................................12 SECTION 13. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE PLEDGOR...................................13 SECTION 14. PLEDGOR'S OBLIGATIONS ABSOLUTE.............................13 SECTION 15. REGISTRATION...............................................13 SECTION 16. INDEMNITY..................................................14 SECTION 17. TERMINATION; RELEASE.......................................15 SECTION 18. NOTICES....................................................15 SECTION 19. MISCELLANEOUS..............................................16
*This Table of Contents is provided for convenience only and is not a part of the attached Pledge Agreement. EXECUTION COPY PLEDGE AGREEMENT ---------------- PLEDGE AGREEMENT, dated as of August 15, 1995, between MAGINET CORPORATION, a corporation organized under the laws of the State of California, as pledgor (the "Pledgor"), and The Chase Manhattan Bank, N.A., a national banking -------- association, as collateral agent ("the Pledgee")for the benefit of the ------- Noteholders pursuant to the Appointment Agreement. Capitalized terms used herein shall have the meanings provided in Section 2. W I T N E S S E T H: - - - - - - - - - - WHEREAS, the Pledgor and the Purchasers have entered into the Note Agreement providing for the issuance and sale of the Notes and the issuance of the Warrants as contemplated therein; WHEREAS, The Chase Manhattan Bank, N.A., the Pledgor and the Purchasers have entered into the Appointment Agreement providing for the appointment of The Chase Manhattan Bank, N.A. to act as collateral agent for the benefit of the Noteholders under the Security Documents (including this Agreement); WHEREAS, it is a condition precedent under the Note Agreement to each Purchaser's obligation, to purchase and pay for the Notes and to accept the Warrants to be issued under the Note Agreement that the Pledgor shall have executed and delivered to the Pledgee this Agreement; WHEREAS, the Pledgor desires to execute this Agreement to satisfy the conditions described in the preceding paragraphs and to induce the Purchasers to enter into the Note Agreement and to purchase and pay for the Notes and to accept the Warrants (and to induce any future Noteholders so to do); NOW, THEREFORE, in consideration of the benefits accruing to the Pledgor, the receipt and sufficiency of which are hereby acknowledged, the Pledgor hereby makes the following representations and warranties to the Pledgee and hereby covenants and agrees with the Pledgee as follows: SECTION 1. SECURITY. (a) This Agreement is for the benefit of the -------- Pledgee as collateral agent for he Noteholders pursuant to the Appointment Agreement (and, 1 to the extent provided in Section 16 of this Agreement, for the benefit of the Pledgee in its individual capacity) to secure: (i) the payment due of the principal of and interest in respect of the Notes and payment of all other obligations and liabilities (including without limitation indemnities, premium, if any, fees and interest thereon) of the Pledgor, now existing or hereafter incurred under, arising out of or in connection with the Note Agreement, each Note or any other Note Document (other than the Warrants); and (ii) the due performance and compliance with the terms of the Note Documents by the Pledgor (all such principal, interest, obligations and liabilities, collectively, the "Secured Obligations"). - --------------------- SECTION 2. DEFINITIONS AND PRINCIPLES OF CONSTRUCTION. For all ------------------------------------------ purposes of this Agreement: (i) capitalized terms not otherwise defined herein shall have the meanings set forth in the Note Agreement; (ii) the principles of construction set forth in the Note Agreement shall apply; and (iii) as used herein, references to "this Agreement", "hereunder" and words of like meaning shall refer to this pledge agreement. As used in this Agreement: "Agreement" and "this Agreement" shall mean this pledge agreement, --------- -------------- dated as of August 15, 1995, as the same may be modified, amended or supplemented from time to time. "Foreign Joint Venture Vehicle" shall mean a Joint Venture Vehicle ----------------------------- that is incorporated or organized outside of the United States or any State or territory thereof. "Legal Mortgage Subsidiaries" shall mean each of Pacific Pay Video --------------------------- (HK) Limited, PPV Singapore Pte Ltd, Pacific Pay Video Pty. Limited, Pacific Pay Video New Zealand Limited and any other Subsidiary or Joint Venture Vehicle incorporated or established under the laws of a jurisdiction which utilizes the common law concepts of legal and equitable mortgages over shares of capital stock or similar equity interests. "Liquidating Dividend" shall have the meaning set forth in Section 6. -------------------- "Maximum Foreign Pledge" shall mean, in respect of any Foreign ---------------------- Subsidiary or Foreign Joint Venture Vehicle: (i) prior to the occurrence of a Change in Tax Law Event, the number of Securities representing 66% (or such other threshold amount as may become relevant after the date hereof in determining whether a pledge under a pledge agreement would result in the undistributed earnings of such Foreign Subsidiary or Foreign Joint Venture Vehicle, as relevant, as determined for Federal income tax purposes being treated as a deemed dividend to the Pledgor) of the total combined voting power of all classes of Securities of such Foreign Subsidiary or Foreign Joint Venture Vehicle entitled to vote; and (ii) on and following the occurrence of a Change in Tax Law Event, the number of Securities representing the maximum total combined voting power of all classes of Securities of such Foreign Subsidiary or Foreign Joint Venture Vehicle entitled to vote that may be pledged without creating a deemed dividend to the Pledgor. 2 "Pledge Documents" shall mean: (i) this Agreement (and any other ---------------- pledge agreement in form and substance satisfactory to the Pledgee entered into as contemplated by this Agreement); (ii) the Note Agreement; and (iii) any other Note Document to which the Pledgee is or will be a party. "Secured Obligations" shall have the meaning set forth in Section 1. ------------------- "Securities" shall mean, with respect to each Subsidiary or Joint ---------- Venture Vehicle, as relevant, all the issued and outstanding shares of capital stock or similar equity interests of such Subsidiary or Joint Venture Vehicle (and any options, warrants or other rights to purchase such capital stock or similar equity interests at any time prior to the date on which the Secured Obligations are discharged in full) owned by the Pledgor, including without limitation all such shares of capital stock, similar equity interests, options, warrants or other rights owned by the Pledgor on the date hereof and all such capital stock, options, warrants or other rights acquired by the Pledgor in the future. The Pledgor hereby represents and warrants that on the date hereof (i) the information set forth in Annex A concerning the Securities and Pledged Securities of each of its Subsidiaries and Joint Venture Vehicles set forth in Annex A is true and correct and (ii) there are no options, warrants, or other rights to purchase any such Securities outstanding. All Securities described as "Pledged Securities" in Annex A and all other Securities from time to time pledged, mortgaged or charged hereunder or under another Pledge Document are hereinafter referred to as the "Pledged ------- Securities," and the Pledged Securities, together the time held by the Pledgee - ---------- hereunder, is hereinafter referred to as the "Pledge Collateral". ----------------- SECTION 3. PLEDGE OF SECURITIES --------------------- 3.1 Pledge. To secure the Secured Obligations and for the ------ purposes set forth in Section 1, the Pledgor: (i) hereby grants to the Pledgee a continuing security interest of first priority in all of the Pledge Collateral; (ii) hereby pledges and deposits as security with the Pledgee (except as otherwise permitted in this Section 3) the Pledged Securities owned by the Pledgor on the date hereof and delivers to the Pledgee certificates therefor (to the extent such Pledged Securities are certificated) accompanied by stock powers for all such Pledged Securities duly executed in blank by the Pledgor (or such other instruments of transfer as are acceptable to the Pledgee); and (iii) hereby assigns, transfers, hypothecates, mortgages, charges and sets over to the Pledgee (including by way of legal mortgage to the extent such Pledged Securities are issued by a Legal Mortgage Subsidiary) all of the Pledgor's right, title and interest in and to such Pledged Securities (and in and to the certificates or instruments (if any) evidencing such Pledged Securities), to be held by the Pledgee upon the terms and conditions set forth in this Agreement and the other Pledge Documents. 3.2 Subsequently Acquired Securities. If the Pledgor shall acquire -------------------------------- (by purchase, stock dividend or otherwise), at any time or from time to time after the date hereof, any additional Securities: 3 (i) issued by a Subsidiary or Joint Venture Vehicle, as relevant, other than a Foreign Subsidiary or Foreign Joint Venture Vehicle, then the Pledgor will forthwith pledge and deposit such Securities as security with the Pledgee; or (ii) issued by a Foreign Subsidiary or Foreign Joint Venture Vehicle, as relevant, and, as a result of such acquisition, the Pledged Securities in respect of such Foreign Subsidiary or Foreign Joint Venture Vehicle are less than such Foreign Subsidiary's or Foreign Joint Venture Vehicle's then existing Maximum Foreign Pledge, then the Pledgor will forthwith pledge, mortgage or charge hereunder (or under another pledge agreement in form and substance satisfactory to the Pledgee, if necessary under any applicable law or if otherwise desirable to carry into effect the purposes of this Agreement) and deposit (subject to the proviso below) as security with the Pledgee such additional Securities as are necessary so that the Pledged Securities in respect of such Foreign Subsidiary or Foreign Joint Venture Vehicle, as relevant, are equal to such Foreign Subsidiary's or Foreign Joint Venture Vehicle's then existing Maximum Foreign Pledge; provided, however, that the Pledgor shall not ----------------- be required pursuant to this Section 3.2(ii) to deposit as security with the Pledgee Securities issued by a Foreign Subsidiary or Foreign Joint Venture Vehicle, as relevant, organized and established after the date hereof (other than a Subsidiary or Joint Venture Vehicle organized under the laws of South Africa, the Securities of which shall be pledged to and deposited with the Pledgee under this Agreement (or under another pledge agreement in form and substance satisfactory to the Pledgee if necessary or otherwise desirable to carry into effect the purposes of this Agreement) so as to create a first priority Lien in favor of the Pledgee on such Securities) so long as such Securities are subject to Liens permitted under Section 8.1(e) of the Note Agreement and the Lien created by this Agreement (or any other pledge agreement entered into as contemplated by this Agreement), which Lien under this Agreement may be junior to the Lien permitted by Section 8.1(e) of the Note Agreement,, and such Securities when pledged, mortgaged or charged hereunder shall thereafter constitute Pledged Securities, and the Pledgor will promptly deliver to the Pledgee a certificate executed by a Responsible Officer describing such Pledged Securities and certifying that the same have been duly pledged, mortgaged or charged with the Pledgee hereunder- (or under such other pledge agreement, as the case may be); provided, further, ----------------- that the Pledgor will deposit such Securities with the Pledgee free and clear of any Lien other than the Lien created by this Agreement (or any other pledge agreement entered into as contemplated by this Agreement), which Lien shall then be a first priority Lien, promptly upon such Securities' no longer being subject to Liens permitted under Section 8.1(e) of the Note Agreement (whether because of release or otherwise); and in each case (except as provided in the first proviso to Section 3.2(ii) and as provided in Section 3.5) deliver to the Pledgee certificates therefor accompanied by stock powers duly executed in blank by the Pledgor (or such other instruments of transfer as are acceptable to the Pledgee), Thereafter such Securities will constitute Pledged Securities, and the Pledgor will promptly deliver to the Pledgee a certificate executed by a Responsible Officer describing such Pledged Securities and certifying that the same have been duly pledged, mortgaged or charged with the Pledgee hereunder (or under such other pledge agreement, as the case may be). 3.3 Uncertificated Securities. Notwithstanding anything to the contrary contained in Sections 3.1 and 3.2, if any Pledged Securities (whether now owned or hereafter 4 acquired) are evidenced by an uncertificated security, the Pledgor shall promptly: (i) notify the Pledgee of such uncertificated security; (ii) take all actions required to perfect the security interest of the Pledgee therein under applicable law; and (iii) notify the Pledgee of such actions taken. The Pledgor further agrees: (i) to take such actions as the Pledgee deems necessary or reasonably desirable to effect the foregoing and to permit the Pledgee to exercise any of its rights and remedies hereunder; and (ii) to provide an opinion of counsel satisfactory to the Pledgee with respect to any such pledge of uncertificated Pledged Securities upon the pledge thereof and at any other time promptly upon request of the Pledgee, 3.4 Change in Tax Law Event. If a Change in Tax Law Event occurs, ----------------------- then the Pledgor shall forthwith pledge, mortgage or charge hereunder (or under another pledge agreement in form and substance satisfactory to the Pledgee, if required by applicable law or if otherwise desirable to carry into effect the purposes of this Agreement), that portion of the Securities of each Foreign Subsidiary or Foreign Joint Venture Vehicle, as relevant, held by the Pledgor and not heretofore pledged, mortgaged or charged pursuant to this Agreement (or another pledge agreement). Thereafter such Securities will constitute Pledged Securities, and the Pledgor will promptly deliver to the Pledgee a certificate executed by a Responsible Officer describing such Pledged Securities and certifying that the same have been duly pledged, mortgaged or charged with the Pledgee hereunder (or under such other pledge agreement, as the case may be). 3.5 Certain Pledged Securities.Notwithstanding anything to the --------------------------- contrary contained in this Section 3, for the purpose of enabling the Pledgee to exercise its rights under this Agreement, the Pledgor undertakes forthwith upon the execution of this Agreement, if it has not already done so, at the cost of the Pledgor, to procure the registration of the Pledged Securities issued by any Legal Mortgage Subsidiary in the name of the Pledgee or its nominee and to deposit or procure to be deposited with the Pledgee the certificates in respect of such Pledged Securities together with signed and undated letters of resignation in the form of Annex C from each director of each Legal Mortgage Subsidiary appointed by the Pledgor. If the Pledgor shall acquire any additional Securities issued by any Legal Mortgage Subsidiary, which Securities are required to be pledged, mortgaged or charged hereunder pursuant to Sections 3.2 (ii) or 3.4, the Pledgor shall promptly upon receipt of such Securities (and at its own expense) pledge, mortgage or charge such Securities hereunder (or under another pledge agreement in form and substance satisfactory to the Pledgee, if necessary under any applicable law or if otherwise desirable to carry into effect the purposes of this Agreement) and register such Securities in the name of the Pledgee or its nominee and deposit the certificates in respect of such Securities with the Pledgee; provided, however, that so long as such ----------------- Securities are not required to be deposited with the Pledgee pursuant to the provisos to Section 3.2(ii), the Pledgor shall not be required to either register such Securities in be name of the Pledgee or in nominee nor deposit such Securities with the Pledgee. Thereafter such Securities will constitute Pledged Securities, and the Pledgor will promptly deliver to the Pledgee a certificate executed by a Responsible Officer describing such Pledged Securities and certifying that the same have been duly pledged, mortgaged or charged with the Pledgee hereunder (or under such other pledge agreement, as the case may be). 5 SECTION 4. APPOINTMENT OF AGENTS; ENDORSEMENTS. The Pledgee shall ----------------------------------- have the right to appoint one or More agents for the purpose of retaining physical possession of the Pledged Securities and other Pledge Collateral, which may be held (in the discretion of the Pledgee) in the name of the Pledgor, endorsed or assigned in blankor in favor of the Pledgee or any nominee or nominees of the Pledgee or an agent appointed by the Pledgee. SECTION 5. VOTING AND OTHER RIGHTS WHILE NO EVENT OF DEFAULT. ------------------------------------------------- Unless and until an Event of Default shall have occurred and be continuing: (a) the Pledgor shall be entitled to vote any and all Pledged Securities other than those issued by Legal Mortgage Subsidiaries and to give consents, waivers or ratifications in respect thereof; (b) the Pledgee shall be entitled to vote any and all Pledged Securities issued by Legal Mortgage Subsidiaries and to give consents, waivers or ratifications in respect thereof and to otherwise exercise any and all rights and powers attaching to such Pledged Securities, in each case as the Pledgor may direct from time to time by notice in writing to the Pledgee; provided, however, ----------------- that the Pledgee shall be under no obligation to so vote or give such consents, waivers or modifications or otherwise act unless it shall have first received from the Pledgor the amount of any payments required to be made in order for such rights or powers to be validly exercised; and provided, further, that in ------------------ the absence of any such direction or receipt of such amounts from the Pledgor the Pledgee shall abstain from exercising such voting or other rights or powers; and (c) The Pledgee shall not utilize any director's resignation letter delivered in connection with Section 3.5 of this Agreement; provided, that in no event shall the Pledgor cast any vote, or give any consent, - -------- waiver or ratification or take any action or direct the Pledgee pursuant to clause (b) above to take any such action which would violate or be inconsistent with any of the terms of this Agreement, any other Note Document or any other instrument or agreement referred to herein or therein or which would have the effect of impairing the position or interests of the Pledgee or any Noteholder, All such rights of the Pledgor to vote and to give consents, waivers and ratifications or to direct the Pledgee pursuant to clause (b) above shall cease upon the earlier to occur of: (i) delivery to the Pledgor of written notice from any Noteholder pursuant to Section 9.1 of the Note Agreement or the Pledgee stating that an Event of Default has occurred and is continuing; or (ii) a Responsible Officer obtaining knowledge of any condition or event which constitutes an Event of Default, when Section 7 shall become applicable; provided, that the Pledgee shall be under no duty to deliver the written notice - --------- described in clause (i) of the foregoing unless and until it has received a notice from any Noteholder stating that an Event of Default has occurred and is continuing. SECTION 6. DIVIDENDS AND OTHER DISTRIBUTIONS. Unless and until an --------------------------------- Event of Default shall have occurred and be continuing: 6 (a) all cash dividends payable in respect of the Pledged Securities other than Pledged Securities issued by Legal Mortgage Subsidiaries shall be paid directly to the Pledgor; and (b) all cash dividends payable in respect of Pledged Securities issued by Legal Mortgage Subsidiaries shall be paid directly to the Pledgee, which will pay the amount of such dividends received by it (after taking into account deductions for withholding or any similar tax) to the Pledgor as soon as practicable after receipt; provided, that, notwithstanding any of the foregoing, all cash dividends payable - -------- in respect of the Pledged Securities which are determined by the Pledgee to represent in whole or in part an extraordinary, liquidating or other distribution in return of capital (each, a "Liquidating Dividend") shall be paid directly to the Pledgee and retained by it as part of the Pledge Collateral unless the event creating such Liquidating Dividend was permitted by, and did not otherwise result in an Event of Default occurring under, the Note Agreement. The Pledgee shall aho be entitled to receive directly, and to retain as part of the Pledge Collateral: (i) all other or additional stock or securities of a Subsidiary or Joint Venture Vehicle, as relevant, paid or distributed by way of dividend in respect of the Pledged Securities; (ii) all other or additional stock or other securities or property (including cash) paid or distributed in respect of the Pledged Securities by way of stock-split, spin-off, split-up, reclassification, combination of shares or similar rearrangement; and (iii) all her or additional stock or other securities or property which may be paid in respect of the Pledge Collateral by reason of any consolidation, merger, exchange of stock, conveyance of assets, liquidation or similar corporate reorganization or otherwise; except, in each case, prior to the occurrence and continuance of an Event of - ------ Default, to the extent the receipt of such stock dividends and other securities distributions would cause the Pledged Securities in respect of any Foreign Subsidiary or Foreign Joint Venture Vehicle, as relevant, to exceed such Foreign Subsidiary's or Foreign Joint Venture Vehicle's Maximum Foreign Pledge, in which case the Pledgee shall be entitled to receive directly and retain as part of the Pledge Collateral such amount of stock dividends and securities distributions as is equal, together with the Pledged Securities previously pledged, to such Foreign Subsidiary's or Foreign Joint Venture Vehicle's then existing Maximum Foreign Pledge. SECTION 7. REMEDIES IN CASE OF EVENT Of DEFAULT. In case an Event of ------------------------------------ Default shall have occurred and be continuing, the Pledgee shall be entitled to exercise all the rights, powers and remedies vested in it (whether vested in it by this Agreement, by any other Note Document or by law) for the protection and enforcement of its rights in respect of the Pledge Collateral, and the Pledgee shall be entitled without limi- 7 tation to exercise the following rights, which the Pledgor hereby agrees to be commercially reasonable: (a) to receive all amounts payable in respect of the Pledge Collateral otherwise payable under Section 6 to the Pledgor; (b) to the extent permitted by law and to the extent not previously transferred, to transfer all or any part of the Pledged Securities into the Pledgee's name or the name of its nominee or nominees; (c) to vote all or any part of the Pledged Securities (whether or not transferred into the name of the Pledgee) and give all consents, waivers and ratifications in respect of the Pledge Collateral and otherwise act with respect thereto as though it were the outright owner thereof (the Pledgor hereby irrevocably constituting and appointing the Pledgee the proxy and attorney-in- fact of the Pledgor, with full power of substitution to do so, as further provided in paragraph (e) below); (d) at any time or from time to time to sell, assign and deliver, or grant options to purchase, all or any part of the Pledge Collateral, or any interest therein, at any public or private sale, without demand of performance, advertisement or notice of intention to sell or of the time or place of sale or adjournment thereof or to redeem or otherwise (all of which are hereby waived by the Pledgor), for cash, on credit or for other property, for immediate or future delivery without any assumption of credit risk, and for such price or prices and on such terms as the Pledgee may determine, provided that at least 10 days' notice of the time and place of any such sale shall be given to the Pledgor. The Pledgor hereby waives and releases to the fullest extent permitted by law any right or equity of redemption with respect to the Pledge Collateral, whether before or after sale hereunder, and all rights, if any, of marshalling the Pledge Collateral and any other security for the Secured Obligations or otherwise. At any such sale, unless prohibited by applicable law, the Pledgee on behalf of the Noteholders may bid for and purchase all or any part of the Pledge Collateral so sold free from any such right or equity of redemption. None of the Pledgee or the Noteholders shall be liable for failure to collect or realize upon any or all of the Pledge Collateral or for any delay in so doing nor shall any of them be under any obligation to take any action whatsoever with regard thereto; and (e) (i) The Pledgor hereby irrevocably appoints the Pledgee as its attorney-infact with right of substitution, so that the Pledgee or any other Person empowered by the Pledgee shall be authorized, without need of further authorization from the Pledgor, upon the occurrence and continuance of an Event of Default and in preservation of the rights of the Pledgee and the Noteholders hereunder: (A) to effect the sale of any of the Pledge Collateral in one or more transactions to the extent permitted by law and in such other manner as may be determined by the attorney-in-fact, including the direct sale without public auction of any such Pledge Collateral at such price, and upon such terms as may be determined by such attorney- in-fact; 8 (B) to enter upon any premises where the Pledge Collateral or any part thereof may be located Without the need for a court order or other form of authority otherwise than upon the authority granted herein; (C) to take and retain actual possession and control of any such Pledge Collateral as receivers without bond or otherwise, and transport any such Pledge Collateral to any location as determined by such attorney-in- fact; (D) to administer, manage and use any of the Pledge Collateral; (E) to conclude any agreement and collect any moneys thereunder or otherwise due to the Pledgor in respect of, or generated through the usage of, any of the Pledge Collateral; (F) to exercise any of the rights of the Pledgor arising under or in connection with the Pledge Collateral or to delegate to another Person, in substitution of such attorney-in-fact, the exercise of such rights of the Pledgor, under such terms as such attomey-in-fact shall deem proper or necessary; (G) to collect, claim and receive all moneys and avail itself of all benefits that accrue and that may become due and payable to the Pledgor with respect to the Pledge Collateral and to hold the same as security for the timely payment and discharge by the Pledgor of the Secured Obligations; (H) to send written notice to any Subsidiary or Joint Venture Vehicle of the Pledgor instructing such Subsidiary or Joint Venture Vehicle to pay all moneys due and owing to the Pledgor from time to time (whether payable in U.S. dollars, in another convertible foreign currency or otherwise), with respect to the Pledge Collateral to such bank accounts as shall be designated in the notice; (I) to institute and maintain such suits and proceedings as such attorney-in-fact shall deem expedient to prevent any impairment of the Pledge Collateral or to preserve and protect such attorney-in-fact's interest therein; (J) to execute and deliver such deeds of conveyance or sale as may be necessary or proper for the purpose of conveying full title and ownership, free from any claims and rights of the Pledgor, to any of the Pledge Collateral, after foreclosure thereof; and (K) in general, to sign such agreements and documents and perform such acts and things required, necessary or, in the opinion of such attorney-in-fact, advisable, to fully accomplish the purpose hereof. (ii) This special power of attorney shall be deemed coupled with an interest, and cannot be revoked by the Pledgor until the discharge in full of the Secured Obligations. Upon the earlier to occur of: (A) delivery to the Pledgor of written notice from any Noteholder pursuant to a notice delivered under Section 9.1 of the Note Agreement or 9 the Pledgee stating that an Event of Default has occurred and is continuing; or (B) a Responsible Officer obtaining knowledge of any condition or event which constitutes an Event of Default, the Pledgor shall abstain from exercising any rights with respect to the Pledge Collateral which shall be inconsistent with the exercise of the rights and functions herein granted to the Pledgee as attorney-in-fact, including abstaining from collecting, claiming and receiving any moneys with respect to the Pledge Collateral; provided, that in the Pledgee -------- shall be under no duty to deliver the written notice described in clause (A) of the foregoing unless and until it has received a notice from any Noteholder stating that an Event of Default has occurred and is continuing. To the extent that the Pledgor shall receive any moneys in respect thereof notwithstanding the provisions of this paragraph (ii), it shall be deemed to have received such funds for the account of the Pledgee and shall hold the same in trust and promptly pay the same to the Pledgee or as it may direct from time to time. SECTION 8. APPLICATION OF PROCEEDS. All moneys collected by the ----------------------- Pledgee upon any sale or other disposition of the Pledge Collateral, together with all other moneys received by the Pledgee hereunder, shall be applied in the following order of priority: (a) FIRST, to the payment of such amounts as are due and payable to the Pledgee or any of its agents (or any prior collateral agent) pursuant to this Agreement or the Appointment Agreement, including the payment of all costs and expenses incurred by the Pledgee in connection with such sale, the delivery of the Pledge Collateral or the collection of any such moneys (including, without limitation, attorneys' fees and expenses); (b) SECOND, to the payment of the Secured Obligations in the following order of priority to the extent such amounts are not sufficient to repay the Secured Obligations in full and within each category on a pro rata basis among the Noteholders: (i) to the payment of charges, fees, indemnity obligations, costs and expenses due under the Note Agreement or the other Note Documents to the Noteholders; (ii) to the payment of interest on interest which became overdue, if any, with respect to the Notes; (iii) to the payment of interest on principal with respect to the Notes which became overdue; (iv) to the payment of interest accrued with respect to the Notes; (v) to the payment of principal with respect to the Notes; and (vi) to the payment of premium, if any, with respect to the Notes. (c) THIRD, any balance of such money as directed in writing by the Pledgor. 10 SECTION 9. PURCHASERS OF PLEDGE COLLATERAL. Upon any sale of the ------------------------------- Pledge Collateral by the Pledgee hereunder (whether by virtue of the power of sale herein granted, pursuant to judicial process or otherwise), the receipt of the Pledgee or the officer making the sale shall be a sufficient discharge to the purchaser or purchasers of the Pledge Collateral so sold; and such purchaser or purchasers shall not be obligated to see to the application of any part of the purchase money paid over to the Pledgee or such officer or be answerable in any way for the misapplication or nonapplication thereof. SECTION 10. FURTHER ASSURANCES. Without limitation to the provisions ------------------ of Section 7, the Pledgor agrees that it will (in each case at its own expense): (a) prepare, execute, file and refile such financing statements, continuation statements and other documents in such offices as may be necessary or reasonably desirable and wherever required or permitted by law in order to perfect and preserve the Pledgee's security interest in the Pledge Collateral, and the Pledgee agrees to execute such financing statements and other documents prepared by the Pledgor, and the Pledgor hereby irrevocably authorizes the Pledgee following am Event of Default, as its attorney-in-fact, to file or cause to be filed such financing statements and amendments thereto and other documents relative to all or any part of the Pledge Collateral without the signature of the Pledgor where permitted by law; (b) comply with the requirements of Section 7.13 of the Note Agreement (which provision is incorporated in full herein by reference); (c) do such further acts and things (including, without limitation, paying all required documentary and other stamp tax) and execute and deliver to the Pledgee such additional conveyances, assignments, agreements and instruments (including without limitation one or more pledge agreements in form and substance satisfactory to the Pledgee) as may be reasonably required or deemed advisable to carry into effect the purposes of this Agreement or to further assure and confirm unto the Pledgee its rights, powers and remedies hereunder; and (d) cause its Legal Mortgage Subsidiaries and each director thereof appointed at any time by the Pledgor or any Subsidiary of the Pledgor: (i) to register immediately in the register of members or similar document of the Legal Mortgage Subsidiary any transfer of Pledged Securities which the Pledgee may request according to the terms of this Agreement; and (ii) to deliver to the Pledgee a signed and undated letter of resignation from such director, in the form of Annex C. SECTION 11. THE PLEDGEE. (a) The Pledgee will hold in accordance with ------------ the terms and provisions of the Appointment Agreement (which terms and provisions are incorporated in full herein by reference) all Pledge Collateral at any time received by it under this Agreement. It is expressly understood and agreed that the obligations of the Pledgee as holder of the Pledge Collateral and interests therein and with respect to the disposition thereof, and otherwise under this Agreement, are only those expressly set forth 11 in this Agreement and in the Appointment Agreement, and no implied covenants or obligations shall be read into this Agreement against the Pledgee. (b) In case of any litigation under this Agreement, or in case of any enforcement of remedies or exercise of rights upon the occurrence of an Event of Default, or in case the Pledgee deems that, by reason of any present or future law of any jurisdiction, it may not or may not effectively exercise any of the powers, rights or remedies herein granted to it or hold title to the properties, in trust, as herein granted, or take any other action which may be desirable or necessary in connection therewith, the Pledgee shall be entitled to appoint, to the extent consistent with applicable law, one or more separate or additional co-agents. In the event that the Pledgee appoints an individual or institution as a separate or additional co-agent: (i) any appointment of any such co-agent by the Pledgee shall be made only with the prior written consent of the Pledgor and the Required Holder(s) (except that, if the Pledgee shall have received written notice from any Holder of Secured Obligations that a Default or an Event of Default has occurred and is continuing, such consent shall be required only of the Required Holder(s)), which consent shall not be unreasonably withheld or delayed; and (ii) each and every remedy, power, right, title, interest, trust, duty and obligation expressed or intended by this Agreement to be exercised by or vested in, conveyed to or imposed upon, the Pledgee with respect thereto shall be exercisable by and vest in such separate or additional co-agent but only to the extent necessary, appropriate or desirable to enable such separate or additional co-agent to exercise or have vested in it such powers, rights, trusts, titles, interests, duties and obligations and remedies, and every covenant and obligation necessary, appropriate or desirable to the exercise thereof by such separate or additional co-agent shall run to and be enforceable by either or any of them. The Pledgee shall have the right to terminate the appointment of any such co-agent hereunder with the prior written consent of the Pledgor and the Required Holder(s) (except that, if the Pledgee shall have received written notice from any Holder that a Default or an Event of Default has occurred and is continuing, such consent shall be required only of the Required Holder(s)), which consent shall not be unreasonably withheld or delayed. Should any instrument in writing from the Pledgor be required by the separate or additional co-agent so appointed by the Pledgee to more fully and certainly vest in and confirm to it such remedies, rights, powers, titles, interests, trusts, duties and obligations, any and all such instruments in writing shall, on request, be executed, acknowledged and delivered by the Pledgor. In case any separate or additional co-agent, or a successor to either, shall become incapable of acting, resign or be removed, all the remedies, rights, powers, titles, interests, trusts, duties and obligations of such separate or additional co-agent; so far as permitted by law, shall vest in and be exercised by the Pledgee until the appointment of a new agent or successor to such separate or additional co-agent. SECTION 12. TRANSFER BY THE PLEDGOR. The Pledgor will not assign, ------------------------ sell or otherwise dispose of grant any option with respect to, or create, incur, assume or suffer to exist any Lien on any portion of the Pledge Collateral or any other Securities, except: (i) liens in favor of Persons other than the Noteholders permitted under 12 Section 8.1 of the Note Agreement; and (ii) Liens created by this Agreement and by any other Pledge Document. SECTION 13. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE PLEDGOR. --------------------------------------------------------- The Pledgor represents and warrants that: (i) it is the legal, record and beneficial owner of, and has good and marketable title to, the Securities described as owned by it on Annex A hereto in existence on the date hereof, subject to no Lien (except the Lien created by this Agreement); (ii) it has full power, authority and legal right to pledge all such Securities pursuant to this Agreement; (iii) all the shares of such Securities have been duly and validly issued, are fully paid and nonassessable; (iv) this Agreement (and any other pledge agreement entered into as contemplated by this Agreement) creates, as security for the Secured Obligations, a valid and enforceable first priority perfected Lien on all of the Pledge Collateral in existence on the date hereof, in favor of the Pledgee for the benefit of the Noteholders, subject to no Lien in favor of any other Person; (v) other than registrations and filings described on Annex B hereto (all of which have been made prior to the date hereof or will be made within the relevant statutory period) no consent, filing, recording or registration is required to perfect the Lien purported to be created by this Agreement; and (vi) the stock powers are duly executed and delivered and give the Pledgee the rights and authority they purport to give. The Pledgor covenants and agrees that: (i) it will defend the Pledgee's right, tide and lien in and to the Pledge Collateral against the claims and demands of all Persons; and (ii) it will take all actions within its powers to ensure that it will have like title to and right to pledge any other property at any time hereafter pledged to the Pledgee as Pledge Collateral hereunder. SECTION 14. PLEDGOR'S OBLIGATIONS ABSOLUTE. The obligations of the ------------------------------ Pledgor under this Agreement shall be absolute and unconditional and shall remain in full force and effect without regard to, and shall not be released, suspended, discharged, terminated or otherwise affected by, any circumstance or occurrence whatsoever, including, without limitation: (i) any renewal, extension, amendment or modification of, or addition or supplement to or deletion from, the Note Agreement, any Note or any other instrument or agreement referred to therein or any assignment or transfer of any thereof; (ii) any waiver, consent, extension, indulgence or other action or inaction under or in respect of the Note Agreement, any Note or any other such instrument or agreement or any exercise or nonexercise of any right, remedy, power or privilege under or in respect of the Note Agreement, any Note or any other such instrument or agreement; (iii) any furnishing of any additional security to the Pledgee or any acceptance thereof or any sale, exchange, release, surrender or realization of or upon any security by the Pledgee; or (iv) any invalidity, irregularity or unenforceability of all or part of the Secured Obligations or of any security therefor or the termination or release of any security therefor. SECTION 15. REGISTRATION. (a) If an Event of Default shall have ------------- occurred and be continuing and the Pledgor shall have received from the Pledgee a written request or requests that the Pledgor cause any registration, qualification or compliance under any securities law or laws, or listing requirements, to be effected with respect to all or any part of the Pledged Securities, the Pledgor as soon as practicable and at its expense will use 13 its best efforts to cause such registration to be effected (and be kept effective) and will use its best efforts to cause such qualification and compliance to be effected (and be kept effective) as may be so requested and as would permit or facilitate the sale and distribution of such Pledged Securities, including without limitation, registration under any applicable securities laws (including the Securities Act) and appropriate compliance with any other governmental and listing requirements, provided that the Pledgee shall furnish to the Pledgor such information regarding the Pledgee as the Pledgor may request in writing and as shall be required in connection with any such registration, qualification or compliance. The Pledgor will cause the Pledgee to be kept reasonably advised in writing as to the progress of each such registration, qualification or compliance and as to the completion thereof, will furnish to the Pledgee such number of prospectuses, offering circulars or other documents incident thereto as the Pledgee from time to time may reasonably request, and agrees to indemnify and hold harmless the Pledgee and all others participating in such registration, qualification or compliance (or the distribution of such Pledged Securities) against all losses, liabilities, claims or damages caused by any untrue statement (or alleged untrue statement) of a material fact contained therein (or in any related registration statement, notification or the like) or by any omission (or alleged omission) to state therein (or in any related registration statement, notification or the like) a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as the same may have been caused by an untrue statement or omission based upon information furnished in writing to the Pledgor by the Pledgee expressly for use therein. (b) If at any time when the Pledgee shall determine to exercise its right to sell all or any part of the Pledged Securities pursuant to Section 7 such Pledged Securities or the part thereof to be sold shall not, for any reason whatsoever, be effectively registered under any applicable securities law or laws (including the Securities Act), the Pledgee may sell such Pledged Securities or part thereof by private sale in such manner and under such circumstances as the Pledgee may deem necessary or advisable in order that such sale may legally be effected without such registration, provided that at least 10 days' notice of the time and place of any such sale shall be given to the Pledgor. Without limiting the generality of the foregoing, in any such event the Pledgee: (i) may proceed to make such private sale notwithstanding that a registration statement for the purpose of registering such Pledged Securities or part thereof shall have been filed under such securities laws; (ii) may approach and negotiate with a single possible purchaser to effect such sale; and (iii) may restrict such sale to a purchaser who will represent and agree that such purchaser is purchasing for its own account, for investment, and not with a view to the distribution or sale of such Pledged Securities or any part thereof. In the event of any such sale, the Pledgee shall incur no responsibility or liability for selling all or any part of the Pledged Securities at a price which the Pledgee (acting in accordance with instructions from the Required Holder(s)) may in good faith deem reasonable under the circumstances, notwithstanding the possibility that a substantially higher price might be realized if the sale were deferred until after registration as aforesaid. SECTION 16. INDEMNITY. (a) The Pledgor covenants and agrees to pay to ---------- the Pledgee from time to time, and the Pledgee shall be entitled to, reasonable compensation for all services rendered by it, and the Pledgor will pay or reimburse the Pledgee upon its request for all reasonable expenses, disbursements and advances incurred 14 or made by the Pledgee in accordance with any of the provisions of this Agreement or any other Pledge Document (including the compensation and the expenses and disbursements of its agents and counsel and of all Persons not regularly in its employ). (b) The Pledgor also covenants to indemnify the Pledgee (which, for purposes of this Section 16, shall include in directors, officers, employees and agents) for, and to hold it harmless from and against, any and all loss, liability or expense reasonably incurred without gross negligence, wilful misconduct or bad faith on the part of the Pledgee, arising out of or in connection with the acceptance or administration of this trust, the exercise of any rights and remedies arising out of this Agreement or any other Pledge Document, or the performance of any of its duties, including the reasonable costs and expenses of defending itself against any claim of liability and in enforcing any provision of this Agreement or any other Pledge Document (except any liability incurred with gross negligence, wilful misconduct or bad faith on the part of the Pledgee), with interest thereon at a rate equal to that in the Pledgee's customary banking practice with respect to overdrafts (including the imposition of interest, fund, wage and administrative fees) from the date the same shall have been paid until actually reimbursed. (c) The obligations of the Pledgor under this Section 16 to compensate and indemnify the Pledgee and to pay or reimburse the Pledgee for reasonable expenses, disbursements and advances shall constitute additional indebtedness hereunder and shall survive the satisfaction, discharge or other termination of this Agreement and any other Pledge Document and the resignation or removal of the Pledgee hereunder (d) To secure payment of such compensation, reimbursement and indemnification, the Pledgee shall have a claim and Lien prior to that of any party, which claim and Lien shall constitute Secured Obligations secured by this Agreement. SECTION 17. TERMINATION: RELEASE, Upon: -------------------- (a) the receipt by the Pledgee of a certificate executed by each Purchaser certifying that the conditions set forth in Section 5.3 of the Note Agreement to the release of the Pledge Collateral have been satisfied; or (b) the date on which the Secured Obligations have been discharged in full; this Agreement shall terminate, and the Pledgee, at the written request and expense of the Pledgor, will promptly execute and deliver to the Pledgor a proper instrument or instruments acknowledging the satisfaction and termination of this Agreement, and will duly assign, transfer and deliver to the Pledgor, without recourse and without any representation or warranty, such of the Pledge Collateral as may be in the possession of the Pledgee and has not theretofore been sold or otherwise applied or released pursuant to this Agreement, together with any moneys at the time held by the Pledgee hereunder, SECTION 18. NOTICES. All notices and other communications hereunder ------- shall be in the English language, in writing and made at the addresses, in the manner and 15 with the effect provided in Section 11.10 of the Note Agreement, provided that, for this purpose, the address of the Pledgee shall be as follows: The Chase Manhattan Bank, N.A. Corporate Trust Administration 4 Chase MetroTech Center, 3rd Floor, Brooklyn, New York 11245 Facsimile: (718) 242-5885 or (718) 242-3529 or sent to the Pledgee at such other address as it may designate for itself by notice given in accordance with this Section 18. SECTION 19. MISCELLANEOUS. ------------- 19.1 Benefit of Agreement. -------------------- This Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective successors and permitted assigns of the parties hereto and shall inure to the benefit of the Noteholders; provided, however, ----------------- that the Pledgor may not, without the prior written consent of the Pledgee (acting on the instructions of all the Noteholders), assign or transfer any of its rights or obligations hereunder. The Pledgee may transfer, assign or grant its rights hereunder in connection with an assignment or transfer of all or any part of its interest in and rights under this Agreement pursuant to the provisions of Sections 10 and 11 of the Appointment Agreement, 19.2 Amendment, Waiver. ----------------- This Agreement may be changed, waived, discharged or terminated only with the written consent of the Required Holder(s), the Pledgor and the Pledgee. 19.3 Governing Law. ------------- This Agreement is a contract made under the laws of the State of New York of the United States and shall for all purposes be construed and enforced in accordance with, and the rights of parties shall be governed by, the laws of such State. 19.4 Section Headings, Counterparts. ------------------------------ The headings of the several sections and subsections in this Agreement and the title of this Agreement are inserted for convenience only and shall not any way affect the meaning or construction of any provision of this Agreement. This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original, but all of which together shall constitute one and the same instrument. 19.5 Severability. ------------ Any prov Any provision of this Agreement which is prohibited orunenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition orunenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 16 19.6 Consent to Jurisdiction: Service of-Process. ------------------------------------------- For the purposes of assuring that the Pledgee and the Noteholders may enforce their respective rights under this Agreement, the Pledgor for itself and its successors and assigns, hereby irrevocably: (i) agrees that any legal or equitable action, suit or proceeding against the, Pledgor arising out of or relating to this Agreement or the other Note Documents (including, without limitation, the Agreement of Assignment as Collateral, dated as of the date hereof, among the Pledgor, the Pledgee and the Purchasers), or any transaction contemplated hereby or the subject matter of any of the foregoing may be instituted in any state or Federal court in the Borough of Manhattan in the State of New York; (ii) waives any objection which it may now or hereafter have to the venue of any action, suit or proceeding in the State of New York or any claim of forum non conveniens in the State of New York; and (iii) irrevocably -------------------- submits itself to the non-exclusive jurisdiction of any state or Federal court of competent jurisdiction in the Borough of Manhattan in the State of New York for purposes of any such action, suit or proceeding. Without limiting the foregoing, the Pledgor hereby appoints, in the case of any such action or proceeding brought in the courts of or in the State of New York, CT Corporation System, with offices on the date hereof at 1633 Broadway, New York, New York 10019, to receive, for it and on its behalf, service of process in the State of New York with respect thereto, provided the Pledgor may appoint any other person, reasonably acceptable to the Pledgee (acting on the instructions of the Required Holder(s)), with offices in the State of New York to replace such agent for service of process upon delivery to the Noteholders of a reasonably acceptable agreement of such new agent agreeing so to act. The Pledgor agrees that service of process by means of notice (as provided in Section 11.10 of the Note Agreement) of any such action, suit or proceeding with respect to any matter as to which it has submitted to jurisdiction as set forth in this Section 19.6 shall be taken and held to be valid personal service upon it. 19.7 No Waiver: Remedies Cumulative. ------------------------------ No failure or delay on the part of the Pledgee or any Noteholder in exercising any right, power or privilege hereunder or under any other Pledge Document, as the case may be, and no course of dealing between the' Pledgor and the Pledgee or any Noteholder shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder or under any other Pledge Document preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder or thereunder. The rights, powers and remedies herein or in any other Pledge Document expressly provided are cumulative and not exclusive of any rights, powers or remedies which the Pledgee or any Noteholder, as the case may be, would otherwise have. No notice to or demand on the Pledgor in any case shall entitle the Pledgor to any other or further notice or demand in similar or other circumstances or constitute a waiver of the rights of the Pledgee or any Noteholder to any other or further action in any circumstances without notice or demand. 19.8 New Secured Lenders. ------------------- The parties acknowledge that Section 8.1 of the Note Agreement contemplates that the Noteholders may enter into an intercreditor agreement for the purpose of sharing the Pledge Collateral with the other parties to such agreement in accordance with the terms thereof. It is understood that at the time of such event, the Pledgor, the Pledgee and the Noteholders will investigate whether and how this Agreement may be amended to accommodate and give effect to such an intercreditor agreement. 17 IN WITNESS WHEREOF, The Pledgor and the Pledgee have caused this Agreement to be executed by their duly elected officers duly authorized as of the date first above written. MAGINET CORPORATION By : /s/ James A. Barth Name : James A. Barth Title : Chief Financial Officer THE CHASE MANHATTAN BANK, N.A., as Collateral Agent By: /s/ Name : Title : IN WITNESS WHEREOF, the Pledgor and the Pledgee have caused this Agreement to be executed by their duly elected officers duly authorized as of the date first above written. MAGINET CORPORATION, THE CHASE MANHATTAN BANK, N.A. By: /s/ Rosama E. Abueva Name: ROSANNA E. ABUEVA Title: SECOND VICE PRESIDENT ANNEX A to PLEDGE AGREEMENT LIST OF SECURITIES AND PLEDGED SECURITIES -----------------------------------------
Number of Number of Name of Subsidiary or Securities Pledged Securities Percentage of Outstanding Joint Venture Vehicle (ordinary shares) (ordinary shares) Shares of Capital Stock Owned by Pledged by Pledgor Pledgor Pledgor Pacific Pay Video (HK) Limited 10,000 6,600 100% 66% PPV Signapore Pte Ltd. 100,000 66,000 100% 66% PPV Signapore Pte Limited (ACN) 100 66 100% 66% 059 748 588) Pacific Pay Video New Zealand 100 66 100% 66% Limited Pacific Pay Video (Korea) Ltd. 266,667 176,000 85% 66% Pacific Pay Video International 1,000 1,000 100% 100P% Pacific Pay Video Limited 100 100 100% 100%
ANNEX B to PLEDGE AGREEMENT Registrations and Filings ------------------------- 1. Hong Kong --------- Registration of the name of the Pledgee in the register of members or shareholders of the Subsidiary. 2. Singapore --------- Registration of the name of the Pledgee in the register of members or shareholders of the Subsidiary. 3. Australia --------- Registration of the name of the Pledgee in the register of members or shareholders of the Subsidiary. 4. New Zealand ----------- Registration of the name of the Pledgee in the register of members or shareholders of the Subsidiary. 5. Korea ----- None. 6. California ---------- UCC-1 Financing Statement filed with the California Secretary of State. 7. Japan ----- None. ANNEX C to PLEDGE AGREEMENT Form of Director's Resignation Letter -------------------------------------- To: The Board of Directors of [name of Subsidiary/Joint Venture Vehicle] (the "Company") I, [name], hereby resign my position as a director of the Company with effect from the date set forth below and waive all claims to fees or compensation in connection with my resignation. Dated this____ date of____.[signature] [name] EX-10.25 5 BLOOMBERG INFORMATION Exhibit 10.25 BLOOMBERG INFORMATION TELEVISION/TM/ PROGRAMMING ------------------------------------------------ AFFILIATION AGREEMENT --------------------- AGREEMENT made this 3rd day of October, 1996, by and between BLOOMBERG L.P., a Delaware limited partnership ("Bloomberg") and MAGINET, a California corporation ("MagiNet"). For and in consideration of the conditions hereinafter set forth, the parties agree as follows: 1. RIGHTS GRANTED -------------- Bloomberg hereby grants to MagiNet, and MagiNet hereby accepts a non- exclusive license, right and commitment during the Term of this Agreement to distribute the BIT Programming to hotel rooms within the hotels to which MagiNet provides its services in the Asia Pacific Region, Europe, South Africa and Israel ("Hotels"). MagiNet shall not distribute the BIT Programming in a cut, edited or otherwise altered form. MagiNet may not copy or make any use of the BIT Programming other than as specifically set forth in this Agreement. MagiNet agrees to pay Bloomberg in accordance with the terms and conditions of Schedule 1 attached hereto. MagiNet agrees to provide Hotel and System reports to Bloomberg, as Bloomberg may reasonably request, for the purpose of verifying compliance with this Agreement. 2. TERM ---- Unless earlier terminated pursuant to the provisions of this Agreement, the term ("Term") of this Agreement shall be for a period of two (2) years from the date hereof and shall automatically renew for successive one (1) year terms unless either party notifies the other in writing of its intention not to renew no less than sixty (60) days before the expiration of the Term or any renewal term. 3. DELIVERY AND DISTRIBUTION ------------------------- (a) Delivery. -------- (i) Bloomberg shall make available to MagiNet a secure or encrypted signal of the BIT Programming by transmitting it via satellite or terrestrial delivery, such delivery to be coordinated by Bloomberg and MagiNet. The costs associated with the receipt at the Hotels of such signal shall be borne by MagiNet. (ii) Notwithstanding anything contained in the Agreement, it is understood and agreed that if, at any time in the future, Bloomberg shall choose to deliver its BIT Programming by means of new technology, which technology shall be used for delivery of programming by at least eighty percent (80%) of other program *** Confidential treatment requested pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission. providers in the industry, then Bloomberg shall have the right to discontinue distribution by satellite or any other outdated technology. (b) Distribution. MagiNet shall, at its own expense, distribute the BIT Programming to the Hotels in its entirety (24 hours per day), as and when transmitted by Bloomberg in the sequence received from Bloomberg in accordance with all applicable local, state and federal laws. (c) Availability. Notwithstanding any other provision of this Agreement to the contrary, MagiNet shall ensure that the BIT Programming is received by the hotel guests of each Hotel free of charge to such guests. Once the BIT Programing has been carried by any or all of MagiNet's Hotels, MagiNet shall have no right, during the term of this Agreement to delete the BIT Programming from any such Hotel (except in the event of force majeure, as defined in Section 8), or unless in MagiNet's reasonable judgment the quality of the BIT programming has so materially changed from the programming as of the date hereof as to make it fundamentally unacceptable to MagiNet's Hotel customers. (d) Piracy. MagiNet shall not itself, and shall not authorize others to, copy, take or otherwise reproduce any part of the BIT Programming without Bloomberg's prior written authorization and shall take reasonable and practical security measures to prevent the unauthorized or otherwise unlawful copying or taping by others. (e) Termination of BIT Programming. Bloomberg retains the right at all times to discontinue providing the BIT Programming (i) to any and all of the Hotels without incurring any liability upon thirty (30) days written notice to MagiNet in the event Bloomberg no longer engages in the business of providing BIT Programming (ii) to any single Hotel in the event there is no Recoupment (as defined below) of capital costs and preferred return on equity (as provided on Schedule 1) within nine (9) months of the commencement of delivery of BIT Programming to such Hotel, and (iii) to any Hotel, if the delivery of such signal, is contrary to or violates, any applicable law, rule or regulation. This Agreement may be terminated by Bloomberg at any time in the event MagiNet fails to perform any material obligation hereunder which is not cured after receipt of written notice thereof from Bloomberg within ten (10) days in regard to payment to be paid by MagiNet to Bloomberg and twenty (20) days in regard to all other obligations hereunder. (f) Non-exclusivity. Notwithstanding anything herein to the contrary, Bloomberg may market and distribute the BIT Programming to any Hotel in the Asia Pacific region, Europe, South Africa and Israel not under contract with MagiNet, and in the event a Hotel under contract with MagiNet elects not to receive the BIT Programming, Bloomberg may market and subsequently distribute the BIT to such Hotel. Bloomberg expressly reserves to itself any and all rights in the BIT Programming not herein specifically granted to MagiNet. Such reserved rights may be exercised and exploited by Bloomberg concurrently with and during the term hereof, freely and without limitation -2- or restriction, regardless of the extent to which the same are competitive with MagiNet or the license granted. 4. PROMOTION --------- Without limiting any other related obligations contained in this Agreement, from the date hereof and throughout the Term, MagiNet shall promote the BIT Programming in at least a comparable manner as it promotes other services. 5. TRADEMARKS ---------- Bloomberg will permit MagiNet and each Hotel to use the service marks, trademarks, trade names, logos and other BIT Programming indicia for the distribution and promotion of the BIT Programming, subject to Bloomberg's prior review and approval, which approval will not be unreasonably withheld. In addition, Bloomberg consents to the use of such indicia in MagiNet's Registration Statement on Form S-1 filed with the Securities and Exchange Commission on September 17, 1996, and any amendment thereto, and in the prospectus contained therein, provided however, that such use and reference to Bloomberg therein is subject to the prior review and approval of Bloomberg. 6. CONFIDENTIALITY --------------- Neither MagiNet nor Bloomberg shall disclose to any third party (other than its respective employees, consultant or agents in their capacity as such), any confidential business information concerning the other, including but not limited to, any information relating to identification of subscribers or financial material obtained through an audit. MagiNet and Bloomberg shall undertake reasonable commercial efforts to ensure that such employees, consultants, and agents maintain the confidentiality of such information. 7. INDEMNIFICATION --------------- (a) Bloomberg will indemnify MagiNet from and against any and all claims, liabilities, costs and expenses arising out of the provision of BIT Programming, pursuant to this Agreement, to the extent that such claims, damages, liabilities, costs and expenses are: (i) based upon alleged libel, slander, defamation, invasion of the right of privacy, or violation or infringement of copyright (other than music performance rights) arising out of the content of the BIT Programming, or based on alleged violations by the BIT Programming of literary or dramatic rights, and (ii) are not based upon any deletions, additions or alterations to the BIT Programming by MagiNet, any Hotel or third party. (b) MagiNet will indemnify Bloomberg, its parent and related and affiliated companies from and against any and all claims, liabilities, costs and expenses arising out of the distribution of the BIT Programming, pursuant to this Agreement, to the extent that such claims, -3- damages, liabilities, costs and expenses are based upon alleged libel, slander, defamation, invasion of the right to privacy or violation or infringement of copyright (other than music performance rights) based upon or growing out of deletions, additions or alterations to the BIT Programming by MagiNet or any System. Notwithstanding anything contained herein to the contrary, MagiNet agrees that it shall pay and forever hold Bloomberg harmless from all payments and fees arising out of the provision of the BIT Programming to Hotels or the exhibition or use of the Bit Programming by MagiNet. MagiNet acknowledges the BIT Programming provides information taken from the New York Stock Exchange, The American Stock Exchange, NASDAQ and others and that the Bloomberg does not guarantee the sequence, accuracy, completeness, or timeliness of the data and information contained therein. Accordingly, anything to the contrary herein set forth notwithstanding, Bloomberg, its parent, affiliates or subsidiaries shall not directly or indirectly, be liable, in any way, to MagiNet, to Hotels, to any of the Hotel's viewers, to any person or entity to whom or to which the BIT Programming shall be provided, or to any other person or entity for (i) any inaccuracies or errors in or omission of, any information or data therein; (ii) any delays or errors in the transmission or delivery of any part thereof, or (iii) any loss or damage arising therefrom or occasioned thereby, or by any reason of nonperformance, or interruption in any such information or data transmitted by Bloomberg for any reason. (c) The party entitled to indemnification hereunder (the "Indemnified Party") shall notify the other party hereto (the "Indemnifying Party") in writing of the claim or action for which such indemnity applies. The Indemnifying Party shall undertake the defense of any such claim or action and permit the Indemnified Party to participate therein at the Indemnified Party's own expense. The settlement of any such claim or action by an Indemnified Party, without the Indemnifying Party's prior written consent, shall release the Indemnifying Party from its obligations hereunder with respect to such claim or action so settled. 8. FORCE MAJEURE ------------- If Bloomberg shall fail to make timely delivery of the BIT Programming hereunder by reason of any act of God, war, fire, flood, strike, labor dispute, public disaster, transportation or laboratory difficulties, order or decree of governmental agency, failure or degradation in performance of the satellite or transponders providing Bloomberg's signal or feed, scrambling/de-scrambling equipment or any other equipment owned and maintained by others, any failure at the origination and up linking center used by Bloomberg, or any other similar or dissimilar cause beyond the control of Bloomberg, such failure on the part of Bloomberg shall not be deemed to be a breach of this Agreement and shall not extend the term thereof. 9. ASSIGNMENT ---------- (a) Bloomberg may freely assign this Agreement, or any portion thereof, without the consent of MagiNet. In the event of any valid assignment of this Agreement by Bloomberg, -4- Bloomberg shall be relieved of all obligations arising thereafter and MagiNet shall look solely to the assignee for enforcement of such obligations. MagiNet agrees that upon receipt of written notice of assignment by Bloomberg, monies due Bloomberg shall be paid to any third party assignee in accordance with Bloomberg's instructions without offset, deduction, counterclaim or other credits which the MagiNet may have against Bloomberg. (b) This Agreement may not be assigned by MagiNet, either voluntarily or by operation of law, without the prior written consent of Bloomberg; provided however, that this Agreement shall automatically be assigned to MagiNet's successor corporation in connection with its redomiciliation in Delaware. Any such assignment shall not relieve MagiNet of its obligations hereunder. 10. THE BLOOMBERG TERMINAL ---------------------- As an incentive to persuade certain top business oriented Hotels to carry BIT Programming, MagiNet may, with the prior consent of Bloomberg, offer to install a BLOOMBERG terminal (for the term during which BIT Programming is delivered to the Hotel) either in the Hotel's business center or concierge floor, provided: (a) Bloomberg shall have final absolute approval over which Hotels are supplied with a BLOOMBERG terminal; (b) Each Hotel shall pay all installation and monthly phone charges as well as the charges for the installation of the equipment to deliver the Bloomberg service; and (c) Each Hotel shall sign a Bloomberg Agreement and Schedule of Services. 11. AUDIT ----- (a) Subscriber Records. MagiNet shall keep accurate and complete records and accounts of billings and all matters which pertain to the Hotels and are relevant to or required by this Agreement. Bloomberg shall have the right to examine and audit those records and accounts, no more than twice in each 365 day period, on reasonable notice to MagiNet to be conducted during normal business hours during the Term and for one (1) year after the final termination. Within two (2) weeks of Bloomberg's request, MagiNet shall provide to Bloomberg all information requested in order to verify the geographical limits of any government authorization pertaining to Hotels. (b) Monthly Reports. On or before the fifteenth (15th) day of each month during the Term of this Agreement, MagiNet shall provide Bloomberg a true and complete report for the prior month signed by MagiNet's chief financial officer, or his/her authorized designee, -5- specifying for each of MagiNet's Hotels which carry the BIT Programming the following information: (i) the name of the Hotel; (ii) the total number of Hotel rooms; (iii) the fee charged by MagiNet for each room in the Hotel; (iv) itemization of capital costs related to each Hotel; (v) other information reasonably requested by Bloomberg for accurate billing purposes; and (vi) the information required pursuant to Exhibit A hereto. 12. DEFINITIONS ----------- As used in this Affiliation Agreement, the following term has the following meaning: (a) "Bloomberg Information Television ("BIT") Programming" means the program service covered by this Agreement, which is offered by Bloomberg consisting primarily of world news, business news, financial market data, sports, health and general information. 13. GENERAL ------- (a) A waiver by either party of any of the terms or conditions of this Agreement shall not be deemed or construed to be a waiver of such term or condition for the future, or of any subsequent breach thereof. All remedies, rights, undertakings, obligations and agreements contained in this agreement shall be cumulative and none of them shall be in limitation of any other remedy, right, undertaking, obligation or agreement of either party. (b) All notices, statements and other documents required to be given shall be given in writing either by personal delivery or mail at the respective addresses: If to MagiNet: If to Bloomberg: MagiNet Bloomberg L.P. Tasman Drive 499 Park Avenue Sunnyvale, CA 94089 New York, NY 10022 ATTN: Kenneth B. Hamlet ATTN: Emilia Fazzalari -6- (c) This Agreement and all matters or issues collateral thereto shall be governed by the laws of the State of New York, without reference to its choice of law doctrine, and any applicable rules and regulations of the Federal Communications Commission. (d) This Agreement constitutes the entire agreement between Bloomberg and MagiNet with respect to the subject matter herein contained and this Agreement cannot be changed or terminated orally, and no changes, amendments or assignments thereof shall be binding upon Bloomberg until accepted in writing by a duly authorized officer of Bloomberg. (e) In the event any provision of this Agreement is found to be invalid, illegal or unenforceable, the validity, legality and enforceability of any of the remaining provisions shall not in any way be affected or impaired thereby. (f) This Agreement supersedes all prior written or oral communications or understanding between the parties concerning the subject matter. (g) Each Hotel receiving the BIT Programming shall agree to be bound by the terms of this Agreement applicable to such Hotel. (h) Bloomberg may, in its absolute discretion, withdraw the BIT Programming, or any portion thereof, if Bloomberg determines that telecast thereof would or might infringe upon the rights of others or violate any law, court order, governmental regulation or other ruling of any government agency, or constitute a breach of the use permitted hereby of the BIT Programming or the material or rights contained therein, or subject Bloomberg to any material liability with respect to the distribution of BIT Programming or otherwise. IN WITNESS WHEREOF, the parties have executed this agreement as of the above date. MAGINET BLOOMBERG L.P. BY: Bloomberg, Inc., General Partner By: /s/ James A Barth By: /s/ Louis V. Eccleston --------------------------------- ----------------------- Name: James A. Barth Name: Louis V. Eccleston ------------------------------- --------------------- Title: Executive Vice President, CFO Title:____________________ ------------------------------- 405 Tasman Drive 499 Park Avenue Sunnyvale, CA 94089 New York, NY 10022 -7- SCHEDULE 1 ---------- Service Rates ------------- MagiNet shall sell the BIT Programming to Hotels at approximately [***] per Hotel room per month (but for not less than [***] per Hotel room per month). MagiNet will use its best efforts to secure the best possible prices for the BIT Programming. MagiNet shall retain 100% of the gross revenue generated from amounts paid to MagiNet by Hotels for the BIT Programming until MagiNet has gross received revenues in an amount equal to capital costs (such capital costs related only to the delivery of the BIT Programming) plus a preferred return on capital equal to [***]. Such total capital costs (along with the preferred return) per Hotel shall not be more than [***]. All other expenses of MagiNet shall not be included in the calculation of these capital costs. MagiNet agrees to itemize the specific capital costs with respect to each Hotel for review by Bloomberg. To the extent such capital costs are also applicable to the receipt of other services, such costs shall be allocated accordingly for purposes of this Agreement. Once gross revenues equal to capital costs plus the above-referenced preferred return on capital have been paid to MagiNet by Hotels ("Recoupment"), MagiNet must pay a license fee to Bloomberg equal to [***] of the gross revenues from the sale of BIT Programming to the Hotels. Recoupment shall be measured on a Hotel by Hotel basis. Notwithstanding anything herein to the contrary, in the event the capital costs and preferred return on capital will not be paid within nine (9) months of the commencement of BIT Programming by any single Hotel, MagiNet shall not offer the BIT Programming to any such Hotel. In addition, to the extent that a Hotel is in default of any payment due MagiNet for receipt of the BIT Programming, MagiNet shall not offer or provide the BIT Programming to any Hotel that is a member of the same chain of Hotels and is under common ownership until such non- paying hotel shall satisfy any outstanding payment obligations to MagiNet. *** Confidential treatment requested pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission. -8- EXHIBIT A --------- (MagiNet to list all Hotels* as defined in the Agreement) - - Data - - Name and Address of Hotel - - Hotel Representative Address Telephone - - Service Launch Date - - Number of Hotel rooms - - Chanel Carrying the BIT Programming - - Name of Town, County, State and Zip Code of Hotel's Operating Area -9- EX-10.28 6 SUMMARY OF TERMS FOR SECOND AMENDMENT 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 (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 ------------------------ 09/30/96 Waive 12/31/96 Waive 03/31/97 8,000,000 06/30/97 6,000,000 09/30/97 4,000,000 ------------------------ SECTION 8.4 TOTAL DEBT TO TOTAL ADJUSTED CAPITAL - Default Level 09/30/97 85% SECTION 8.5 DEBT TO HISTORICAL EBITDA - Default Level 03/31/97 Waive 06/30/97 Waive 09/30/97 Waive 12/31/97 6.5 SECTION 8.6 HISTORICAL EBITDA - Default Level ------------------------ 03/31/97 Waive 06/30/97 Waive 09/30/97 1 12/31/97 5,675,000 03/31/98 15,907,000 06/30/98 22,093,000 09/30/98 28,085,000 12/31/98 28,445,000 03/31/99 30,333,000 06/30/99 32,097,000 09/30/99 33,738,000 12/31/99 35,223,000 03/31/00 36,507,000 06/30/00 37,700,000 ------------------------ SECTION 8.9 CUMULATIVE INSTALLED ROOMS - 2x Default Level 06/30/97 138,284 09/30/97 138,284
4 EXHIBIT B IPO + MagiNet and Prodac Consolidated -------------------------------------
SECTION 8.3 ADJUSTED CONSOLIDATED NET WORTH - Default level 9/30/96 Waive 12/31/96 Waive 3/31/97 35,000,000 6/30/97 35,000,000 9/30/97 35,000,000 12/31/97 35,000,000 03/31/98 35,000,000 06/30/96 35,000,000 09/30/96 35,000,000 SECTION 8.5 DEBT TO HISTORICAL EBITDA - Default Level 03/31/97 Waive 06/30/97 Waive 09/30/97 6.5 12/31/97 4.5 SECTION 8.6 HISTORICAL EBITDA - Default Level 03/31/97 Waive 06/30/97 2,500,000 09/30/97 4,500,000 12/31/97 10,000,000 03/31/98 16,000,000 06/30/98 22,000,000 09/30/98 30,000,000 12/31/98 40,000,000 03/31/99 45,000,000 06/30/99 50,000,000 09/30/99 55,000,000 12/31/99 62,000,000
5 EX-10.29 7 AGREEMENT OF ASSIGNMENT AS COLLATERAL EXHIBIT 10.29 (Pledge Agreement (Jaspanese law)) AGREEMENT OF ASSIGNMENT AS COLLATERAL This AGREEMENT OF ASSIGNMENT AS COLLATERAL, dated as of August 15, 1995 among MAGINET CORPORATION, a corporation organized under the laws of the State of California, as assignor (the "Assignor"), and The Chase Manhattan Bank, N.A., a national banking association, as collateral agent for the benefit of the Noteholders (the "Agent") and the banks and financial institutions named in Schedule A attached hereto (collectively the "Purchasers"). Capitalized terms used herein shall have the meanings provided in Section W I T N E S S E T H : - - - - - - - - - - - WHEREAS, the Assignor and the Purchasers have entered into the Note Agreement providing for the issuance and sale of the Notes and the issuance of the Warrants an contemplated therein; WHEREAS, the Purchasers, the Assignor and the Agent have entered into the Appointment Agreement providing for the appointment of the Agent to act as collateral agent for the benefit of the Noteholders under the Security Documents (including this Agreement); WHEREAS, it is at condition precedent under the Note Agreement to each Purchaser's obligation to purchase and pay for the Notes and to accept the Warrants to be issued under the Note Agreement that the Assignor shall have executed and delivered to the Purchasers this Agreement; WHEREAS, the Assignor acknowledges and confirms that this is one of the Pledge Agreements (as such term is defined in the Note Agreement); WHEREAS, the Assignor desires to execute this Agreement to satisfy the conditions described in the preceding paragraphs and to induce the Purchasers to enter into the Note Agreement and to purchase and pay for the Notes and to accept the Warrants (and to induce any future Noteholders so to do); NOW, THEREFORE, the Assignor hereby makes the following representations and warranties to the Assignees and hereby covenants and agrees with the Assignees as follows: SECTION 1. DEFINITIONS AND PRINCIPLES OF CONSTRUCTION. For all purposes of ------------------------------------------ this Agreement, (i) capitalized terms not otherwise defined herein shall have the meanings set forth in the Note Agreement and (ii) as used herein, references to "this Agreement", "hereunder" and words of like meaning shall refer to this Agreement of Assignment as Collateral. As used in this Agreement: "Agreement" and "this Agreement" shall mean this Agreement of Assignment as --------- -------- Collateral dated as of August 15, 1995, as the same may be modified, amended or supplemented from time to time. "Assignee" or "Assignees" shall mean at any time all or each of the Agent -------- --------- and the then Noteholders, which are initially the Purchasers. "Liquidating Dividend" shall have the meaning set forth in Section 5. -------------------- "Maximum Foreign Pledge" shall mean, in respect of PPV Japan, (i) prior to ----------------------- the occurrence of a Change in Tax Law Event, the number of securities representing 66% (or such other threshold amount as may become relevant after the date hereof in determining whether a security interest under this Agreement would result in the undistributed earnings of PPV Japan as determined for Federal income tax purposes being treated as a deemed dividend to the Assignor) of the total combined voting power of all classes of securities of PPV Japan entitled to vote and (ii) on and following the occurrence of a Change in Tax Law Event, the number of securities representing the maximum total combined voting power of all classes of securities of PPV Japan entitled to vote that may be pledged or assigned as collateral without creating a deemed dividend to the Assignor. "Noteholder" shall mean from time to time a registered holder of the Notes. ---------- "Pledge Documents" shall mean (i) this Agreement (and any other pledge or ---------------- assignment as collateral agreement in form and substance satisfactory to the Assignee entered into as contemplated by this Agreement), (ii) the Note Agreement and (iii) any other Note Document to which any Assignee is or will be a party. "PPV Japan" shall mean PPV Japan, Inc, a Japanese corporation. --------- "Secured ObligAtions" shall mean (i) the payment due of the principal of ------------------ and interest in respect of the Notes and payment of all other obligations and liabilities (including without limitation indemnities premium, if any, fees and interest thereon) of the Assignor owed to the Assignees (including the Agent in its individual capacity), now existing or hereafter incurred under the Note Agreement, each Note, the Appointment Agreement, any Pledge Document and this Agreement and (ii) the due performance and compliance with the terms of the Note Documents by the Assignor. "Securities" shall mean all the issued and outstanding shares of capital ---------- stock of PPV Japan (and any options, warrants or other rights to purchase such capital stock at any time prior to the date on which the Secured Obligations are discharged in full) owned by the Assignor, including without limitation all such shares of capital stock, options, warrants or other rights owned by the Assignor on the date hereof and all such capital stock, options, warrants or other rights acquired by the Assignor in the future. The Assignor hereby represents and warrants that on the date hereof (i) the Assignor owns 360 - 2 - shares of common stock of PPV Japan, which constitutes 90% of the issued and outstanding shares of capital stock of PPV Japan and (ii) there are no options, warrants, or other rights to purchase any Securities outstanding. "Subject Securities" shall mean 264 shares of capital stock of PPV Japan ------------------ owned by the Assignor and all other Securities from time to time assigned as collateral hereunder. The Subject Securities, together with all proceeds thereof (including any securities, property and moneys) received and at the time held by any of the Assignees hereunder, is hereinafter referred to as the "Subject Collateral." SECTION 2. ASSIGNMENT OF SECURITIES AS COLLATERAL. -------------------------------------- 2.1 Assignment. To secure the Secured Obligations, the Assignor hereby (i) ---------- assigns the Subject Securities to the Assignees as collateral (Jototanpo) and --------- delivers to the Agent the share certificates representing the Subject Securities to be held by the Agent on behalf of all the Assignees upon the terms and conditions set forth in this Agreement and (ii) assigns the Subject Collateral to the Assignees as collateral (Jototano). Each Assignee shall have an undivided -------- interest in the Subject Collateral so assigned, each such interest determined pro rata in accordance with the amount of the Secured Obligations from time to time owed to such Assignee. 2.2 Subsequently Acquired Securities. If the Assignor shall acquire (by -------------------------------- purchase stock dividend or otherwise), at any time or from time to time after the date hereof, any additional shares or other securities in the capital stock of PPV Japan and, as a result of such acquisition, the number of the Subject Securities in respect of PPV Japan is less than PPV Japan's then existing Maximum Foreign Pledge, then the Assignor will forthwith assign as collateral hereunder (or under another agreement of assignment as collateral in form and substance satisfactory to the Agent, if necessary under applicable law or if otherwise desirable to carry into effect the purposes of this Agreement), and deliver to the Agent the share certificates representing, such additional Securities as is necessary so that the number of the Subject Securities is equal to PPV Japan's then existing Maximum Foreign Pledge. Thereafter such Securities shall constitute Subject Securities, and the Assignor shall promptly deliver to the Agent a certificate executed by a Responsible officer describing such Subject Securities and certifying that the same have been duly assigned as collateral to the Assignees hereunder or under such other agreement of assignment as collateral, as the case may be. 2.3 Change In Tax Law Event. If a Change in Tax Law Event occurs, then ------------------------ the Assignor shall forthwith assign as collateral hereunder (or under another agreement of assignment as collateral in form and substance satisfactory to the Agent, if necessary under applicable law or if otherwise desirable to carry into effect the purposes of this Agreement) that portion of the securities of PPV Japan hold by the Assignor and not heretofore assigned as collateral pursuant to this Agreement (or - 3 - another agreement of assignment as collateral) and deliver the share certificates representing such Securities to the Agent. Thereafter such Securities shall constitute Subject Securities, and the Assignor shall promptly deliver to the Agent a certificate executed by a Responsible Officer describing such Subject Securities and certifying that the same have been duly assigned as collateral to the Assignee hereunder (or under another agreement of assignment as collateral, as the case may be). 2.4 Non-registration of Subject Securities in Shareholders' Register. The ---------------------------------------------------------------- Assignees shall not have the Subject Securities registered in the shareholders' register of PPV Japan in any names other than that of the Assignor unless and until the Subject Securities have been acquired by the Assignee or any other Person through the enforcement of the security interest in the Subject Securities created herein or until an Event of Default shall have occurred and be continuing. SECTION 3. APPOINTMENT OF AGENTS. The Agent shall receive and continue to --------------------- retain possession of the Subject Collateral on behalf of the Assignees pursuant to the terms and conditions of this Agreement and the Appointment Agreement. The Agent shall have the right to appoint one or more agents (other than the Assignor) for the purpose of retaining physical possession of the share certificates representing the Subject Securities and other Subject Collateral on behalf of the Agent. SECTION 4. VOTING AND OTHER RIGHTS WHILE NO EVENT OF DEFAULT. Unless and ------------------------------------------------- until an Event of Default shall have occurred and be continuing, the Assignor shall be entitled to vote any and all Subject Securities and to give consents, waivers or ratification in respect thereof; provided, that the Assignor shall cast no vote, or give any consent, waiver or ratification or take any action which would violate or be inconsistent with any of the terms of this Agreement, any other Note Document or any other instrument or agreement referred to herein or therein or which would have the effect of impairing the position or interests of the Assignees. All such rights of the Assignor to vote and to give consents, waivers and ratifications shall cease upon the earlier to occur of (i) delivery to the Assignor of written notice from any Noteholder or pursuant to a notice delivered under Section 9.1 of the Note Agreement or the Agent stating that an Event of Default has occurred and is continuing or (ii) a Responsible Officer obtaining knowledge of any condition or event which constitutes an Event of Default, when Sections 2.4 and 6 shall become applicable; provided, that the Agent shall be under no duty to deliver the written notice described in clause (i) of the foregoing unless and until it has received a notice from any Noteholder stating that an Event of Default has occurred and is continuing. SECTION 5. DIVIDENDS AND OTHER DISTRIBUTIONS. Unless and until an Event of --------------------------------- Default shall have occurred and be continuing, all cash dividends payable in respect of the Subject Securities shall be paid directly to the Assignor; provided, that the - 4 - Assignor shall cause to be paid to the Agent, and the Agent shall have the right to receive and retain as part of the Subject Collateral, all cash dividends payable in respect of the Subject Securities which are determined by the Agent to represent in whole or in part an extraordinary, liquidating or other distribution in return of capital (each a "Liquidating Dividend"), unless the event creating such Liquidating Dividend was permitted by, and did not otherwise result in an Event of Default occurring under, the Note Agreement. In case an Event of Default shall have occurred and be continuing, the Assignor shall cause to be paid to the Agent, and the Agent shall have the right to receive and retain as part of the Subject Collateral, all cash dividends payable in respect of the Subject Securities. The Assignor shall also cause to be delivered or paid, as relevant, to the Agent, and the Agent shall have the right to receive and retain as part of the Subject Collateral: (a) all other or additional stock or securities of PPV Japan paid or distributed by way of dividend in respect of the Subject Securities; (b) all other or additional stock or other securities or property (including cash) paid or distributed in respect of the Subject Securities by way of stock-split, spin-off, split-up, reclassification, combination of shares or similar rearrangement; and (c) all other or additional stock or other securities or property (including cash) which may be paid in respect of the Subject Securities by reason of any consolidation, merger, exchange of stock, conveyance of assets, liquidation or similar corporate reorganization or otherwise; except, in each case, prior to the occurrence and continuance of an Event of - ------ Default, to the extent the receipt of such stock dividends and other securities distributions would cause the Subject securities of PPV Japan to exceed PPV Japan's Maximum Foreign Pledge, in which case the Assignor shall cause to be delivered to the Agent, and the Agent shall have the right to receive and retain as part of the Subject Collateral, such amount of stock dividends and securities distributions as is equal, together with the Subject Securities previously assigned as collateral, to PPV Japan's then existing Maximum Foreign Pledge. SECTION 6. REMEDIES IN CASE OF EVENT OF DEFAULT. In case an Event of ------------------------------------ Default shall have occurred and be continuing, the Noteholders (as Assignees) directly or through the Agent shall be entitled to exercise all the rights, powers and remedies vested in them or it as relevant (whether vested in them or it by this Agreement, by any other Note Document or by law) for the protection and enforcement of their or its rights, as relevant in respect of the Subject Collateral, and the Noteholders (as Assignees) directly or through the Agent shall be entitled without limitation to exercise the following rights, which the Assignor hereby agrees to be commercially reasonable: - 5 - (a) to, upon giving written notice to the Assignor, dispose of the Subject Collateral by such method, at such time and for such price as are generally considered reasonable by the Agent (acting in accordance with the instructions from the Required Holder(s)), and apply the proceeds toward the payment of the Secured obligations in accordance with Section 7 below; and (b) to, upon giving written notice to the Assignor, acquire the Subject Collateral as payment of the whole or a part of the Secured Obligations, as relevant, in the order set forth in Section 7 below at such time and for such price as are generally (considered reasonable by the Agent (acting in accordance with the instructions from the Required Holder(s)). None of the Agent or the other Assignees shall be liable for failure to collect or realize upon any or all of the Subject Collateral or for any delay in so doing nor shall any of them be under any obligation to take any action whatsoever with regard thereto. SECTION 7. APPLICATION OF PROCEEDS. All moneys collected by the Agent or ----------------------- the other Assignees upon any sale or other disposition of the Subject Collateral (including, without limitation, the amount of the price at which the Noteholders (as Assignees) may acquire the Subject Securities in accordance with Section 6(b), together with all other moneys received by the Agent or the other Assignees hereunder, shall be applied in the following order of priority: (a) FIRST, to the payment of such amounts an are due and payable to the Agent (including in respect of its agents) or to any prior Agent hereunder pursuant to the Appointment Agreement and this Agreement, including the payment of all costs and expenses incurred by the Agent in connection with such sale, the delivery of the Subject Collateral or the collection of any such moneys (including without limitation reasonable attorneys' fees and expenses); and (b) SECOND, to the payment of the other Secured Obligations in the following order of priority to the extent such amounts are not sufficient to repay such other Secured Obligations in full and within each category on a pro rata basis among the Noteholders: (i) to the payment of charges, fees, indemnity obligations, costs and expenses due under the Note Agreement, each Note, the Appointment Agreement, this Agreement or the other Pledge Documents to the Noteholders; (ii) to the payment of interest on interest which became overdue, if any, with respect to the Notes; (iii) to the payment of interest on principal with respect to the Notes which became overdue; (iv) to the payment of interest accrued with respect - 6 - to the Notes; (v) to the payment of principal with respect to the Notes; (vi) to the payment of premium, if any, with respect to the Notes; and (vii) to the payment of the remaining Secured Obligations, if any. Following the foregoing applications, any balance of such moneys shall be returned to the Assignor or otherwise disposed of as directed in writing by the Assignor. SECTION 8. PURCHASERS OF COLLATERAL. Upon any sale of the Subject ------------------------ Collateral by the Noteholders (as Assignees) or the Agent hereunder, the receipt of the Noteholders (as Assignees), the Agent or the officer making the sale shall be a sufficient discharge to the purchaser or purchasers of the Subject Collateral so sold, and such purchaser or purchasers shall not be obligated to see to the application of any part of the purchase money paid over to the Noteholders (as Assignees), the Agent or such officer or be answerable in any way for the misapplication or non-application thereof. SECTION 9. FURTHER ASSURANCES. Without limitation to the provisions of ------------------ Section 6 the Assignor agrees that it shall at its own expense: (a) do such further acts and things and execute and deliver to the Agent and the other Assignees such additional conveyances, assignments agreements and instruments (including, without limitation, one or more pledge or assignment as collateral agreements in form and substance satisfactory to the Agent) as may be reasonably required or deemed advisable to carry into effect the purposes of this Agreement or to further assure and confirm unto the Agent and the other Assignees its and their rights, powers and remedies hereunder; and (b) comply with the requirements of Section 7.13 of the Note Agreement (which provision is incorporated in full herein by reference). SECTION 10. TRANSFER BY THE ASSIGNOR. The Assignor shall not assign, sell ------------------------ or otherwise dispose of, grant any option with respect to, or create, incur, assume or suffer to exist any Lien on any portion of the Subject Collateral or any other Securities, except (i) Liens in favor of Persons other than the Noteholders permitted under Section 8.1 of the Note Agreement and (ii) Liens created by this Agreement and by any other Pledge Document. SECTION 11. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE ASSIGNOR. The --------------------------------------------------------- Assignor represents and warrants that: (i) it is the owner of, and has good and marketable title to, 360 shares of the capital stock of PPV Japan in existence on the - 7 - date hereof, subject to no Lien (except the Lien created by this Agreement); (ii) it has full corporate power, authority and legal right to assign as collateral all such Securities pursuant to this Agreement; (iii) all such Securities have been duly and validly issued, are fully paid and nonassessable; (iv) this Agreement creates, as security for the Secured Obligations, a valid and enforceable first priority security interest on all of the Subject Securities in existence on the date hereof, in favor of the Noteholders (as Assignees) and the Agent acting on behalf of such Assignees, subject to no Lien in favor of any other Person; and (v) no consent, filing, recording or registration is required to perfect the security interest in the Subject Securities purported to be created by this Agreement. The Assignor covenants and agrees that: (i) it shall not cause the article on the share transfer restrictions to be incorporated in the Articles of Incorporation of PPV Japan; (ii) it will defend the Assignees' right, title and Lien in and to the Subject Collateral against the claims and demands of all Persons; and (iii) it will take all actions within its powers to ensure that it will have like title to and right to assign an collateral any other securities or property at any time hereafter assigned as collateral to the Assignees as Subject Collateral hereunder. SECTION 12. THE AGENT. (a) The Agent will hold in accordance with the --------- terms and provisions of the Appointment Agreement and this Agreement all Subject Collateral at any time received by it under this Agreement. It is expressly understood and agreed that the obligations of the Agent as holder of the Subject Collateral and with respect to the disposition thereof are only those expressly set forth in this Agreement and in the Appointment Agreement, and no implied covenants or obligations shall be read into this Agreement against the Agent. (b) In case of any litigation under this Agreement, or in case of any enforcement of remedies or exercise of rights upon the occurrence of an Event of Default, or in case the Agent deems that, by reason of any present or future law of any jurisdiction, it may not or may not effectively exercise any of the powers, rights or remedies herein granted to it or hold title to the properties as herein granted, or take any other action which may be desirable or necessary in connection therewith, the Agent shall be entitled to appoint, to the extent consistent with any applicable law, one or more separate or additional co-agents. In the event that the Agent appoints an individual or institution as a separate or additional co-agent (i) any appointment of any such co-agent by the Agent shall be made only with the prior written consent of the Assignor and the Required Holder(s) (except that, if the Agent shall have received written notice from any Holder of Secured Obligations that a Default or an Event of Default has occurred and is continuing, such consent shall be required only of the Required Holder(s)), which consent shall not be unreasonably withheld or delayed and (ii) each and every remedy, power, right, title, interest, duty and obligation expressed or intended by this Agreement to be exercised by or vested in, conveyed to or imposed upon, the Agent with respect - 8 - thereto shall be exercisable by and vest in such separate or additional co-agent but only to the extent necessary, appropriate or desirable to enable such separate or additional co-agent to exercise or have vested in it such powers, rights, trusts, titles, interests, duties and obligations and remedies, and every covenant and obligation necessary, appropriate or desirable to the exercise thereof by such separate or additional co-agent shall run to and be enforceable by either or any of them. The Agent shall have the right to terminate the appointment of any such co-agent hereunder with the prior written consent of the Assignor and the Required Holder(s) (except that, if the Agent shall have received written notice from any Holder that a Default or an Event of Default has occurred and is continuing, such consent shall be required only of the Required Holder(s)), which consent shall not be unreasonably withheld or delayed. Should any instrument in writing from the Assignor be required by the separate or additional co-agent so appointed by the Agent to more fully and certainly vest in and confirm to it such remedies, rights, powers, titles, interest, duties and obligations, any and all such instruments in writing shall, on request, be executed, acknowledged and delivered by the Assignor. In case any separate or additional co-agent, or a successor to either, shall become incapable of acting, resign or be removed all the remedies, rights, powers, titles, interests, trusts, duties and obligations of such separate or additional coagent, so far as permitted by law, shall vest in and be exercised by the Agent until the appointment of a new agent or successor to such separate or additional co-agent. SECTION 13. ASSIGNOR'S OBLIGATIONS. The obligations of the Assignor under ---------------------- this Agreement shall be absolute and unconditional and shall remain in full force and effect without regard to, and shall not be released, suspended, discharged or terminated or otherwise affected by, any circumstance or occurrence whatsoever, including without limitation; (i) any renewal, extension, amendment or modification of, or addition or supplement to or deletion from, the Note Agreement, any Note or any other instrument or agreement referred to therein or any assignment or transfer of any thereof; (ii) any waiver, consent, extension, indulgence or other action or inaction under or in respect of the Note Agreement, any Note or any other such instrument or agreement or any exercise or non-exercise of any right, remedy, power or privilege under or in respect of the Note Agreement, any Note or any other such instrument or agreement; (iii) any furnishing of any additional security to the Assignees or any acceptance thereof or any sale, exchange, release, surrender or realization of or upon any security by the Assignees; or (iv) any invalidity, irregularity or unenforceability of all or part of the Secured Obligations or of any security therefor or the termination or release of any security therefor. SECTION 14. REGISTRATION. If an Event of Default shall have occurred and ------------ be continuing and any registration, qualification or compliance under any securities law or laws is - 9 - required to be effected by any applicable law with respect to the enforcement of the security interest in all or any part of the Subject Securities; the Assignor, at the Agent's written request, as soon as practicable and at its expense will use its best efforts to cause such registration to be effected (and be kept effective) and will use its best efforts to cause such qualification and compliance to be effected (and be kept effective) as may be so requested and as would permit the enforcement of the security interest in such Subject Securities, including without limitation, registration under any applicable securities laws (including the Securities Act) and appropriate compliance with any other governmental requirements, provided that the Agent shall furnish to the Assignor such information regarding the Assignees as the Assignor may request in writing and as shall be required in connection with any such registration, qualification or compliance. The Assignor will cause the Agent to be kept reasonably advised in writing as to the progress of each such registration, qualification or compliance and as to the completion thereof, will furnish to the Assignees such number of prospectuses, offering circulars or other documents incident thereto as the Agent from time to time may reasonably request, and agrees to indemnify the Agent and the other Assignees against all losses, liabilities, claims or damages caused by any untrue statement (or alleged untrue statement) of a material fact contained therein (or in any related registration statement, notification or the like) or by any omission (or alleged omission) to state therein (or in any related registration statement, notification or the like) a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as the same may have been caused by an untrue statement or omission based upon information furnished in writing to the Assignor by the Agent expressly for use therein. SECTION 15. INDEMNITY. (a) The Assignor will pay or reimburse the Agent --------- upon its request for all reasonable expenses, disbursements and advances incurred or made by the Agent in accordance with any of the provisions of this Agreement or any other Pledge Document (including the compensation and the expenses and disbursements of its agents and counsel and of all Persons not regularly in its employ). (b) The Assignor also covenants to indemnify the Agent and the other Assignees for any and all loss liability or expense reasonably incurred without gross negligence, wilful misconduct or bad faith on the part of the Agent or the other Assignees, arising out of or in connection with the acceptance or administration of the Subject Collateral, the exercise of any rights and remedies arising out of this Agreement, or the performance of any of its duties, including the reasonable costs and expenses of defending itself against any claim of liability and in enforcing any provision of this Agreement or any other Pledge Document (except any liability incurred with gross negligence, wilful misconduct or bad faith on the part of the Agent or the other Assignees), with interest thereon (i) at the rate of 10.5% per annum with respect to amounts owing to the Noteholders (as Assignees) and (ii) at a rate equal to the - 10 - Agent's customary banking practices with respect to overdrafts (including the imposition of interest, funds, wage charges and administrative fees), with respect to amounts owing to the Agent, in each case from the date the same shall have been paid until actually reimbursed. (c) The obligations of the Assignor under this Section 15 to indemnify the Agent and the other Assignees and to pay or reimburse the Agent and the other Assignees for reasonable expenses, disbursements and advances shall for avoidance of doubt be a Secured Obligation secured by this Agreement and shall survive the satisfaction, discharge or other termination of this Agreement and the resignation or removal of the Agent hereunder. SECTION 16. TERMINATION; RELEASE. Upon: -------------------- (a) the receipt by the Agent of a certificate executed by each Noteholder certifying that the conditions set forth in Section 5.3 of the Note Agreement to the release of the Subject Collateral have been satisfied; or (b) the date on which the Secured Obligations have been discharged in full; this Agreement shall terminate, and the Agent, at the written request and expense of the Assignor, shall promptly execute and deliver to the Assignor a proper instrument or instruments acknowledging the satisfaction and termination of this Agreement, and shall release, reassign and deliver to the Assignor, without any representation or warranty, such of the Subject Collateral as maybe in the possession of the Agent and has not theretofore been sold or otherwise applied, released or reassigned pursuant to this Agreement, together with any moneys at the time held by the Agent hereunder. SECTION 17. NOTICES. All notices and other communications hereunder shall be in the English language in writing and made at the addresses, in the manner and with the effect provided in Section 11.10 of the Note Agreement, provided that, for this purpose, the address of the Agent shall be as follows: The Chase Manhattan Bank, N.A. Corporate Trust Administration 4 Chase MetroTech Center 3rd Floor Brooklyn, New York 11245 Facsimile: (718) 242-5885 or (718) 242-3529 or such other address as the Agent may designate for itself by notice given in accordance with this Section 17. SECTION 18. Change of the Assignees. Each of the Assignor, the Agent and ----------------------- each of the other Assignees hereby (a) acknowledges that the Noteholders (and, accordingly, the Assignees) may be changed and/or new Noteholders (and accordingly, new Assignees) may be added from time to time in accordance with the Note Agreement and the other Note Documents and agrees that, without taking any action, the security interest created or to be created hereunder shall automatically be effective for the benefit of the Agent and the then current Noteholders who shall automatically be deemed to be Assignees hereunder. The Agent further agrees that the Agent shall maintain possession of the Subject Collateral in accordance with the terms of this Agreement on behalf of the Assignees who may be changed or added to from time to time. The Assignor further agrees that upon the Agent's request the Assignor shall execute and deliver to the Agent a letter of confirmation in substantially the form attached hereto as Appendix A, which letter shall be deemed upon delivery to the Agent to have become an integral part of this Agreement,. SECTION 19. MISCELLANEOUS. ------------- 19.1 Benefit of Agreement. This Agreement shall be binding upon and inure -------------------- to the benefit of and be enforceable by the Assignor, the Agent and the other Assignees and their respective successors and permitted assigns; provided, however, that the Assignor may not, without the prior written consent of the Agent (acting on the instructions of all the other Assignees), assign or transfer any of its rights or obligations hereunder. Each of the Assignees (other than the Agent) may assign or transfer its rights hereunder in connection with an assignment or transfer of all or any part of its interest in and rights under its Notes and the Note Agreement pursuant to the provisions of the Note Agreement. The Agent may be replaced by another entity pursuant to the provisions of Sections 10 and 11 of the Appointment Agreement, in which case the Subject Collateral shall be transferred, delivered and possessed by the substituting agent in accordance with the Appointment Agreement and this Agreement. 19.2 Amendment, Waiver. This Agreement may be changed, waived, discharged ----------------- or terminated only with the written consent of the Required Holder(s), the Agent and the Assignor. 19.3 Governing Law. This Agreement is a contract made under the laws of ------------- Japan and shall for all purposes be construed and enforced in accordance with, and the rights of parties shall be governed by the laws of Japan; provided, however, that with respect to the Agent under Section 12 of this Agreement, the laws of the State of New York shall apply. 19.4 Section Heading, Counterparts. The headings of the several sections ----------------------------- and subsections in this Agreement are inserted for convenience only and shall not in any way affect the meaning or construction of any provision of this Agreement This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original, but all of which together shall constitute one and the same instrument. 19.5 Remedies Cumulative. The rights, powers and remedies herein or in ------------------- any other Pledge Document expressly - 12 - provided are cumulative and not exclusive of any rights, powers or remedies which the Assignees would otherwise have. 19.6 Severability. Any provision of this Agreement which is prohibited or ------------ unenforceable in Japan shall be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof. 19.7 Consent to Jurisdiction; Service of Process. The Assignor for itself ------------------------------------------- and its successors, hereby irrevocably; (i) agrees that any action, suit or proceeding against the Assignor arising out of or relating to this Agreement or the other Note Documents or any transaction contemplated hereby or the subject matter of any of the foregoing may be instituted in the Tokyo District Court; (ii) waives any objection which it may now or hereafter have to the venue of any action, suit or proceeding in Tokyo or any claim of forum non conveniens in Tokyo; and (iii) submits itself to the non-exclusive jurisdiction of the Tokyo District Court or any court competent to hear any appeal from a decision of the Tokyo District Court for purposes of any such action, suit or proceeding. 19.8 No Waiver. No failure or delay on the part of the Agent or any other --------- Assignee in exercising any right, power of privilege hereunder and no course of dealing between the Assignor and the Agent or any other Assignee shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder. 19.9 New Secured Lenders. The parties acknowledge that Section 8(i) of ------------------- the Note Agreement contemplates that the Noteholders may enter into an intercreditor agreement for the purpose of sharing the Subject Collateral with the other parties to such agreement in accordance with the terms thereof. It is understood that at the time of such event, the Assignor, the Agent and the other Assignees will investigate whether and how this Agreement may be amended to accommodate and give affect to such an intercreditor agreement. - 13 - IN WITNESS WHEREOF, the Assignor, the Agent and the Purchasers have cause this Agreement to be executed by their duly elected officers duly authorized as of the date first above written. MAGINET CORPORATION, as Assignor By /s/ J.A. Barth Name: James A. Barth Title: Chief Financial Officer The Chase Manhattan Bank, N.A., as Agent and an Assignee By /s/ R.E. Abueva Name: Rossana E. Abueva Title: Second Vice President New York Life Insurance Company, as an Assignee By /s/ Himi L. Kitner Name: Himi L. Kittner Title: Vice President The Mutual Life Insurance Company of New York, as an Assignee By /s/ Diane Hom Name: Diane Hom Title: Managing Director Namtor BVC LP, as an Assignee By /s/ Michael Rothman Name: Michael C. Rothman Title: Partner Waslic Company II, as an Assignee By /s/ Daniel F. Lindley Name: Daniel F. Lindley Title: President & Secretary - - 14 - Schedule A to Agreement of Assignment as Collateral New York Life Insurance Company 51 Madison Avenue New York, NY 10010 The Mutual Life Insurance Company of New York 1740 Broadway, 11th Floor New York, NY 10019 Namtor BVC LP 311 South Wacker Drive, Suite 4190 Chicago, IL 60606 Waslic Company II c/o Ft. Washington Investment Advisors 400 Broadway Cincinnati, OH 45202 - 15 - APPENDIX A to Agreement of Assignment as Collateral Form of a Letter of Confirmation under Section 18 -------------------------------------------------- Date: , 19__ The Chase Manhattan Bank, N.A. as the Agent for the Noteholders (as Assignees) Re: Noteholders of the Notes issued by MagiNet Corporation pursuant to the Note Agreement dated August 15, 1995 and Assignees of the Agreement of Assignment as Collateral referred to below Dear Sirs: We refer to the Agreement of Assignment as Collateral dated August 15, 1995 (as amended to date, "Assignment as Collateral") made between you as the Agent and an Assignee, the Purchasers and us. All capitalized terms defined or used herein and not otherwise defined herein shall have the same meanings specified in the Assignment as Collateral. We understand that the current Noteholders, and accordingly the current Assignees (excluding you), are those listed below and confirm that all security interests created or to be created under the Assignment as Collateral are effective for the benefit of you and such other Assignees as if they all were Assignees on the date the Assignment as Collateral was first executed. Very truly yours, MagiNet Corporation (Authorized Signatory) (List of Assignees): EX-10.46 8 COLLATERAL ASSIGNMENT AGREEMENT EXHIBIT 10.46 COLLATERAL ASSIGNMENT AGREEMENT ------------------------------- THIS COLLATERAL ASSIGNMENT AGREEMENT (this "Agreement") dated as of August 15, 1995, between PACIFIC PAY VIDEO LIMITED, a corporation organized under the laws of the State of California, as assignor (the "Assignor"), and THE -------- CHASE MANHATTAN BANK, N.A., as collateral agent (the "Assignee") for the benefit -------- of the Noteholders. Unless otherwise defined herein, capitalized terms used herein shall have the meanings provided in the Note Agreement, as defined below. W I T N E S S E T H : - - - - - - - - - - WHEREAS, MagiNet Corporation (the "Company") has entered into the Note Agreement dated as of August 15, 1995 with certain U.S. financial institutions, providing for the issuance and sale of up to $30,000,000 aggregate principal amount of its 10.5% Senior Secured Notes and the issuance of warrants (the "Note Agreement"); WHEREAS, the Company, the Assignee and the Purchasers have entered into the Appointment Agreement dated as of August 15, 1995 (the "Appointment Agreement") providing for the appointment of The Chase Manhattan Bank, N.A. to act as collateral agent for the benefit of the Noteholders under the Security Documents (including this Agreement); WHEREAS, it is a condition precedent under the Note Agreement to each Purchaser's obligation to purchase and pay for the Notes and to accept the Warrants to be issued under the Note Agreement that the Assignor shall have executed and delivered to the Assignee this Agreement; WHEREAS, the Assignor desires to execute this Agreement to satisfy the conditions described in the preceding paragraphs and to induce the Purchasers to enter into the Note Agreement and to purchase and pay for the Notes and the Warrants (and to induce any future Noteholders so to do); NOW, THEREFORE, in consideration of the benefits accruing to the Assignor and the Company, the receipt and sufficiency of which are hereby acknowledged, the Assignor hereby makes the following representations and warranties to the Assignee and hereby covenants and agrees with the Assignee as follows: 1. Grant of Security Interest. Assignor hereby grants to Assignee a -------------------------- security interest in the contract and related items described in Paragraph 2 below (the "Collateral") for the benefit of the Assignee as collateral trustee for the Noteholders to secure (i) the payment due of the principal of and interest in respect of the Notes and payment of all other obligations and liabilities EXHIBIT E TO NOTE AGREEMENT Collateral Assignment Agreement also appears as Exhibit 10.46 to this Registration Statement COLLATERAL ASSIGNMENT AGREEMENT ------------------------------- THIS COLLATERAL ASSIGNMENT AGREEMENT (this "Agreement") dated as of August 15, 1995, between PACIFIC PAY VIDEO LIMITED, a corporation organized under the laws of the State of California, as assignor (the "Assignor"), and THE -------- CHASE MANHATTAN BANK, N.A., as collateral agent (the "Assignee") for the benefit -------- of the Noteholders. Unless otherwise defined herein, capitalized terms used herein shall have the meanings provided in the Note Agreement, as defined below. W I T N E S S E T H : - - - - - - - - - - WHEREAS, MagiNet Corporation (the "Company") has entered into the Note Agreement dated as of August 15, 1995 with certain U.S. financial institutions, providing for the issuance and sale of up to $30,000,000 aggregate principal amount of its 10.5% Senior Secured Notes and the issuance of warrants (the "Note Agreement"); WHEREAS, the Company, the Assignee and the Purchasers have entered into the Appointment Agreement dated as of August 15, 1995 (the "Appointment Agreement") providing for the appointment of The Chase Manhattan Bank, N.A. to act as collateral agent for the benefit of the Noteholders under the Security Documents (including this Agreement); WHEREAS, it is a condition precedent under the Note Agreement to each Purchaser's obligation to purchase and pay for the Notes and to accept the Warrants to be issued under the Note Agreement that the Assignor shall have executed and delivered to the Assignee this Agreement; WHEREAS, the Assignor desires to execute this Agreement to satisfy the conditions described in the preceding paragraphs and to induce the Purchasers to enter into the Note Agreement and to purchase and pay for the Notes and the Warrants (and to induce any future Noteholders so to do); NOW, THEREFORE, in consideration of the benefits accruing to the Assignor and the Company, the receipt and sufficiency of which are hereby acknowledged, the Assignor hereby makes the following representations and warranties to the Assignee and hereby covenants and agrees with the Assignee as follows: 1. Grant of Security Interest. Assignor hereby grants to Assignee a -------------------------- security interest in the contract and related items described in Paragraph 2 below (the "Collateral") for the benefit of the Assignee as collateral trustee for the Noteholders to secure (i) the payment due of the principal of and interest in respect of the Notes and payment of all other obligations and liabilities (including without limitation indemnities, premium, if any, fees and interest thereon) of the Company, now existing or hereafter incurred under, arising out of or in connection with the Note Agreement, each Note or any other Note Document (other than the Warrants) and (ii) the due performance and compliance with the terms of the Note Documents (other than the Warrant) by the Company (all such principal, interest, obligations and liabilities, collectively, the "Secured Obligations"). In no event solely as a consequence of the grant of ------------------- this security interest shall the Assignee be liable for any obligations and/or amounts owing to On Command Video Corporation pursuant to the terms of the Technology License Agreement; provided that nothing in this sentence shall diminish the obligation of a transferee of the rights under the Technology License Agreement pursuant to Section 6 of this Agreement to pay royalties thereunder. 2. Collateral. The Collateral shall consist of all right and interest of ---------- Assignor in and to (A) all of Assignor's right and interest in the Technology License Agreement as now or hereafter amended, modified or supplemented, in accordance with the terms hereof and the Note Agreement and (B) all proceeds of the foregoing collateral, including whatever is receivable or received when the foregoing collateral is sold, collected, assigned, exchanged or otherwise disposed of, whether such disposition is voluntary or involuntary. 3. Representations and Warranties. Assignor hereby represents and warrants ------------------------------ that: (i) except as disclosed in Annex A, Assignor has a valid interest in the Collateral and that no other person has any right, title, claim or interest (by way of security interest or other lien or charge or otherwise) in, against or to the Collateral, (ii) it has full power, authority and legal right to assign its right and interest in the Collateral pursuant to this Agreement; and (iii) other than registrations or filings described in Annex B hereto (all of which have been made prior to the date hereof or will be made within the relevant statutory period) no consent, filing, recording or registration is required to perfect the Lien purported to be created by this Agreement. 4. Covenants of the Assignor. The Assignor covenants and agrees that (i) ------------------------- it will defend the Assignee's right, title and Lien in and to the Collateral against the claims and demands of all Persons, (ii) it will procure, execute and deliver from time to time any endorsements, assignments, financing statements and other writings deemed reasonably necessary or appropriate to perfect, maintain and protect the Assignee's security interest hereunder and the priority thereof (iii) except as otherwise permitted by Sections 8.1 and 8.8 of the Note Agreement, it will not sell, encumber, or otherwise dispose of or transfer the Collateral or right or interest therein except as hereinafter provided, and to keep the Collateral free of all levies and security interests or other liens or charges except those approved in writing by the Required Holders and Permitted Liens, (iv) except as otherwise permitted by Section 8.11 of the Note Agreement, it will not amend, modify or supplement the Technology License Agreement and (v) it will duly fulfill all obligations on its part to be fulfilled under or in connection with the Technology License Agreement and will do nothing to impair the rights of the Assignor in respect of the Collateral. 5. Authorized Action by Assignee. Effective upon and during the ----------------------------- continuance of an Event of Default, Assignor hereby irrevocably appoints Assignee as its attorney-in-fact to do (but Assignee shall not be obligated to and shall incur no liability to Assignor or any third party for failure so to do) any act which Assignor is obligated by this Agreement to do, and to cure a failure by Assignor to perform its obligations under the Technology License Agreement and, after an Event of Default and upon acceleration of the Notes in accordance with the terms of the Note Agreement, to exercise such rights and powers as Assignor might exercise with respect to the Collateral, including, without limitation, to the extent permitted by law and the terms of the Technology License Agreement, the right to (i) collect by legal proceedings or otherwise and endorse, receive and receipt for proceeds and other sums and property now or hereafter payable on or on account of the Collateral, (ii) enter into any extension or other agreement pertaining to, or deposit, surrender, accept, hold or apply other property in exchange for the Collateral, (iii) transfer the Collateral to its own or its nominee's name, and (iv) make any compromise or settlement, and take any action it deems advisable, with respect to the Collateral. Assignor agrees to reimburse Assignee upon demand for any costs and expenses, including, without limitation, attorneys' fees, Assignee may incur while acting as Assignor's attorney-in-fact hereunder, all of which costs and expenses are included in the Secured Obligations secured hereby. Assignee shall not be required to make any presentment, demand or protest, or give any notice and need not take any action to preserve any rights against any prior party or any other person in connection with the Secured Obligations or with respect to the Collateral. 6. Default and Remedies. Assignor shall be deemed in default under this -------------------- Agreement upon the occurrence of an Event of Default. Upon the occurrence and continuance of an Event of Default, Assignee may, at its option, and without notice to or demand on Assignor and in addition to all rights and remedies available to Assignee under any guaranty, this Agreement or any agreement with Assignor, or by law, do any one or more of the following: (i) enforce Assignee's security interest in any manner permitted by law, or provided for in this Agreement, (ii) sell, transfer, assign or otherwise dispose of any Collateral, for cash or credit or future delivery, on such terms and in such manner as Assignee may determine; and (iii) recover from Assignor all costs and expenses, including, without limitation, reasonable attorneys' fees, incurred or paid by Assignee in exercising any right, power or remedy provided by any guaranty, this Agreement, any agreement with Assignor, or by law. 7. Termination; Release. Upon: -------------------- (a) the receipt by the Assignee of a certificate, satisfactory to the Assignee executed by each Noteholder certifying that the conditions set forth in Section 5.3 of the Note Agreement to the release of the Collateral have been satisfied; or (b) the date on which the Secured Obligations have been discharged in full; this Agreement shall terminate, and the Assignee, at the written request and expense of the Assignor, will promptly execute and deliver to the Assignor a proper instrument or instruments acknowledging the satisfaction and termination of this Agreement, and will duly assign, transfer and deliver to the Assignor, without recourse and without any representation or warranty, such of the Collateral as may be in the possession of the Assignee and has not theretofore been sold or otherwise applied or released pursuant to this Agreement, together with any moneys at the time held by the Assignee hereunder. 8. Cumulative Rights. The rights, powers and remedies of Assignee under ----------------- this Agreement shall be in addition to all rights, powers and remedies given to Assignee by virtue of any statute or rules of law, or any agreement, all of which rights, powers and remedies shall be cumulative and may be exercised successively or concurrently without impairing Assignee's security interest in the Collateral. 9. Amendment; Waiver. Any forbearance or failure or delay by Assignee in ----------------- exercising any right, power or remedy shall not preclude the further exercise thereof, and every right, power or remedy of Assignee shall continue in full force and effect until such right, power or remedy is specifically waived in a writing executed by Assignee. Assignor waives any right to require Assignee to proceed against any person or to pursue any remedy in Assignee's power. This Agreement may be changed, waived, discharged or terminated only by an instrument in writing in accordance with Section 11.3 of the Note Agreement. 10. Binding Upon Successors. All rights of Assignee under this Agreement ----------------------- shall inure to the benefit of its successors and (subject to the prior written consent of On Command Video Corporation) assigns, and the Secured Obligations of Assignor shall bind its heirs, executors, administrators, successors and assigns; provided, however, that the Assignor may not, without the prior written -------- ------- consent of the Assignee (acting on the instructions of all the Noteholders), assign or transfer any of its rights or obligations under this Agreement. The Assignee may transfer, assign or grant its rights hereunder in connection with an assignment or transfer of all or any part of its interest in and rights under this Agreement pursuant to the provisions of Section 11 of the Appointment Agreement. 11. Severability. If any of the provisions of this Agreement shall be held ------------ invalid or unenforceable, this Agreement shall be construed as if not containing those provisions and the rights and obligations of the parties hereto shall be construed and enforced accordingly. If any agreement or obligation contained in this Agreement shall be held to be in violation of law, then such agreement or obligation shall be deemed to be the agreement or obligation of the party hereto to the full extent permitted by law. 12. Choice of Law. This Agreement is a contract made under the laws of the ------------- State of New York of the United States and shall for all purposes be construed and enforced in accordance with, and the rights of parties shall be governed by, the laws of such State and except as otherwise defined herein, terms used herein shall have the meanings given them in the New York Uniform Commercial Code. 13. Notice. Any written notice, consent or other communication provided for ------ in this Agreement shall be delivered or sent in accordance with Section 11.10 of the Note Agreement, provided that, for this purpose, the address of the Assignor and the Assignee shall be as follows: If to the Assignor: 405 Tasman Drive Sunnyvale, California 94089 Attention: Chief Financial Officer Facsimile: 408 734 1687 With a copy to: On Command Video Corporation 3301 Olcott Santa Clara, California 95054 Facsimile: 408 496 0668 If to the Assignee: The Chase Manhattan Bank, N.A. Corporate Trust Administration 4 Chase Metro Tech Center Third Floor Brooklyn, New York 11245 Facsimile: 718 292 5885 or sent to the Assignee at such other address as it may designate for itself by notice given in accordance with this Section 13. 14. Consent to Jurisdiction; Service of Process. For the purposes of ------------------------------------------- assuring that the Assignee and the Noteholders may enforce their respective rights under this Agreement, the Assignor for itself and its successors and assigns, hereby irrevocably (i) agrees that any legal or equitable action, suit or proceeding against the Assignor arising out of or relating to this Agreement or the Note Documents or any transaction contemplated hereby or the subject matter of any of the foregoing may be instituted in any state or Federal court in the Borough of Manhattan in the State of New York, (ii) waives any objection which it may now or hereafter have to the venue of any action, suit or proceeding in the State of New York or any claim of forum non conveniens in the -------------------- State of New York, and (iii) irrevocably submits itself to the non-exclusive jurisdiction of any state or Federal court of competent jurisdiction in the Borough of Manhattan in the State of New York for purposes of any such action, suit or proceeding. Without limiting the foregoing, the Assignor hereby appoints, in the case of any such action or proceeding brought in the courts of or in the State of New York, CT Corporation System, with offices on the date hereof at 1633 Broadway, New York, New York 10019, to receive, for it and on its behalf, service of process in the State of New York with respect thereto, provided the Assignor may appoint any other person, reasonably acceptable to the Assignee (acting on the instructions of the Required Holder(s)), with offices in the State of New York to replace such agent for service of process upon delivery to the Noteholders of a reasonably acceptable agreement of such new agent agreeing so to act. The Assignor agrees that service of process by means of notice (as provided in Section 11.10 of the Note Agreement) of any such action, suit or proceeding with respect to any matter as to which it has submitted to jurisdiction as set forth in this Section 14 shall be taken and held to be valid personal service upon it. 15. Counterparts. This Agreement may be executed in one or more ------------ counterparts, and each of which when so executed and delivered shall be deemed an original for all purposes but all of which together shall constitute but one and the same instrument. IN WITNESS WHEREOF, the Assignor and the Assignee have caused this Collateral Assignment Agreement to be executed by their duly elected officers duly authorized as of the date first above written. PACIFIC PAY VIDEO LIMITED, as Assignor By /s/ James A. Barth ------------------------- Name: James A. Barth Title: Chief Financial Officer THE CHASE MANHATTAN BANK, N.A., as Assignee By /s/ Rossana E. Abueua ------------------------- Name: Rossana E. Abueua Title: Second Vice President APPROVAL AND AGREEMENT The undersigned, being the licensor under the Technology License Agreement referred to in the foregoing Collateral Assignment Agreement, hereby approves said Collateral Assignment Agreement and the assignment of the Technology License Agreement thereunder for all purposes of said Collateral Assignment Agreement subject to the terms and conditions of the Technology License Agreement. ON COMMAND VIDEO CORPORATION By /s/ Robert Snyder ------------------------- Name: Robert Snyder Title: President Schedule A to Agreement of Assignment as Collateral New York Life Insurance Company 51 Madison Avenue New York, NY 10010 The Mutual Life Insurance Company of New York 1740 Broadway, 11th Floor New York, NY 10019 Namtor BVC LP 311 South Wacker Drive, Suite 4190 Chicago, IL 60606 Waslic Company II c/o Ft. Washington Investment Advisors 400 Broadway Cincinnati, OH 45202 APPENDIX A to Agreement of Assignment as Collateral Form of a Letter of Confirmation under Section 18 ------------------------------------------------- Date: ,19__ The Chase Manhattan Bank, N.A. as the Agent for the Noteholders (as Assignees) Re: Noteholders of the Notes issues by MagiNet Corporation pursuant to the Note Agreement dated August 15, 1995 and Assignees of the Agreement of Assignment as Collateral referred to below -------------------------------------------------------- Dear Sirs: We refer to the Agreement of Assignment as Collateral dated August 15, 1995 (as amended to date, "Assignment as Collateral") made between you as the Agent and an Assignee, the Purchasers and us. All Capitalized terms defined or used herein and not otherwise defined herein shall have the same meanings specified in the Assignment as Collateral. We understand that the current Noteholders, and accordingly the current Assignees (excluding you), are those listed below and confirm that all security interests created or to be created under the Assignment as Collateral are effective for the benefit of you and such other Assignees as if they all were Assignees on the date the Assignment as Collateral was first executed. Very truly yours, MagiNet Corporation ______________________ (Authorized Signatory) (List of Assignees): EX-10.47 9 COMMITMENT LETTER Exhibit 10.47 [COMMITMENT LETTER] CIBC WG ARGOSY MERCHANT FUND 2, L.L.C. 425 Lexington Avenue 3rd Floor New York, New York 10017 December 11, 1996 MagiNet Corporation 405 Tasman Drive Sunnyvale, California 94089 Attention: Kenneth R. Hamlet Gentlemen: You have requested that CIBC WG ARGOSY MERCHANT FUND 2, L.L.C. ("CIBC"), an indirect majority-owned subsidiary of Canadian Imperial Bank of Commerce and each party to which CIBC may syndicate a portion of the commitment made hereby pursuant to Section 7 hereof (the "Syndication Parties") commit to provide to MagiNet Corporation (the "Company") funds in the amount of up to $10 million in the form of senior subordinated notes to be made available as described in Section 1 hereof (the "Senior Subordinated Notes"). Concurrently with the issuance of any Senior Subordinated Notes, and in consideration therefor, the Company will issue to CIBC up to 1,333,333 Warrants to purchase Company Common Stock, par value $.0001 per share (the "Financing Warrants") on a pro rata basis equal to the principal amount of Senior Subordinated Notes issued. The commitment to acquire the Senior Subordinated Notes has been requested to provide the Company with assurances as to the general availability of funds to the Company for its ongoing operations in the event the initial public offering of the Company's common equity ("IPO") currently being pursued is not consummated. The financing evidenced by the Senior Subordinated Notes and the issuance of the Financing Warrants is referred to herein as the "Transaction". Accordingly, subject to the terms and conditions set forth or incorporated in this letter, CIBC (the "Lender") agrees with you as follows: Section 1. Senior Subordinated Notes. The Lender hereby commits, subject to the terms and conditions hereof and -2- in the Summary Term Sheet attached hereto as Exhibit A (the "Term Sheet"), to provide to the Company at its request, subject to the conditions set forth herein and the issuance of the pro rata portion of the Financing Warrants, up to $10 million through the issuance of Senior Subordinated Notes. The commitment contemplated hereby shall expire at 5:00 p.m. New York time on January 15, 1997 (the "Closing Date," which may be extended by the Extended Commitment Option (as defined in Section 6 hereof)). The proportion of each of CIBC's and each Syndication Party's commitment to provide the financing evidenced by the Senior Subordinated Notes is set forth in their respective commitment letters, if any, delivered to the Company. The Lender shall be obligated to provide the entire amount of such funds in the event that no other person elects to become a Syndication Party. In addition to the Senior Subordinated Notes and the Financing Warrants, the Company will issue to the Lender (A) upon delivery and acceptance of this commitment letter, 40,000 warrants to purchase fully diluted common stock of the Company at a nominal exercise price ($.01 per warrant (the "Initial Warrants") and (B) for so long as any Senior Subordinated Notes are outstanding, upon each annual anniversary of the issuance of the Senior Subordinated Notes, 200,000 warrants (subject to adjustment as set forth in the Term Sheet) to purchase fully diluted common stock of the Company at a nominal exercise price ($.01 per warrant) (the "Annual Warrants"). The proceeds of the Transaction shall be used for general corporate purposes other than repayment of indebtedness or the purchase or redemption of, or any payments on, equity securities of the Company. The principal terms of the Senior Subordinated Notes and the Financing Warrants are summarized in the Term Sheet. This letter is not intended to be, nor shall it be construed as, an attempt to define or set forth all of the terms and conditions of the Transaction. Rather, it is intended only as a statement of the principal terms of the basic business understanding, around which the legal documentation is to be structured. Further negotiations within the general parameters of these principal terms shall not be precluded by the issuance of this letter or its acceptance by you, although in no event may Lender negotiate to (i) reduce the maximum principal amount, (ii) shorten the final maturity date, (iii) increase the annual interest rate, (iv) increase the amount of the redemption premium or the change in control premium, (v) increase the amount of any fees, (vi) increase the -3- number of Financing Warrants or the Initial Warrants (including the rate at which Additional Warrants are to be granted), or decrease the exercise price thereof, other than, as may be adjusted pursuant to the Term Sheet or (vii) shorten the commitment expiry date. This letter agreement is a binding agreement between the parties with respect to such principal terms. Unless the Lender's commitment hereunder shall have been terminated pursuant to Section 6 and subject to participations which may be made available pursuant to Section 7, the Lender shall have the exclusive right to provide the financing evidenced by the Senior Subordinated Notes. The Lender has reviewed certain historical and pro forma financial statements of the Company and has met with you and with the management of the Company and is pleased to advise you that the results of the Lender's investigations to date are satisfactory. You hereby represent and covenant that based on your review and analysis, to the best of your knowledge (a) all information , including the Projections (as defined below), which has been or is hereafter made available to the Lender by you or your representatives, advisors or affiliates in connection with the transactions contemplated hereby (the "Information") has been reviewed and analyzed by you in connection with the performance of your own due diligence and is, or in the case of Information made available after the date hereof will be, complete and correct in all material respects and does not and will not contain any untrue statement of a material fact or omit to state a material fact known to you and necessary to make the statements contained therein, in the light of the circumstances under which such statements were or are made, not misleading and (b) all financial projections (after giving pro forma effect to the Transaction and all other transactions referred to in the IPO other than the consummation of the IPO) that have been or are hereafter made available to the Lender by you or your representatives, advisors or affiliates in connection with the transactions contemplated hereby (the "Projections") have been or, in the case of Projections made available after the date hereof, will be prepared in good faith based upon reasonable assumptions (it being understood that the Projections are subject to significant uncertainties and contingencies, many of which are beyond your control and that no assurance can be given that such Projections will be realized). You agree to supplement the Information and the Projections from time to time until the Closing Date so that the -4- representation and warranty made in the preceding sentence is correct on the Closing Date. In making the commitment contemplated hereby and syndicating such commitment, CIBC will be using and relying on the Information and the Projections without independent verification thereof. In addition, the Lender does not intend to conduct any appraisal of the current or prospective assets of the Company. Prior to the execution of the Financing Documentation you shall provide the Lender and its counsel access to such documents agreements and persons as is reasonably requested to confirm the Information and as requested in connection with Lender's counsel's legal due diligence. the representations and covenants contained in this paragraph shall remain effective until a definitive financing agreement is executed and thereafter the disclosure representations contained herein shall be terminated and be of no further force and effect. Section 2. Financing Documentation. The issuance of the Senior Subordinated Notes and the Financing Warrants (together, the "Financing Documentation") and the Initial Warrants, Additional Warrants and Annual Warrants (collectively the "Fee Warrants") required hereby will be governed by definitive loan and related agreements and documentation in form and substance reasonably satisfactory to the Lender and you. This commitment letter, the Fee Warrants and the Financing Documentation shall be prepared by Cahill Gordon & Reindel, special counsel to the Lender. The Fee Warrants and Financing Documentation shall contain such covenants, terms and conditions as are consistent with this letter and the Term Sheet and such other covenants, terms, conditions, representations, warranties, indemnities, events of default and remedies provisions as shall be reasonably satisfactory to the Lender and you. At the request of the Company, but subject to the receipt by the Lender of reasonable assurances from the Company as to the reimbursement of its expenses as set forth in Section 5 hereof, the Lender will make reasonable commercial efforts to execute Financing Documentation as soon as reasonably practicable. Section 3. Conditions. The obligation of the Lender under Section 1 of this letter to provide the financing evidenced by the Senior Subordinated Notes is subject to fulfillment of conditions precedent typical in the context of a borrowing such as that evidenced by the Senior Subordinated Notes, including the following: (a) Financing Documentation. The Company and the Lender shall have entered into the financing Documentation -5- relating to the Transaction, on terms and in form and substance reasonably satisfactory to the Lender. (b) No Adverse Change or Development, Etc. (i) Since the date hereof, nothing shall have occurred which could reasonably be likely to have a material adverse effect on the rights or remedies of the Lender, or on the ability of the Company and its subsidiaries to perform their respective obligations to the Lender under the Financing Documentation and the Fee Warrants; (ii) there shall not have been, in the sole judgment of the Lender, any material adverse change in the business, prospects, condition (financial or other), results of operations, operations, property, assets or liabilities of the Company and its subsidiaries, taken as a whole (provided that the failure of the Company to consummate the IPO shall in no event be deemed to be such a material adverse change) and there shall not have come to the attention of the Lender any misstatements in, or omissions from, the Information which, in the sole judgment of Lender, are material; (iii) trading in securities generally on the Toronto, New York or American Stock Exchange shall not have been suspended; minimum or maximum prices shall not have been established on any such exchange; (iv) a banking moratorium shall not have been declared by New York, United States or Canadian authorities; and (v) there shall not have been (A) a material outbreak or escalation of hostilities between the United States or Canada and any foreign power, or (B) a material outbreak or escalation of any other insurrection or armed conflict involving the United States, Canada or any other national or international calamity or emergency, or (C) any fire, flood, earthquake, strike, civil disturbance or act of God which, in each case, in the reasonable judgment of the Lender, makes it impracticable or inadvisable to proceed with the consummation of the Transaction or any of the other transactions contemplated hereby or that would materially effect the ability to sell the Senior Subordinated Notes or the Financing Warrants, in each case, on the terms contemplated hereby. (c) No Defaults. On the Closing Date, the Company and its subsidiaries shall not be in default under any material agreement or instrument. Consummation of the Transaction will not cause or result in any breach or default (including any event, which, with notice or lapse of time or both would be a breach or a default) or trigger -6- any purchase requirements under any of the terms or provisions of any of the instruments governing the existing indebtedness of the Company or any of its subsidiaries to remain outstanding after the consummation of the Transaction. (d) Capital Structure. The consolidated capital structure of the Company, after giving effect to the Transaction, shall be consistent with the capital structure described in the Company's registration statement with respect to the IPO as on file as of the date hereof (the "IPO Registration Statement") under the caption "Capitalization" in the column titled "actual". (e) Solvency Certificate. As of the Closing Date, the Lender shall have received a solvency certificate from the Company's chief financial officer, and in form and substance, reasonably satisfactory to the Lender, setting forth the conclusion that, after giving effect to the Transaction, the Company and its subsidiaries taken as a whole are not insolvent and will not be rendered insolvent by the Transaction and will not be left with unreasonably small capital with which to engage in their business and will not have incurred debts beyond its ability to pay such debts as they mature. (f) Applicable Law. The Lender and its counsel shall be reasonably satisfied that the consummation of the Transaction shall be in compliance with all applicable statutes, laws, rules and regulations of all applicable governmental and regulatory agencies and authorities. There shall not have occurred after the date hereof any change in law, rule or regulation which would prohibit or impose conditions upon the Lender's ability to provide the financing evidenced by the Senior Subordinated Notes or the commitment hereunder which are materially adverse to the Lender or would result in or require any material adverse change to the net capital of the Lender. There shall not exist any judgement, order, injunction or other restraint prohibiting or imposing conditions upon consummation of any portion of the Transaction which are materially adverse to the Lender or the Company and its subsidiaries taken as a whole. (g) Financial Statements. The Lender shall be satisfied with the audited, unaudited and pro forma financial statements meeting the requirements of Regulation S-X -7- under the Securities Act of 1933, as amended (the "Act"), of the Company (in a form no more detailed or comprehensive than the financial statements in the form included in the IPO Registration Statement. (h) Financing Warrants and Fees. On the Closing Date, the Company shall have issued a pro rata portion of the Financing Warrants and paid all fees (including, without limitation, the Initial Warrants and any Additional Warrants (as defined)) that are due to the Lender at or prior to the funding of the Senior Subordinated Notes. (i) Litigation. Except as disclosed in publicly available documents filed by the Company with the Securities and Exchange Commission prior to the date hereof under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, no litigation or similar proceeding (governmental or other) shall exist or be threatened with respect to or affecting (i) the Company, any of its subsidiaries, or the Transaction, which is reasonably likely to have a material adverse effect on the Company and its subsidiaries, taken as a whole, or (ii) the Financing Documentation or the consummation of the Transaction. (j) Notice. The Company shall have delivered written notice to the Lender setting forth the anticipated funding date, which shall not be less than two weeks from the date of such notice. Section 4. Indemnification and Contribution. You agree to indemnify CIBC and each of its affiliates, any Syndication Parties and each person in control of CIBC or any of the Syndication Parties and each of its or their affiliates and the respective officers, directors, employees, agents and representatives of CIBC, its affiliates, the Syndication Parties and their respective control persons, as provided in the Indemnity Letter dated the date hereof (the "Indemnity Letter") and attached hereto; provided that upon execution of the Financing Documentation, the Indemnity Letter shall be terminated and of no further force and effect, it being understood that the Financing Documentation will contain indemnification provisions relating to the matters and periods of time covered in the Indemnity Letter. Section 5. Structuring and Commitment Fees and Expenses. The Company shall pay the Lender a cash commitment -8- fee of 3.5% of the aggregate principal amount of the Senior Subordinated Notes committed to be purchased (the "Original Cash Commitment Fee") by CIBC as set forth on the signature page hereof. Such fee shall be due and owing from and after the date hereof but shall be payable on the earliest to occur of (a) the closing date of the IPO, (b) fifteen days following the expiration of this commitment and (c) the date any of the Senior Subordinated Notes are issued. The Company shall also pay Additional Commitment Fees (as defined in Section 6 below) and issue Additional Warrants (as defined in Section 6 below) in the event the Company exercises the Extended Commitment Option (as defined in Section 6 below). The Company shall also issue the Annual Warrants on the same basis and terms as the Initial Warrants in accordance with Section 1 above. In addition to any fees that may be payable to the Lender hereunder and regardless of whether any of the transactions contemplated by this letter agreement are consummated, this letter agreement is terminated, the financing evidenced by the Senior Subordinated Notes is made available or the Financing Documentation is executed and delivered, you hereby agree to reimburse the Lender for all reasonable fees (not to exceed $100,000) and disbursements of legal counsel, including but not limited to the reasonable fees and disbursements of Cahill Gordon & Reindel, the Lender's special counsel, and all of the Lender's travel and other reasonable out-of-pocket expenses incurred in connection with the Transaction or otherwise arising out of the Lender's commitment hereunder. Section 6. Termination. The Lender's commitment hereunder to provide the financing evidenced by the Senior Subordinated Notes shall terminate, unless expressly agreed to by the Lender in its sole discretion to be extended to another date, on January 15, 1997 if the Senior Subordinated Notes have not been issued. Notwithstanding the foregoing, the Lender agrees to extend its commitment to provide the financing evidenced by the Senior Subordinated Notes, upon notice from the Company (received on or prior to January 15, 1997) and in the Company's sole discretion, until (a) February 15, 1997 or (b) March 15, 1997 (the "Extended Commitment Option"). Upon exercise of the Extended Commitment Option, the Company shall immediately issue 50,000 warrants if the one month Extended Commitment Option is selected and 75,000 warrants if the two month Extended Commitment Option is selected (collectively, the "Additional Warrants") on the same basis and with an identical exercise price as the Initial Warrants. In addition, if the one month Extended Commitment Option is selected, the Company shall pay the Lender an additional cash commitment fee of -9- $250,000 and if the two month Extended Commitment Option is selected, an additional cash commitment fee of $375,000 (the "Additional Commitment Fees"). In the event the Company elects to exercise the Extended Commitment Option, the Original Cash Commitment Fee as well as any and all Additional Commitment Fees, shall be payable on the earliest to occur of (a) 15 days following the final expiration of the commitment made hereby, (b) the consummation of the IPO or (c) the date any of the Senior Subordinated Notes are issued. No such termination of any such commitment shall affect your obligations under Sections 4 and 5 hereof or this Section 6, which shall survive any such termination. Section 7. Assignment; Qualified Institutional Buyers. This letter shall not be assignable by any party hereto without the prior written consent of the other parties (other than, in the case of the Lender, to an affiliate of the Lender, it being understood that any such affiliate shall be subject to the restrictions set forth in this Section 7); provided, however, that CIBC shall have the right, in its sole discretion to sell portions of the Commitment hereunder, the Senior Subordinated Notes and the Financing Warrants among banks or other financial institutions pursuant to the Financing Documentation or otherwise and to sell, transfer or assign all or any portion of, or interests or participations in, the Senior Subordinated Notes, the Financing Warrants and the Fee Warrants; provided that prior to the consummation of an initial public offering CIBC shall not sell, transfer or assign all or any portion of the Fee Warrants to any person who is not an affiliate without the consent of the Company, which consent shall not be unreasonably withheld. CIBC agrees to act as arranger, documentation agent and administrative agent for the Senior Subordinated Notes, the Financing Warrants and the Fee Warrants unless removed from such positions pursuant to the terms of the Financing Documentation or unless prohibited from acting as such by any applicable statute, law, rule or regulation. CIBC represents that it is a "Qualified Institutional Buyer" as defined in Rule 144A of the Securities Act of 1933, as amended, and that any Syndication Party described above will also be a "Qualified Institutional Buyer" or an "institutional accredited investor". Section 8. Miscellaneous. THIS LETTER SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO THE PRINCIPLES GOVERNING CONFLICTS OF LAWS. This letter (including the provisions of the Indemnity Letter specifically incorporated herein) embodies -10- the entire agreement and understanding between you and the Lender supersedes all prior agreements and understandings relating to the subject matter hereof. This letter may be executed in any number of counterparts, each of which shall be an original, but all of which shall constitute one instrument. The Lender reserves the right to employ the services of its affiliates (including CIBC Wood Gundy Securities Corp. ("WGSC")) in providing services contemplated by this letter and to allocate, in whole or in part, to WGSC certain fees payable to the Lender in such manner as the Lender and WGSC may agree in their sole discretion. You acknowledge that the Lender may share (without duplication) with any of its affiliates (including WGSC) and such affiliates may share with the Lender (in each case, subject to any confidentiality agreements applicable thereto), any information related to you or your affiliates or their respective subsidiaries (including information relating to creditworthiness) or the Transaction. -11- If you are in agreement with the foregoing, please sign and return to the Lender at 425 Lexington Avenue, New York, New York 10017, the enclosed copy of this letter no later than 5:00 p.m., New York time, on December 11, 1996, whereupon the undertakings of the parties shall become effective to the extent and in the manner provided hereby. A telecopied signature on this letter shall be acceptable to and binding on each of the Company and the Lender; provided that each party hereto shall undertake to promptly deliver to the other a signed original hereof. This offer shall terminate if not so accepted by you on or prior to that time. Very truly yours, CIBC WG ARGOSY MERCHANT FUND 2, L.L.C. By: /s/ authorized signature ------------------------------------ Name: Title: Principal Amount of Senior Subordinated Notes committed to be purchased: $10 Million Accepted and Agreed to as of the date first above written: MAGINET CORPORATION By: /s/ authorized signature ----------------------------- Name: Title: EXHIBIT A SUMMARY OF TERMS AND CONDITIONS* $10,000,000 SENIOR SUBORDINATED NOTES DUE 2003 AND RELATED WARRANTS TO PURCHASE COMMON STOCK Issuer: MagiNet Corporation ("MagiNet" or the "Company"). Issue: Senior Subordinated Notes (the "Senior Subordinated Notes"). Principal Amount: Up to $10,000,000. Final Maturity: 2004 (7 years). Lender: CIBC WG Argosy Merchant Fund 2, L.L.C. Rate: 12% payable semi-annually. Notes: Senior Subordinated Notes. Financing Warrants: Up to 1,333,333 warrants to purchase Company Common Stock, par value $.0001 per share, issuable on a pro rata basis with the Senior Subordinated Notes. The Financing Warrants shall expire seven years from the date of issuance. The Financing Warrants (and the Fee Warrants) shall not be exercised by Lender for greater than 5% of the voting stock of the Company except in compliance with the Bank Holding Company Act. Exercise Price of the Subject to the reset provisions Financing Warrants: referred to below, the Financing Warrants will be exercisable into common stock of the Company at a - --------------------- * Capitalized terms not otherwise defined herein shall have the meanings attributed to them in the Commitment Letter to which this term sheet is attached. -2- price of $7.50 per share at any time after the issuance of the Senior Subordinated Notes prior to their expiration (the "Exercise Price"). Reset Provisions: The Exercise Price of the Financing Warrants is to be reset to 85% of the price to the public in the Com- pany's initial public offering of Common Stock ("IPO") if such reset results in a reduction of the Exer- cise Price below $7.50 per share (the "First Reset Price"). In addition, at the first year anni- versary of the IPO the Exercise Price is to be reset to the lower of the First Reset Price and the price of the Common Stock at such time (the "Second Reset Price"). Pre-issuance The number of Financing Warrants Anti-Dilution Adjustment and the Exercise Price shall be adjusted in respect of any event that occurs after the date of the Commitment Letter and prior to the date the Financing Warrants are issued which would have caused an anti-dilution adjustment under the Financing Warrants had they been outstanding at the time. Anti-Dilution Provisions: The Financing Warrants will be subject to standard and customary adjustment including for shares of Common Stock or equivalents issued at a price per share of less than Fair Market Value (to be defined) (regardless of whether prior to or after the consummation of an IPO). Redemption of the Notes The Senior Subordinated Notes are at the Option of the redeemable at the option of the Issuer: Issuer, in whole or in part (pro- vided that no less than $5 million of Senior Subordinate Notes remain outstanding) from the date of issu- ance at a redemption price equal to 100% of the principal amount of the Senior Subordinated Notes plus -3- accrued interest to the date of redemption. Redemption of the Notes In the event of a Change of Control at the Option of the (to be defined) or other Purchaser: Fundamental Change (to be defined) the Senior Subordinated Notes will be redeemable at the option of the Purchaser at a purchase price equal to 112% of principal amount. In the event of the consummation of an initial public offering of equity or the issuance of any debt securities or preferred stock the Senior Subordinated Notes will be redeemable at the option of the Purchaser at a purchase price equal to 100% of principal amount. Registration Rights: The Purchaser will be entitled to (i) unlimited piggy back registra- tions subject to pro rata reduc- tions, commencing on the issue date, (ii) one demand registration subject to pro rata reductions, commencing on the issue date, and (iii) certain rights to cause the Company to effect and keep current a shelf-registration on or after the issue date. In each case, such registration shall pertain to the Common Stock underlying the Financ- ing Warrants and the Fee Warrants. Ranking: The Senior Subordinated Notes are unconditional, unsecured and senior subordinated obligations of the Company and will rank senior to all other unsecured and subordinated obligations of the Company and jun- ior to all other senior indebted- ness of the Company. Use of Proceeds: General corporate purposes other than repayments of indebtedness or -4- purchases or redemptions of or pay- ments on equity securities. Commitment Fees: As set forth in Commitment Letter. Funding Fee: 2.0% of Gross Proceeds. Legal Fees: The Company and/or its agents will reimburse Purchaser for the fees and expenses of legal counsel to be selected by the Purchaser whether or not the transaction closes. Certain Covenants: The Financing Documentation will contain customary affirmative and negative covenants, including, without limitation, prohibitions on the ability of the Company and its subsidiaries to incur additional indebtedness (subject to limited exceptions), prohibitions on the ability of the Company and its sub- sidiaries to issue subordinated indebtedness senior to the Senior Subordinated Notes, prohibitions on the ability of the Company to pay certain dividends and make certain other restricted payments and investments including, without limitation, the repurchase of capi- tal stock or subordinated indebted- ness (subject to limited excep- tions), restrictions on the ability of the Company and the Company's subsidiaries to enter into agree- ments which restrict their ability to pay dividends or make certain payments to the Company, create liens, enter into transactions with affiliates, merge, consolidate or transfer substantially all of their respective assets and restrictions on the ability of the Company and its subsidiaries to utilize pro- ceeds from asset sales for purposes other than related business investments. -5- Participation/Assignment CIBC and each other Lender, if any, may, with the or Syndication: consent of CIBC, participate out or sell or assign, or syndicate to other lenders, the Senior Subordinated Notes, in whole or in part, at any time, subject to compliance with applicable securities laws. Management of the Company will cooperate to the fullest extent possible (including, without limitation, participation in road show presentations and investor meetings) in any such syndication efforts. Modifications and The consent of holders of a majority in outstanding Amendments: aggregate principal amount of the Senior Subordinated Notes will be required with respect to amendments which do not affect the payments terms, or relative ranking of the Senior Subordinated Notes. The consent of holders of a majority of the Financing Warrants will be required to amend any of the principal terms thereof. Representations and Customary for transactions of this type. Warranties: Conditions Precedent: As set forth in the Commitment Letter. Events of Default: Customary for transactions of this type, including, without limitation, payment defaults, covenant defaults, bankruptcy and insolvency, judgments, cross acceleration of and failure to pay at final maturity other indebtedness aggregating $750,000 or more. Governing Law and Forum: The State of New York. -6- Indemnification and Expense Reimbursement: Customary for transactions of this type. Fee Warrants: Initial Warrants: As set forth in Commitment Letter. Issuance of Additional Warrants: As set forth in Commitment Letter. Issuance of Annual Warrants: As set forth in Commitment Letter. Exercise Price: $.01 per share of Common Stock. Term of Fee Warrants: The Fee Warrants will be exercisable for common stock of the Company for a period of 7 years and will be immediately exercisable. Pre-issuance Anti- The number of Annual Warrants to be issued shall dilution Protection: be adjusted in respect of any event that occurs after the date of the Commitment Letter and prior to the issuance of such Annual Warrants which would have caused an anti-dilution adjustment under the Annual Warrants had they been outstanding at the time. Anti-dilution Protection: The Fee Warrants will be subject to standard and customary anti-dilution protection (i.e., stock dividends, splits and reclassifications and, only prior to the consummation of an IPO, below market issuances of securities and assets). Registration Rights: As set forth in the definitive Initial Warrant issued on the date of the Commitment Letter. To the extent the Financing Warrants are issued, the Fee Warrants shall have identical registration rights as are granted to the holders of Financing Warrants. EX-23.1 10 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. 4 to the Registration Statement (Form S-1) and related Prospectus of MagiNet Corporation for the registration of 6,325,000 shares of its common stock. ERNST & YOUNG LLP Palo Alto, California December 16, 1996 EX-23.2 11 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. 4 to the Registration Statement (Form S-1) and related Prospectus of MagiNet Corporation for the registration of 6,325,000 shares of its common stock. ERNST & YOUNG GMBH Dusseldorf, Germany December 16, 1996 EX-27.1 12 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 53,241 124 605 (25,744) (37,877) 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) (2.49) (2.77) (2.49)
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