-----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, Cmem+xKgB+taCbn9O4xDFj/wf2qAB4z4JKx7yGTSMWoYweQZUPYhB89H4TLfV/yi tPpEeVPny57z2os1I3FhOg== 0000950131-96-004937.txt : 19961008 0000950131-96-004937.hdr.sgml : 19961008 ACCESSION NUMBER: 0000950131-96-004937 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 19961007 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MAGINET CORP CENTRAL INDEX KEY: 0001001134 STANDARD INDUSTRIAL CLASSIFICATION: CABLE & OTHER PAY TELEVISION SERVICES [4841] IRS NUMBER: 770407677 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-12185 FILM NUMBER: 96640288 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 1 TO FORM S-1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 7, 1996 REGISTRATION NO. 333-12185 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- AMENDMENT NO. 1 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ---------------- MAGINET CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ---------------- CALIFORNIA (PRIOR TO 4841 77-0407677 REINCORPORATION) (PRIMARY STANDARD (I.R.S. EMPLOYER DELAWARE (AFTER INDUSTRIAL IDENTIFICATION NUMBER) REINCORPORATION) CLASSIFICATION CODE NUMBER) (STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) 405 TASMAN DRIVE SUNNYVALE, CALIFORNIA 94089 (408) 752-1000 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ---------------- KENNETH B. HAMLET PRESIDENT AND CHIEF EXECUTIVE OFFICER MAGINET CORPORATION 405 TASMAN DRIVE SUNNYVALE, CALIFORNIA 94089 (408) 752-1000 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ---------------- COPIES TO: THOMAS C. DEFILIPPS, ESQ. EDWARD M. LEONARD, ESQ. WILSON SONSINI GOODRICH & ROSATI BROBECK, PHLEGER & HARRISON LLP PROFESSIONAL CORPORATION TWO EMBARCADERO PLACE 650 PAGE MILL ROAD 2200 GENG ROAD PALO ALTO, CA 94304 (415) 493-9300 PALO ALTO, CA 94303 (415) 424-0160 ---------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. ---------------- If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [_] If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] ---------------- CALCULATION OF REGISTRATION FEE - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM AGGREGATE AMOUNT OF TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(1)(2) FEE - -------------------------------------------------------------------------------------------------- Common Stock, $.001 par value... 5,750,000 $14.00 $80,500,000 $27,758.62(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 October 7, 1996 PROSPECTUS 5,000,000 SHARES LOGO COMMON STOCK ------------ Of the 5,000,000 shares of Common Stock, $.001 par value ("Common Stock"), of MagiNet Corporation ("MagiNet" or the "Company") being offered hereby, 4,000,000 shares are being offered initially in the United States and Canada by the U.S. Underwriters (the "U.S. Offering") and 1,000,000 shares are being offered initially outside the United States and Canada by the International Managers (the "International Offering"). Such offerings are referred to collectively as the "Offerings." Prior to the Offerings, there has been no public market for the Common Stock of the Company. It is currently estimated that the initial public offering price per share will be between $12.00 and $14.00 per share. See "Underwriting" for a discussion of factors to be considered in determining the initial public offering price. Application has been made to have the Common Stock approved for quotation 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 6. ------------ 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 $1,050,000 payable by the Company. (3) The Company has granted to the U.S. Underwriters a 30-day option to purchase up to 600,000 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 150,000 additional shares of Common Stock solely to cover over- allotments, if any. If such options are exercised in full, the total Price to Public, Underwriting Discounts and Commissions and Proceeds to Company will be $ , $ and $ , respectively. See "Underwriting." ------------ The shares of Common Stock offered by this Prospectus are offered by the U.S. Underwriters, subject to prior sale, to withdrawal, cancellation or modification of the offer without notice, to delivery to and acceptance by the U.S. Underwriters and to certain other conditions. It is expected that delivery of such shares will be made at the offices of Lehman Brothers Inc., New York, New York, on or about , 1996. ------------ LEHMAN BROTHERS HAMBRECHT & QUIST , 1996 [INSIDE FRONT COVER] [MAGINET LOGO] [ARTWORK] ---------------- IN CONNECTION WITH THE OFFERINGS, THE U.S. UNDERWRITERS AND THE INTERNATIONAL MANAGERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. 2 [GATEFOLD--FIRST PAGE] MagiNet is the largest provider of in-room on-demand video entertainment and information systems outside North America. [Graphic: Underneath the above caption on both the first and second page of the gatefold is a map of the continents outside of North and South America with the countries where there are MagiNet 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. MagiNet users are business and leisure guests at the world's leading hotels. [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 has over 50,000 rooms installed with on-demand systems 250% 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 leading 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, 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, 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 June 30, 1996, MagiNet served 138 hotels having 49,683 rooms, with an additional 20,868 rooms in backlog. 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. 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 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 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, with InterGame for in-room casino-style gaming and with Trinity Group for in-room advertising. The Company incorporated in California in July 1991, changed its name from Pacific Pay Video Limited to MagiNet Corporation in August 1995 and will reincorporate into Delaware prior to the completion of the Offerings. Unless the text otherwise requires, references in this Prospectus to "MagiNet" and the "Company" refer to MagiNet Corporation, a California corporation, and its Delaware successor, together with their subsidiaries. The Company's principal executive offices are located at 405 Tasman Drive, Sunnyvale, California 94089, and its telephone number at that address is (408) 752-1000. 3 THE OFFERINGS Common Stock initially offered in: The U.S. Offering.................. 4,000,000 shares The International Offering......... 1,000,000 shares Total Common Stock offered........ 5,000,000 shares ---------- Common Stock to be outstanding after the Offerings...................... 18,435,436 shares(1) Use of proceeds..................... System installations, working capital and general corporate purposes. See "Use of Proceeds." Proposed Nasdaq National Market symbol............................. MGNT
SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ---------------------------- ------------------- 1993 1994 1995 1995 1996 ------- ------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE AND OTHER DATA) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenue.................. $ 395 $ 2,342 $ 8,689 $ 3,302 $ 7,923 Direct costs............. 294 1,156 3,731 1,687 3,854 Depreciation and amortization............ 171 957 3,682 1,510 3,149 Operations expenses...... 464 2,876 3,108 1,213 1,016 Selling, general and administrative.......... 1,497 4,294 8,420 3,563 4,652 Research and development............. 1,320 856 1,247 571 937 ------- ------- -------- -------- -------- Operating loss........... (3,351) (7,797) (11,499) (5,242) (5,685) Interest income (expense), net.......... (28) (253) (991) 4 (1,382) ------- ------- -------- -------- -------- Loss before income taxes and minority interest in net losses of consolidated subsidiaries............ (3,379) (8,050) (12,490) (5,238) (7,067) Provision for income taxes .................. -- -- (554) (300) (383) Minority interest in net losses of consolidated subsidiaries............ -- 124 248 153 124 ------- ------- -------- -------- -------- Net loss................. $(3,379) $(7,926) $(12,796) $ (5,385) $ (7,326) ======= ======= ======== ======== ======== Pro forma net loss per share(2)................ $ (1.03) $ (0.59) ======== ======== Shares used in computation of pro forma net loss per share(2)... 12,392 12,407 OTHER DATA: EBITDA (In thousands)(3)........... $(3,180) $(6,840) $ (7,817) $ (3,732) $ (2,536) EBITDA margin............ (805)% (292)% (90)% (113)% (32)% New rooms installed...... 2,087 10,929 26,106 14,632 10,561 Total rooms served(4).... 2,087 13,016 39,122 27,648 49,683 Rooms in backlog......... -- 10,941 12,194 10,574 20,868 Average monthly gross video revenue per room.. -- $ 32.39 $ 29.18 $ 30.05 $ 29.60
JUNE 30, 1996 ------------------------ ACTUAL AS ADJUSTED(5) -------- -------------- (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Cash, cash equivalents and short-term investments..... $ 14,772 $ 74,172 Working capital....................................... 13,571 72,971 Total assets.......................................... 52,185 111,585 Long-term debt........................................ 25,403 25,403 Accumulated deficit................................... (32,800) (32,800) Total stockholders' equity............................ 20,163 79,563
4 (1) Based on shares outstanding as of June 30, 1996. Excludes as of June 30, 1996, an aggregate of 1,487,394 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 $1.55. See "Management--Stock Plans," "Certain Transactions" and Note 5 of Notes to Consolidated Financial Statements. Also excludes an aggregate of 2,560,528 shares reserved for issuance after June 30, 1996 under the 1992 Key Personnel Stock Option Plan, the 1996 Director Stock Option Plan and the 1996 Employee Stock Purchase Plan. See "Management-- Stock Plans." (2) See Note 1 of Notes to Consolidated Financial Statements for a discussion of the computation of net loss per share. (3) 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. (4) Includes all rooms installed with Company-owned systems. (5) Adjusted to reflect the net proceeds of the sale of Common Stock offered by the Company hereby at an assumed initial public offering price of $13.00 per share and the application thereof. See "Use of Proceeds." ---------------- Except as set forth in the Consolidated Financial Statements or otherwise indicated herein, all information in this Prospectus (i) reflects the reincorporation of the Company into Delaware which will be effected prior to the effectiveness of the registration statement covering the Offerings, (ii) reflects the conversion of all the Company's outstanding shares of Preferred Stock into 10,908,878 shares of Common Stock, which will occur automatically upon the closing of the Offerings, (iii) reflects the filing, upon the closing of the Offerings, of the Company's Restated Certificate of Incorporation authorizing 5,000,000 shares of undesignated Preferred Stock, (iv) assumes the net exercise of warrants to acquire up to an aggregate maximum of 3,704,840 shares of Common Stock and Preferred Stock for 2,045,800 shares of Common Stock in connection with the Offerings at an assumed fair market value of $13.00 per share and (v) assumes that the U.S. Underwriters' and International Managers' over-allotment options are not exercised. See "Description of Capital Stock," "Underwriting" and Note 5 of Notes to Consolidated Financial Statements. ---------------- MagiNet and iLook are trademarks of the Company. This Prospectus also contains trademarks and tradenames of other companies. 5 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 a comparatively small, one-time fee. 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. 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. HISTORY OF LOSSES; FUTURE CAPITAL NEEDS; ANTICIPATED FUTURE LOSSES MagiNet has recorded cumulative net losses of approximately $32,800,000 since its inception, including a loss of approximately $7,326,000 for the six months ended June 30, 1996. MagiNet's business requires substantial investment on a continuing basis for the installation of MagiNet'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 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. RELIANCE ON NEW HOTEL CONTRACTS AND INSTALLATIONS MagiNet'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 6 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 the Company's master hotel contracts, the Company must install the interactive video entertainment and information system specified in the contract with the hotel chain. The inability to provide the particular system specified 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 and install systems at the rate it currently anticipates for these or other reasons could have a material adverse effect on the Company's future results of operations. FLUCTUATIONS IN OPERATING RESULTS MagiNet'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 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. 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 general economic and other conditions affecting the timing of contracts and installations, capital spending, and order cancellations or rescheduling. SUBSTANTIAL FIXED COMMITMENTS Funds generated by existing operations are not sufficient to enable the Company to meet its debt service obligations on the Senior Secured Notes due 2000 (the "Notes"), together with other fixed charges. Net proceeds from the Offerings will be used by the Company primarily 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 or will 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 an amendment of the covenants in exchange for the Company issuing additional warrants to the holders of the Notes. In addition, as of September 30, 1996, the Company is not in compliance with a financial covenant under the Notes and has requested an amendment of the covenant from the holders of the Notes. No assurance can be given that the holders of the Notes will agree to an amendment of the covenant on acceptable terms, if at all. 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. IMPORTANCE OF POTENTIAL NEW SOURCES OF REVENUE 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. There can be no assurance that the Company's new products 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 7 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. To the extent that such services 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. EXPANSION OF BUSINESS THROUGH ACQUISITIONS Part of MagiNet's business strategy is to pursue acquisitions that will complement its existing business. The Company has had preliminary discussions with, or has evaluated the potential acquisition of, several companies. Although no such transaction is being considered at this time, the Company is unable to predict whether or when any prospective acquisition candidates will become available or the likelihood of a material transaction being completed should any negotiations commence. There can be no assurance that any acquisitions will occur, that the Company can be successful in integrating the operations and personnel of an 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 such a 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 in order 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. The Company 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 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 substantially all of the Company's revenue is derived from use of the Company's on-demand services, 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. DEPENDENCE ON LOCAL PARTNERS; INTERNATIONAL BUSINESS All of MagiNet'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. The Company has entered into joint ventures or similar arrangements in certain of its markets with local businesses and individuals believed by the Company 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 8 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 MagiNet's revenue is denominated in foreign currencies. The Company has not historically attempted to reduce the risk of currency fluctuations by hedging except in certain limited circumstances. The Company may attempt to reduce these risks by hedging in the future. Changes in the exchange rates of foreign currencies or exchange controls may adversely affect the Company's results of operations. There can be no assurance that the Company's current or any future currency exchange strategy will be successful in avoiding exchange related losses or that any of the factors listed above will not have a material adverse effect on the Company's future international revenue and, consequently, on the Company's business, 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. 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 MagiNet's success depends upon the continued contributions of certain senior corporate managers and key employees, 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 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 9 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 PRODAC Prozebdatentechnik GmbH, Thorn-EMI Plc, Video Management Services, Inc. and Granada Group Plc, which have installed mainly free-to-guest and scheduled systems. 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 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 10 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 such license agreements were to be successfully challenged by these or other companies, the Company's business, financial condition and results of operations would be materially adversely affected. 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 challenged by the U.S. Patent and Trademark Office. 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." CONTROL BY CURRENT STOCKHOLDERS MagiNet's officers, directors and principal stockholders and their affiliates totaling 11 stockholders will in the aggregate beneficially own approximately 46.3% 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 5,005,000 shares of Common Stock, including the 5,000,000 shares offered hereby, will be eligible for immediate sale in the public market without restriction. Ninety days after the date of this Prospectus, approximately 31,000 additional shares will be eligible for sale 11 pursuant to Rule 144 or Rule 701 under the Securities Act of 1933. Following expiration or release from 180-day lock-up agreements, approximately 9,448,000 additional shares will be eligible for immediate sale, subject in some cases to compliance with Rule 144. Thereafter, approximately 3,977,000 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. 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 Schedule E of the By-Laws 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." 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 12 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. See "Dilution." 13 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 $59,400,000 (approximately $68,467,500 if the U.S. Underwriters' and International Managers' over- allotment options are exercised in full) assuming an initial public offering price of $13.00 per share and after deducting the estimated underwriting discounts and commissions and estimated offering expenses. The Company currently anticipates that the net proceeds of the Offerings will be used for system installations, working capital and for general corporate purposes. 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 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 "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. 14 CAPITALIZATION The following table sets forth as of June 30, 1996 the total capitalization of the Company and the total capitalization as adjusted to reflect (i) the reincorporation of the Company into Delaware, which will be effected prior to the effectiveness of the registration statement covering the Offerings, (ii) the conversion of all the Company's outstanding shares of Preferred Stock into 10,908,878 shares of Common Stock, which will occur automatically upon the closing of the Offerings, (iii) the filing, upon the closing of the Offerings, of the Company's Restated Certificate of Incorporation authorizing 5,000,000 shares of undesignated Preferred Stock and 45,000,000 shares of Common Stock, (iv) the net exercise of warrants to acquire up to an aggregate maximum of 3,704,840 shares of Common Stock and Preferred Stock into 2,045,800 shares of Common Stock in connection with the Offerings, at an assumed fair market value of $13.00 per share, (v) that the U.S. Underwriters' and International Managers' over-allotment options are not exercised and (vi) the sale by the Company of 5,000,000 shares of Common Stock in the Offerings at an assumed offering price of $13.00 per share and the application of the net proceeds therefrom. 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.
JUNE 30, 1996 --------------------- ACTUAL AS ADJUSTED -------- ----------- (IN THOUSANDS) Long-term debt(1)........................................ $ 25,403 $ 25,403 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, as adjusted.......... 53,241 -- Common Stock, no par value; 20,000,000 shares authorized, 480,758 shares issued and outstanding, actual; $.001 par value, 45,000,000 shares authorized, 18,435,436 shares issued and outstanding, as adjusted(2)............................................ 255 18 Additional paid in capital.............................. -- 112,979 Warrants to purchase Common Stock....................... 101 -- Accumulated deficit..................................... (32,800) (32,800) Cumulative translation adjustment....................... (634) (634) -------- -------- Total stockholders' equity............................. 20,163 79,563 -------- -------- Total capitalization................................... $ 45,566 $104,966 ======== ========
- -------- (1) See Note 3 of Notes to Consolidated Financial Statements. (2) Excludes an aggregate of 1,487,394 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 June 30, 1996 at a weighted average exercise price of $1.55. Also excludes an aggregate of 2,560,528 shares reserved for issuance after June 30, 1996 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," "Description of Capital Stock" and Note 5 of Notes to Consolidated Financial Statements. 15 DILUTION The net tangible book value of the Company at June 30, 1996 was approximately $19,070,000 or $1.42 per share of Common Stock. Net tangible book value per share represents the Company's total tangible assets less total liabilities, divided by the number of outstanding shares of Common Stock then outstanding (assuming the conversion of all then outstanding Preferred Stock into Common Stock and the net exercise of certain warrants to acquire an aggregate of 3,704,840 shares of Common Stock into 2,045,800 shares of Common Stock and Preferred Stock assuming, for purposes of such net exercises, a fair market value of $13.00 per share of Common Stock). 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 5,000,000 shares in the Offerings (at an assumed initial public offering price of $13.00 per share and after deducting the estimated underwriting discounts and commissions and offering expenses payable by the Company), the Company's net tangible book value as of June 30, 1996 would have been $78,470,000 or $4.26 per share of Common Stock. This represents an immediate increase in net tangible book value of $2.84 per share to existing stockholders and an immediate dilution in net tangible book value of $8.74 per share to new investors. The following table illustrates this per share dilution: Assumed initial public offering price per share................... $13.00 Net tangible book value per share as of June 30, 1996........... $1.42 Increase in net tangible book value per share attributable to new investors.................................................. 2.84 ----- Net tangible book value per share after offering.................. 4.26 ------ Dilution per share to new investors............................... $ 8.74 ======
The following table summarizes, on a pro forma basis as of June 30, 1996, the number of shares of Common Stock, 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, purchased from the Company, the total consideration paid and the average price per share paid by the existing stockholders and by new investors purchasing shares in the Offerings (at an assumed initial public offering price of $13.00 per share and before deducting underwriting discounts and commissions and estimated offering expenses payable by the Company).
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE ------------------ -------------------- PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ---------- ------- ------------ ------- --------- Existing stockholders......... 13,435,436 72.9% $ 56,758,000 46.6% $ 4.22 New investors................. 5,000,000 27.1 65,000,000 53.4 13.00 ---------- ----- ------------ ----- Total....................... 18,435,436 100.0% $121,758,000 100.0% ========== ===== ============ =====
The foregoing computations assume no exercise of stock options after June 30, 1996 and the net exercise of outstanding warrants to acquire up to an aggregate of 3,704,840 shares of Common Stock and Preferred Stock into 2,045,800 shares of Common Stock, assuming, for purposes of such net exercises, a fair market value of $13.00 per share of Common Stock. The foregoing net exercises are anticipated to occur upon either the effectiveness of the registration statement covering the Offerings, the closing of the Offerings, or the tenth business day following such closing as set forth in the applicable warrant agreement. As of June 30, 1996, there were outstanding options to purchase 1,487,394 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 $1.55 per share. After June 30, 1996 (i) an additional 1,800,000 shares of Common Stock were reserved for issuance under the Company's 1992 Key Personnel Stock Option Plan, (ii) 200,000 shares were reserved for issuance under the Company's 1996 Director Stock Option Plan and (iii) 200,000 shares of Common Stock were reserved for issuance under the Company's 1996 Employee Stock Purchase Plan. To the extent that any shares are issued upon exercise of options, warrants or rights that are presently outstanding or granted in the future, or reserved for future issuance under the Company's stock plans, there will be further dilution to new investors. See "Management--Stock Plans," "Description of Capital Stock" and Note 5 of Notes to Consolidated Financial Statements. 16 SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA The selected consolidated statement of operations 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, and for the six-month period ended June 30, 1996 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 as of June 30, 1996, and for each of the years in the three-year period ended December 31, 1995, and for the six-month period ended June 30, 1996 and the report thereon of Ernst & Young LLP, independent auditors, are included elsewhere in this Prospectus. The selected consolidated statement of operations data set forth below for the six months ended June 30, 1995 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 six months ended June 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.
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, -------------------------------------------- ------------------- 1991 1992 1993 1994 1995 1995 1996 ----- ------- ------- ------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE AND OTHER DATA) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenue................ $ -- $ -- $ 395 $ 2,342 $ 8,689 $ 3,302 $ 7,923 Direct costs........... -- -- 294 1,156 3,731 1,687 3,854 Depreciation and amortization.......... -- 2 171 957 3,682 1,510 3,149 Operations expenses.... -- -- 464 2,876 3,108 1,213 1,016 Selling, general and administrative........ 149 514 1,497 4,294 8,420 3,563 4,652 Research and development........... -- 665 1,320 856 1,247 571 937 ----- ------- ------- ------- -------- -------- -------- Operating loss......... (149) (1,181) (3,351) (7,797) (11,499) (5,242) (5,685) Interest income (expense), net........ -- (43) (28) (253) (991) 4 (1,382) ----- ------- ------- ------- -------- -------- -------- Loss before income taxes and minority interest in net losses of consolidated subsidiaries.......... (149) (1,224) (3,379) (8,050) (12,490) (5,238) (7,067) Provision for income taxes................. -- -- -- -- (554) (300) (383) Minority interest in net losses of consolidated subsidiaries.......... -- -- -- 124 248 153 124 ----- ------- ------- ------- -------- -------- -------- Net loss............... $(149) $(1,224) $(3,379) $(7,926) $(12,796) $ (5,385) $ (7,326) ===== ======= ======= ======= ======== ======== ======== Pro forma net loss per share(1).............. $ (1.03) $ (0.59) ======== ======== Shares used in computation of pro forma net loss per share(1).............. 12,392 12,407 OTHER DATA: EBITDA (In thousands)(2)......... $(149) $(1,179) $(3,180) $(6,840) $ (7,817) $ (3,732) $ (2,536) EBITDA margin.......... -- -- (805)% (292)% (90)% (113)% (32)% New rooms installed.... -- -- 2,087 10,929 26,106 14,632 10,561 Total rooms served(3).. -- -- 2,087 13,016 39,122 27,648 49,683 Rooms in backlog....... -- -- -- 10,941 12,194 10,574 20,868 Average monthly gross video revenue per room.................. -- -- -- $ 32.39 $ 29.18 $ 30.05 $ 29.60
DECEMBER 31, JUNE 30, 1996 ---------------------------------------- ------------------------ 1991 1992 1993 1994 1995 ACTUAL AS ADJUSTED(4) ---- ------ ------ -------- -------- -------- -------------- (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Cash, cash equivalents and short-term investments........... $ 1 $ 77 $ 315 $ 10,961 $ 18,823 $ 14,772 $74,172 Working capital........ (24) (386) (1,652) 7,751 14,542 13,571 72,971 Total assets........... 2 1,458 4,711 23,999 46,540 52,185 111,585 Long-term debt......... 125 349 1,400 -- 24,900 25,403 25,403 Accumulated deficit.... (149) (1,373) (4,752) (12,678) (25,474) (32,800) (32,800) Total stockholders' equity (net deficit).. (149) 648 1,208 19,924 14,611 20,163 79,563
- -------- (1) 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. (2) 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. (3) Includes all rooms installed with Company-owned systems. (4) Adjusted to reflect the net proceeds of the sale of Common Stock offered by the Company hereby at an assumed initial public offering price of $13.00 per share and the application thereof. 17 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 June 30, 1996, the Company had 49,683 rooms installed with its systems in 138 hotels and had an installation backlog of 20,868 rooms in 58 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. 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 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. 18 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 $634,000 in accumulated translation losses, which are reflected in stockholders' equity as of June 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.
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, --------------------------- ------------- 1993 1994 1995 1995 1996 ------- ------- ------- ----- ----- Revenue.......................... 100% 100% 100% 100% 100% Costs and expenses Direct costs.................... 74 49 43 51 49 Depreciation and amortization... 43 41 42 46 40 Operations expenses............. 118 123 36 37 13 Selling, general and administra- tive........................... 379 183 97 108 59 Research and development........ 334 37 14 17 12 ------- ------- ------- ----- ---- Total costs and expenses....... 948% 433% 232% 259% 173% ------- ------- ------- ----- ---- Operating loss................... (848) (333) (132) (159) (73) Interest income (expense), net... (7) (11) (11) -- (17) Provision for income taxes....... -- -- (6) (9) (5) Minority interest in net losses of consolidated subsidiaries.... -- 5 3 5 2 ------- ------- ------- ----- ---- Net loss......................... (855)% (339)% (146)% (163)% (93)% ======= ======= ======= ===== ==== EBITDA........................... (805)% (292)% (90)% (113)% (32)% ======= ======= ======= ===== ====
SIX MONTHS ENDED JUNE 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 six months ended June 30, 1995 and 1996.
SIX MONTHS ENDED JUNE 30, -------------------------- 1995(1) 1996(1) ------------ ------------ Revenue............................................. $3,302,000 $7,923,000 Average monthly gross video revenue per room........ $ 30.05 $ 29.60 Average movie price................................. $ 11.17 $ 10.85 Average movie buy rate.............................. 12% 12.2% Average hotel occupancy............................. 74% 73% Installed base of rooms............................. 27,648 49,683
- -------- (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. 19 Revenue Analysis During the six months ended June 30, 1996, the Company installed its systems in an additional 10,561 hotel rooms, bringing the total number of installed rooms to 49,683. The Company's revenue for the first six months of 1996 increased 140% to $7,923,000 compared to $3,302,000 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. During the six months ended June 30, 1996, average monthly gross video revenue per room has declined approximately one-and-one-half percent compared to that of the same period in 1995, principally as a result of price decreases in certain countries and currency fluctuations affecting 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. Movie buy rates have remained relatively constant principally as a result of installations in new countries and improved buy rates in certain existing countries, offset by lower buy rates in other existing countries. Expense Analysis The following table sets forth information regarding the Company's costs and expenses for the six months ended June 30, 1995 and 1996.
SIX MONTHS ENDED JUNE 30, -------------------------------------------- 1995 1996 --------------------- ---------------------- % OF % OF AMOUNT REVENUE AMOUNT REVENUE ---------- ---------- ----------- ---------- (IN THOUSANDS, EXCEPT PERCENTAGE DATA) Costs and expenses Direct costs..................... $ 1,687 51% $ 3,854 49% Depreciation and amortization.... 1,510 46 3,149 40 Operations expenses.............. 1,213 37 1,016 13 Selling, general and administrative.................. 3,563 108 4,652 59 Research and development......... 571 17 937 12 ---------- ------- ----------- ------- Total costs and expenses.......... $ 8,544 259% $ 13,608 173% ========== ======= =========== =======
Direct costs. Direct costs increased by $2,167,000 for the first six months of 1996 compared to the same period in 1995 but declined marginally as a percentage of revenue, due principally to lower film royalty and licensing fees resulting from greater efficiencies achieved through expanded operations and direct management of film contracts rather than relying on Comsat Corporation, which charged the Company higher royalties and fees. Prior to July 1995, the Company obtained substantially all of its programming through Comsat Corporation. As a percentage of revenue, these reduced royalty and licensing fees have been partially offset by increased maintenance expenses associated with repairing or replacing faulty equipment installed in hotel rooms during the first half of 1996 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. 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 $1,639,000 for the first six months of 1996 compared to the same period in 1995 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 20 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 $197,000 for the first six months of 1996 compared to the same period in 1995 due to write-downs of certain video system equipment taken in the first six 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 37% for the first six 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 $1,089,000 for the first six months of 1996 compared to the same period in 1995 due to significant increases in local country activities to support the Company's larger installed base of rooms. 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 51 employees at June 30, 1995 to 107 employees at June 30, 1996. Headquarters marketing expenses increased to support promotion and merchandising initiatives as well as to provide leadership for new product development. 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. Selling, general and administrative expenses decreased as a percentage of revenue from 108% for the first six months of 1995 to 59% 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 $366,000 for the first six months of 1996 compared to the same period in 1995 due to increases in engineering personnel, materials and related expenses. Research and development decreased as a percentage of revenue from 17% for the first six months of 1995 to 12% 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. During the first half of 1996, the Company incurred net interest expense of $1,382,000 as a result of the issuance in August 1995 of its Senior Secured Notes due 2000 with an aggregate principal amount of $24.9 million. During the first half of 1995, the Company earned net interest income from short-term investments of excess cash. 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. 21 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. 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% ====== === ======= === ======= ===
22 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 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. 23 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. QUARTERLY RESULTS OF OPERATIONS The following tables set forth certain unaudited consolidated financial information for the six quarters ended June 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, 1995 1995 1995 1995 1996 1996 -------- -------- --------- -------- -------- -------- (IN THOUSANDS) Revenue................. $ 1,287 $ 2,015 $ 2,353 $ 3,034 $ 3,549 $ 4,374 Costs and expenses Direct costs........... 700 987 899 1,145 1,827 2,027 Depreciation and amortization.......... 646 864 1,054 1,118 1,388 1,761 Operations expenses.... 665 548 948 947 468 548 Selling, general and administrative........ 1,524 2,039 2,084 2,773 2,074 2,578 Research and development........... 314 257 319 357 421 516 ------- ------- ------- ------- ------- ------- Total costs and expenses............... 3,849 4,695 5,304 6,340 6,178 7,430 ------- ------- ------- ------- ------- ------- Operating loss.......... (2,562) (2,680) (2,951) (3,306) (2,629) (3,056) Interest income (expense), net......... 77 (73) (383) (612) (667) (715) Provision for income taxes.................. (148) (152) (123) (131) (213) (170) Minority interest in net losses of consolidated subsidiaries........... 67 86 51 44 78 46 ------- ------- ------- ------- ------- ------- Net loss................ $(2,566) $(2,819) $(3,406) $(4,005) $(3,431) $(3,895) ======= ======= ======= ======= ======= ======= EBITDA.................. $(1,916) $(1,816) $(1,897) $(2,188) $(1,241) $(1,295) ======= ======= ======= ======= ======= =======
24
QUARTER ENDED ------------------------------------------------------ MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, 1995 1995 1995 1995 1996 1996 -------- -------- --------- -------- -------- -------- (AS A PERCENTAGE OF REVENUE) Revenue................. 100% 100% 100% 100% 100% 100% Costs and expenses Direct costs........... 55 49 38 38 52 46 Depreciation and amortization.......... 50 43 45 37 39 40 Operations expenses.... 52 27 40 31 13 13 Selling, general and administrative........ 118 101 89 91 58 59 Research and development........... 24 13 14 12 12 12 ----- ----- ----- ----- ---- ---- Total costs and expenses............... 299 233 226 209 174 170 ----- ----- ----- ----- ---- ---- Operating loss.......... (199) (133) (126) (109) (74) (70) Interest income (expense), net......... 6 (4) (16) (20) (19) (16) Provision for income taxes.................. (12) (8) (5) (4) (6) (4) Minority interest in net losses of consolidated subsidiaries........... 5 4 2 1 2 1 ----- ----- ----- ----- ---- ---- Net loss................ (200)% (141)% (145)% (132)% (97)% (89)% ===== ===== ===== ===== ==== ==== EBITDA.................. (149)% (90)% (81)% (72)% (35)% (30)% ===== ===== ===== ===== ==== ====
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, 1995 1995 1995 1995 1996 1996 -------- -------- --------- -------- -------- -------- Revenue (in thousands).. $ 1,287 $ 2,015 $ 2,353 $ 3,034 $ 3,549 $ 4,374 Average monthly gross video revenue per room................... $ 29.56 $ 30.16 $ 27.03 $ 30.08 $ 30.00 $ 29.24 Average movie price..... $ 11.16 $ 11.18 $ 10.83 $ 10.83 $ 10.83 $ 10.87 Average movie buy rate.. 11.6% 12.3% 11.0% 11.9% 12.0% 12.5% Average hotel occupancy.............. 76% 72% 73% 75% 76% 71% Installed base of rooms.................. 18,424 27,648 31,091 39,122 42,940 49,683
- -------- (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 six quarters ended June 30, 1996, the Company installed an average of 6,111 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 $500,000. 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 two quarters of 1996, compared to the first two 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 during 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 25 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 quarter over quarter during the first three quarters of 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 declined to 46% of revenue in the second quarter of 1996 reflecting a decrease 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. Amortization of prepaid royalties has remained relatively constant as a percentage of revenue during the five quarters ended June 30, 1996. Depreciation expense has trended downwards, as a percentage of revenue, over the last six quarters, reflecting marginally lower installed costs of rooms during these periods. Operations expenses. Operations expenses, as a percentage of revenue, fluctuated from an average of 37% in 1995 to 13% in the first half 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 increased slightly to 91% in the fourth quarter of 1995 before decreasing to 58% and 59% in the first two quarters of 1996. The decreases as a percentage of revenue are primarily attributed to subsidiary and headquarters expenses spread over a larger revenue base. Selling, general and administrative expenses have increased in foreign subsidiaries and at the Company's headquarters but at a lesser rate than revenue increases. 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 constant at 12% over the three quarters ended June 30, 1996 as increases in research and development expenses were proportional to revenue increases. 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 June 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 an amendment 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 26 $7.00 per share, subject to adjustments of the number of shares and exercise price as set forth in the applicable warrants. As of September 30, 1996, the Company is not in compliance with a financial covenant under the Notes, but has requested an amendment of the covenant from the holders of the Notes. No assurance can be given that the holders of the Notes will agree to an amendment of the covenant on acceptable terms, if at all. Failure of the Company to comply with the covenants, or in the event of non-compliance, to obtain an amendment of the covenants, could result in acceleration of the maturity of the Company's borrowings, which would have a material adverse effect on the Company's business, financial condition and results of operations. The continued expansion of the Company's business will require significant capital investments to finance the installation of equipment in hotel rooms. Historically, cash flow generated from the Company's operations has not been sufficient to fund the costs associated with expanding the Company's business. The Company believes that the net proceeds from the Offerings, together with cash flow from operations, will be sufficient to support the Company's focused expansion plans and capital expenditures as well as working capital requirements until at least December 1997. Thereafter, if cash generated from operations is insufficient to satisfy the Company's capital requirements, the Company may be required to raise additional funds. No assurance can be given that additional financing will be available or that, if available, such financing could be obtained by the Company on terms favorable to the Company and its stockholders. 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 $6,975,000 for the six months ended June 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 $10,145,000 for the six months ended June 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 six months ended June 30, 1996, financing activities provided $13,984,000. Financing activities provided $30,656,000, $25,715,000 and $5,082,000 for 1995, 1994 and 1993, respectively. 27 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 June 30, 1996 served 49,683 rooms in 138 hotels with an additional 20,868 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, with InterGame for in-room casino-style gaming and with Trinity Group for in-room advertising. 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. Video Entertainment and Information Services Leading hotels throughout the Pacific Rim 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 28 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. 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. 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. The Company targets high-growth markets outside of North America, Central America and South 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 Middle East and Africa.. 600,000 3.9% 288,000 1,272 Europe.................. 5,500,000 4.0% 1,108,000 5,637 North, Central, and South America.......... 4,500,000 2.9% N/A N/A
-------- (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. 29 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, Europe and the Middle East directly; however, the Company also intends to evaluate potential acquisitions in order to further penetrate its target markets. The Company believes that growth through acquisition will be part of the Company's expansion strategy. . 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 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 30 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 Japan, 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 established a relationship with Trinity Group in Thailand to sell advertising for display on its iLook interactive information directory being introduced on MagiNet's systems in Thailand, the country which represents the Company's largest installed base of rooms. In addition, MagiNet has 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 "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 31 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. 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 executed an agreement to provide its "yellow page" style iLook advertising directory to guests in hotels utilizing the Company's system. The Company will initiate this service in Thailand and later identify local partners to assist the Company in soliciting advertisers for the system in other markets. With this service, MagiNet's local partner in Thailand will market the advertising space and the Company will provide the advertising to the hotel guest on its systems. 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, 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 distribution agreements relating to first-run motion pictures generally provide for a specified license period and percentage of revenue of each motion picture that are negotiated separately, 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. 32 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. Such programming can therefore account for a significant portion of the Company's operating income in certain of its markets. 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 June 30, 1996 are set forth below:
ROOMS INSTALLED BACKLOG ------------------ ------------------ COUNTRY ROOMS # OF HOTELS ROOMS # OF HOTELS ------- ------ ----------- ------ ----------- Australia.............................. 6,356 27 2,480 8 France................................. 377 1 11 -- Guam/Saipan............................ 4,310 14 -- -- Hong Kong.............................. 3,885 7 1,473 3 Israel................................. 2,507 9 3,227 9 Japan.................................. 6,121 15 2,156 6 New Zealand............................ 1,794 7 -- -- The Philippines........................ -- -- 1,502 3 Singapore.............................. 3,115 6 830 1 South Africa........................... 2,630 8 3,996 19 South Korea............................ 2,974 6 2,964 5 Taiwan................................. 4,822 12 150 -- Thailand............................... 10,792 26 2,079 4 ------ --- ------ --- Total................................ 49,683 138 20,868 58 ====== === ====== ===
SALES, DISTRIBUTION AND MARKETING The Company currently targets leading hotels generally in excess of 100 rooms in the Pacific Rim, the Middle East, Africa and Europe. 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 33 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 June 30, 1996, contracts for approximately 6% of the Company's installed rooms expire on or before December 31, 1998, 21% of the Company's installed rooms expire during 1999 and 28% 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 Japan, South Korea, Taiwan and Thailand, and expects to establish further ventures with local partners as and when the need and opportunity arise. In Australia, Hong Kong, Israel, New Zealand, Singapore and South Africa, the Company operates through its local country subsidiaries and provides sales, installation, service and maintenance through its own local employees and independent contractors. The Company believes that the existing familiarity its local employees and independent contractors have with the business cultures of these countries will enable the Company to further penetrate these markets successfully without the assistance of a joint venture or similar arrangement. Distributors and Representatives The Company installs and services hotels in Guam and Saipan through one distributor and one representative. In addition, the Company has retained a distributor to install and service the Company's Guestserve-based systems in Malaysia, Singapore, Indonesia and Brunei. The representative installs and services systems owned by the Company, in exchange for a monthly fee and a percentage of revenue. The distributors purchase, install and service the systems and pay the Company a royalty based on rooms installed or revenue. 34 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 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. Trinity Group. The Company has entered into an agreement with the Trinity Group ("Trinity"), the Company's partner in Thailand, for Trinity to sell advertising to be displayed to hotel guests using the Company's iLook service. iLook is a service developed by the Company, that will display video advertising directories on MagiNet systems. MagiNet has agreed to install the technology on the Company's systems in Thailand to allow guests to interactively search the iLook system for businesses and services, and to provide training to the Trinity sales force. MagiNet will retain control over the content of the advertising and will receive approximately one-half of the gross iLook revenue. The agreement will remain in force until December 31, 2002, and thereafter automatically renew annually, unless terminated by either party. 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. 35 MANUFACTURING Although under its technology agreements the Company has the right to manufacture the components and sub-assemblies of its systems, the Company 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 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 June 30, 1996, the Company's installation and service organization consisted of 46 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 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. 36 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. 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. 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 PRODAC Prozebdatentechnik GmbH, Thorn-EMI Plc, Video Management Services, Inc. and Granada Group Plc, which have installed mainly free-to-guest and scheduled systems. The Company believes that penetration of the European market with on-demand video systems by these or other competitors is fairly low. 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. 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. 37 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 such license agreements were to be successfully challenged by these or other companies, the Company's business, financial condition and results of operations would be materially adversely affected. 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 challenged by the U.S. Patent and Trademark Office. 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. EMPLOYEES As of June 30, 1996, the Company had 164 employees, of which 107 are 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. 38 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 as of August 30, 1996.
NAME AGE POSITION ---- --- -------- Kenneth B. Hamlet....... 52 Chairman of the Board, President and Chief Executive Officer Robert R. Creager....... 51 Founder, Executive Vice President, Corporate Development, and Director James A. Barth.......... 53 Executive Vice President, Chief Financial Officer and Secretary Gordon E. (Ned) Druehl, Jr. ................... 54 Executive Vice President and Chief Operating Officer Pang T. Ho, Ph.D........ 50 Vice President of Engineering Stuart J. Ellman(1)(2).. 29 Director Michael D. Granoff(1)... 38 Director Michael Ramsay(2)....... 44 Director James D. Robinson IV(2).................. 34 Director
- -------- (1)Member of the Audit Committee. (2)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 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 39 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. 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, 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, 40 upon joining the Board of Directors, each new non-employee director will automatically be granted an option to purchase 25,000 shares of Common Stock. Each non-employee director will subsequently be granted an option to purchase 5,000 shares of Common Stock at each annual meeting of stockholders beginning with the 1997 Annual Meeting of Stockholders. Each such option will be granted at the fair market value of the Common Stock on the date of grant. The initial options granted to non-employee directors will vest at a rate of 25% on the first anniversary of the date of grant and at a rate of 1/48 of the shares per month thereafter, and subsequent options granted to non-employee directors will become exercisable at a rate of 1/48 of the shares subject to such additional options on the monthly anniversary of the date of grant subject to continued Board service. See "--Stock Plans--1996 Director Stock Option Plan." COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Compensation Committee is responsible for determining salaries, incentives and other forms of compensation for directors, officers and other employees of the Company and administers various incentive compensation and benefit plans. The Compensation Committee currently consists of Stuart J. Ellman, Michael Ramsay and James D. Robinson IV. During 1995, the Compensation Committee consisted of Michael Ramsay, Michael D. Granoff, James D. Robinson III and James D. Robinson IV. Kenneth B. Hamlet, Chairman of the Board, President and Chief Executive Officer and a director of the Company, participates in all discussions and decisions regarding salaries and incentive compensation for all employees and consultants of the Company, except that he is excluded from discussions regarding his own salary and incentive compensation. No interlocking relationship exists between any member of the Company's Compensation Committee and any member of any other company's board of directors or compensation committee. 41 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"). 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. The Company and Mr. Creager are parties to an agreement governing Mr. Creager's employment with the Company under which Mr. Creager's salary is set at $175,000. See "--Employment Agreements and Change in Control Arrangements" and "Certain Transactions." (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. 42 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. 43 AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES No Named Executive Officer exercised a stock option during fiscal 1995. The following table sets forth certain information regarding stock options held as of December 31, 1995 by the Named Executive Officers.
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT DECEMBER 31, 1995 DECEMBER 31, 1995(1) ------------------------- ------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ----------- ------------- ----------- ------------- Current Executive Officers Kenneth B. Hamlet (2)...... -- -- $ -- $ -- Robert R. Creager ......... 135,917 213,583 1,631,004 2,562,996 James A. Barth............. 32,292 117,708 384,379 1,365,621 Gordon E. (Ned) Druehl, Jr.(3).................... -- -- -- -- Pang T. Ho, Ph.D. ......... 29,583 75,417 353,746 886,254 Former Executive Officers Jeffrey A. Bixler(4)....... -- -- -- -- Eric S. Hass(5)............ 73,000 146,000 876,000 1,752,000
- -------- (1) Based on an initial public offering price of $13.00 per share minus the exercise price of outstanding options. (2) Mr. Hamlet became President and Chief Executive Officer of the Company in January 1996 and, accordingly, held no outstanding options as of December 31, 1995. In January 1996, the Company granted Mr. Hamlet an option expiring January 2001 to acquire 654,324 shares of the Company's Common Stock at an exercise price per share of $2.00 with vesting to occur ratably over 36 months. (3) Mr. Druehl became Executive Vice President and Chief Operating Officer in August 1996 and, accordingly, held no outstanding options as of December 31, 1995. In August 1996, the Company granted Mr. Druehl an option expiring August 2001 to acquire 150,000 shares of the Company's Common Stock at an exercise price per share of $5.25 with 25% of the shares vesting in July 1997 and the remaining shares vesting ratably over the succeeding 36 months of service. (4) Mr. Bixler resigned from the Company effective in December 1995. No shares subject to the option granted to Mr. Bixler had vested as of the date of his resignation, and the option terminated as of such date. Accordingly, Mr. Bixler held no outstanding options as of December 31, 1995. (5) Mr. Hass resigned from the Company effective in March 1996. In connection with his resignation, Mr. Hass exercised two outstanding options for 19,791 and 66,895 shares, respectively. All remaining shares subject to options held by Mr. Hass were unvested and terminated on the effective date of his resignation. STOCK PLANS 1992 Key Personnel Stock Option Plan. The Company's Restated 1992 Key Personnel Stock Option Plan (the "1992 Plan") was originally adopted by the Board of Directors in December 1992 and approved by the Company's stockholders in December 1993. The Board of Directors approved the amendment and restatement of the 1992 Plan in September 1996. A total of 3,800,000 shares of Common Stock, less the number of shares issued under and not returned to the Company's now-terminated 1992 Stock Option Plan, has been reserved for issuance under the 1992 Plan. The 1992 Plan provides for the grant to employees of incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code"), and for the grant to employees and consultants of nonstatutory stock options. Unless terminated sooner, the 1992 Plan will terminate automatically in December 2002. The 1992 Plan may be administered by the Board of Directors or a committee of the Board (the "Committee"), which Committee shall, in the case of options intended to qualify as "performance-based compensation" within the meaning of Section 162(m) of the Code, consist of two or more "outside directors" within the meaning of Section 162(m) of the Code. The Committee has the power to determine the terms of the 44 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 211,061 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 45 more than 10% of the voting power of all classes of the Company's outstanding capital stock at the date of grant, 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- 46 employee directors not entitled to receive a First Option, will also be granted an option to purchase 5,000 shares of Common Stock (a "Subsequent Option") each year on the date of the annual shareholder's meeting of the Company, if on such date he or she shall have served on the Board for at least six months. The First Option shall have a term of 10 years and the shares subject to each such option shall vest as to 25% of the shares of Common Stock subject to the option one year after its date of grant, and as to 1/48th of the shares subject to the option each month thereafter, and each Subsequent Option will become exercisable at a rate of 1/48 of the shares subject to such additional options on the monthly anniversary of the date of grant. The exercise prices of the First Option and each Subsequent Option shall be 100% of the fair market value per share of the Common Stock, generally determined with reference to the closing price of the Common Stock as reported on the Nasdaq National Market on the date of grant. In the event of a merger of the Company or the sale of substantially all of the assets of the Company, each option may be assumed or an equivalent option substituted by the successor corporation. If an option is assumed or substituted for, it shall continue to vest as provided in the Director Plan. If a non-employee director's status as a director of the Company or the successor corporation, as applicable, is terminated other than upon a voluntary resignation by the non-employee director, each option granted to such non-employee director shall become fully vested and exercisable. If the successor does not agree to assume or substitute the option, each option shall also become fully vested and exercisable for a period of thirty days, after which period the option shall terminate. Options granted under the Director Plan must be exercised within three months of the end of the optionee's tenure as a director of the Company, or within twelve months after termination of the director's tenure by death or disability, but in no event later than the expiration of the option's ten year term. No option granted under the Director Plan is transferable by the optionee other than by will or the laws of descent and distribution, and each option is exercisable, during the lifetime of the optionee, only by such optionee. 401(k) Plan. The Company maintains the MagiNet Corporation 401k Savings Plan (the "401(k) Plan") which covers all of the Company's U.S. employees who have completed 1/12 of a year of service. Pursuant to the 401(k) Plan, eligible employees may elect to defer their current compensation by up the statutorily prescribed annual limit and have the amount of such reduction contributed to the 401(k) Plan on their behalf as an elective deferral contribution. The 401(k) Plan is intended to qualify under Section 401 of the Internal Revenue Code of 1986, as amended, so that contributions to the 401(k) Plan, and income earned on such contributions, are not includible in the participant's gross income until withdrawn from the 401(k) Plan. The trustee under the 401(k) Plan, at the direction of each participant, invests the assets of the 401(k) Plan in any of a number of investment options. EMPLOYMENT AGREEMENTS AND CHANGE IN CONTROL ARRANGEMENTS The Company currently has employment agreements in effect with Kenneth B. Hamlet, the Company's Chairman of the Board, President and Chief Executive Officer and Gordon E. (Ned) Druehl, Jr., the Company's Executive Vice President and Chief Operating Officer. 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. 47 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. 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. 48 CERTAIN TRANSACTIONS Between October 1992 and May 1996, the Company sold and issued 10,908,878 shares of its Preferred Stock for an aggregate consideration of $56,402,000. The Company sold the Preferred Stock in series as follows: (i) 150,000 shares of Series A Preferred Stock in October 1992 at a price of $2.00 per share; (ii) 440,068 shares of Series B Preferred Stock in October 1992 at a price of $4.00 per share; (iii) 888,859 shares of Series B Preferred Stock in March 1993 at a price of $4.50 per share and warrants to acquire 174,993 shares of Common Stock at an exercise price of $4.50 per share; (iv) 6,287,093 shares of Series C Preferred Stock in September 1994 at a price of $4.50 per share and warrants to acquire 1,111,111 shares of Series C Preferred Stock at an exercise price of $4.50 per share; (v) an aggregate of 3,142,858 shares of Series D Preferred Stock in December 1995 and May 1996 at a price of $7.00 per share and warrants to acquire up to an aggregate 200,000 shares of Common Stock (subject to adjustment) at an exercise price of $7.00 per share. The following table summarizes purchases, valued in excess of $60,000, of shares of Preferred Stock and Common Stock by directors, executive officers and 5% stockholders of the Company:
SHARES ----------------------------------------------------------------- COMMON SERIES C SERIES D COMMON SERIES C WARRANTS(1) WARRANTS(2) SERIES D WARRANTS(3) ------ --------- ----------- ----------- --------- ----------- RRE Investors, L.L.C.(4).............. -- 4,000,000 -- 1,111,111 -- -- Equity-Linked Investors II..................... -- -- -- -- 1,500,000 95,455 Festival Company, Inc... -- -- -- -- 1,000,001 63,636 Pomona Capital, L.P.(5)................ -- 669,150 66,667 -- -- -- Kenneth B. Hamlet(6).... 28,000(8) -- -- -- 28,000 1,782 James A. Barth(7)....... 12,000(8) -- -- -- 12,000 764
- -------- (1) Represents the maximum number of shares issuable upon exercise of warrants to acquire Common Stock at an exercise price of $0.50 per share issued in connection with a bridge note financing in September 1994. (2) Represents the maximum number of shares issuable upon exercise of warrants to acquire Series C Preferred Stock (and, upon the effectiveness of the registration statement covering the Offerings, to acquire Common Stock) issued in connection with the Company's Series C Preferred Stock Financing. If not exercised in connection with the Offerings, such warrants will terminate. (3) Represents the maximum number of shares issuable upon exercise of warrants to acquire Common Stock issued in connection with the Company's Series D Preferred Stock Financing. If not exercised in connection with the Offerings, such warrants will terminate. (4) Includes shares purchased by Sunset Partners, L.P., Sunset Partners II, L.P., and Sunset Partners III, L.P. (collectively, the "Sunset Partnerships"). RRE Investors, L.L.C. is the general partner of each of the Sunset Partnerships. (5) Includes shares purchased by Pomona Capital, L.P., SOF Venture Capital, L.P., SP Offshore Venture Capital, L.P. and SP Venture Capital, L.P. Michael D. Granoff, a member of the Company's Board of Directors, is the sole shareholder of Pomona Partners, Inc., the general partner of SOF Venture Capital, L.P., SP Offshore Venture Capital, L.P. and SP Venture Capital, L.P. and the general partner of Pomona Associates, L.P. which serves as the general partner of Pomona Capital, L.P. (6) Mr. Hamlet is Chairman of the Board, President and Chief Executive Officer of the Company. (7) Mr. Barth is Executive Vice President and Chief Financial Officer of the Company. (8) Mr. Hamlet and Mr. Barth purchased the number of shares of Common Stock indicated on May 30, 1996 at a purchase price per share of $2.00. On September 29, 1994, the Company entered into a consulting agreement with RRE Investors, L.L.C. ("RRE"), which terminates on September 28, 1997. RRE is the general partner of each of Sunset Partners, L.P., Sunset Partners, L.P. and Sunset Partners III, L.P., which collectively hold greater than 5% of the outstanding Common Stock of the Company. The agreement provides that RRE will provide consulting and advisory services to the Company regarding strategic planning and business and financial matters for a fee of $150,000 for the first 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 officers of the Company. See "Management--Employment Agreements and Change in Control Arrangements." 49 PRINCIPAL STOCKHOLDERS The following table sets forth certain information regarding the beneficial ownership of the Company's Common Stock as of August 31, 1996 and as adjusted to reflect the sale of the 5,000,000 shares of Common Stock offered hereby by (i) each person or entity who is known by the Company to own beneficially 5% or more of the Company's outstanding Common Stock; (ii) each director of the Company; (iii) each of the Named Executive Officers and (iv) all directors and executive officers of the Company as a group.
NUMBER OF PERCENTAGE OF TOTAL SHARES(2) SHARES BENEFICIALLY ------------------------------ NAME AND ADDRESS(1) OWNED(2) BEFORE OFFERING AFTER OFFERING ------------------- ------------------- --------------- -------------- RRE Investors, L.L.C.(3).... 4,726,495 35.1% 25.6% 126 East 56th Street, 22nd Floor New York, NY 10022 Equity-Linked Investors II.. 1,522,028 11.3% 8.2% c/o Desai Capital Management, Inc. 540 Madison Avenue, 36th Floor New York, NY 10022 Festival Company, Inc. ..... 1,014,685 7.5% 5.5% Wisma Barito Pacific, Tower B Lt. 11, J1 S. Paman Kav. 62-63 Jakarta 11410 Indonesia Pomona Capital, L.P.(4)..... 733,251 5.4% 4.0% 780 Third Avenue New York, NY 10017-7076 Kenneth B. Hamlet(5)........ 219,992 1.6% 1.2% Robert R. Creager(6)........ 423,000 3.1% 2.3% James A. Barth(7)........... 85,718 * * Gordon E. (Ned) Druehl, Jr. ............................ -- -- -- Pang T. Ho, Ph.D.(8) ....... 51,459 * * Stuart J. Ellman(9)......... 4,726,495 35.1% 25.6% Michael D. Granoff(10)...... 733,251 5.4% 4.0% Michael Ramsay(11).......... 7,292 * * James D. Robinson IV(12).... 4,726,495 35.1% 25.6% Jeffrey A. Bixler(13)....... -- -- -- Eric S. Hass(14)............ 132,826 1.0% * All current executive officers and directors as a group (9 persons)(15)............. 6,247,207 44.8% 33.0%
- -------- *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 13,459,439 shares of Common Stock outstanding as of August 31, 1996 and 18,459,439 shares immediately following the completion of the Offerings (assuming no exercise of the Underwriters' over-allotment option), together with applicable options for such stockholder. 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 August 31, 1996 are deemed to be beneficially owned by the person holding such options for the purpose of computing the percentage of ownership of 50 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. (3) Includes 1,808,907 shares held by Sunset Partners, L.P. ("Sunset"), 1,591,412 shares held by Sunset Partners II, L.P. ("Sunset II") and 1,326,176 shares held by Sunset Partners III, L.P. ("Sunset III"). RRE Investors, L.L.C. is the general partner of each of Sunset Partners, L.P., Sunset Partners II, L.P. and Sunset Partners III, L.P. (collectively, the "Sunset Partnerships"). (4) Includes 244,417 shares held by Pomona Capital, L.P. ("Pomona"), 195,534 shares held by SOF Venture Capital, L.P. ("SOF Venture"), 175,980 shares held by SP Offshore Venture Capital, L.P. ("SP Offshore") and 117,320 shares held by SP Venture Capital, L.P. ("SP Venture"). Michael D. Granoff, a director of the Company, is the sole shareholder of Pomona Partners, Inc., which serves as the general partner of SOF Venture, SP Offshore and SP Venture, and which also serves as the general partner of Pomona Associates, L.P., the general partner of Pomona. (5) Includes 163,581 shares of Common Stock issuable upon exercise of stock options which are presently exercisable or will become exercisable within 60 days of August 31, 1996. Mr. Hamlet is the Company's President and Chief Executive Officer and Chairman of its Board of Directors. (6) Includes 233,000 shares of Common Stock issuable upon exercise of stock options which are presently exercisable or will become exercisable within 60 days of August 31, 1996. Mr. Creager is the Company's founder and Executive Vice President of Corporate Development. (7) Includes (i) 63,542 shares of Common Stock issuable upon exercise of stock options which are presently exercisable or will become exercisable within 60 days of August 31, 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. (8) Includes 27,459 shares of Common Stock issuable upon exercise of stock options which are presently exercisable or will become exercisable within 60 days of August 31, 1996 and 4,000 shares held byDr. Ho's children. Dr. Ho is the Company's Vice President of Engineering. (9) Includes 1,808,907 shares held by Sunset, 1,591,412 shares held by Sunset II and 1,326,176 shares held by Sunset III. Mr. Ellman is a member of the Company's Board of Directors and a member of RRE Investors, L.L.C., a limited liability company that serves as general partner of each of the Sunset Partnerships. Mr. Ellman disclaims beneficial ownership of such shares except to the extent of his pecuniary interest therein. (10) Includes 244,417 shares held by Pomona, 195,534 shares held by SOF Venture, 175,980 shares held by SP Offshore and 117,320 shares held by SP Venture. Mr. Granoff, a member of the Company's Board of Directors, is the sole shareholder of Pomona Partners, Inc., the general partner of SOF Venture, SP Offshore and SP Venture and the general partner of Pomona Associates, L.P., which serves as the general partner of Pomona. Mr. Granoff disclaims beneficial ownership of such shares except to the extent of his pecuniary interest therein. (11) Includes 7,292 shares of Common Stock issuable upon exercise of stock options which are presently exercisable or will become exercisable within 60 days of August 31, 1996. Mr. Ramsay is a member of the Company's Board of Directors. (12) Includes 1,808,907 shares held by Sunset, 1,591,412 shares held by Sunset II and 1,326,176 shares held by Sunset III. Mr. Robinson is a member of the Company's Board of Directors and a member of RRE Investors, L.L.C., a limited liability company that serves as general partner of each of the Sunset Partnerships. Mr. Robinson disclaims beneficial ownership of such shares except to the extent of his pecuniary interest therein. (13) Mr. Bixler resigned from the Company effective in December 1995. (14) Includes 46,140 shares held by Mr. Hass individually and 86,686 shares held by Mr. Hass and his wife, as trustees of the Hass Community Property Trust. Mr. Hass resigned from the Company effective in March 1996. (15) Includes 494,874 shares of Common Stock issuable upon exercise of outstanding stock options which are presently exercisable or will become exercisable within 60 days of August 31, 1996. Excludes 132,826 shares beneficially held by Eric S. Hass, who resigned as an officer of the Company effective in March 1996. 51 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, there will be 13,459,439 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 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. 52 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 3,977,000 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. TRANSFER AGENT The Transfer Agent and Registrar for the Common Stock is The First National Bank of Boston. 53 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 18,459,439 shares of Common Stock based upon shares outstanding as of August 31, 1996. In addition to the 5,000,000 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 13,459,439 shares of Common Stock outstanding, 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 of the Securities Act. Beginning 180 days after the Effective Date, approximately 9,448,000 additional Restricted Shares of Common Stock subject to lock-up agreements will become eligible for sale in the public market. Of the approximately 9,448,000 Restricted Shares that will become available for sale in the public market beginning 180 days after the Effective Date, approximately 7,411,000 shares will be subject to certain volume and other resale restrictions pursuant to Rule 144. On August 31, 1996, options to purchase 1,655,484 shares were outstanding, of which options to purchase approximately 489,483 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, 798,679 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. 54 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 55 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. 56 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........................................................... 4,000,000 ========= 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........................................................... 1,000,000 =========
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 reallows a concession not in excess of $ per share to certain brokers and dealers. 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. 57 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 600,000 and 150,000 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 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. 58 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. LEGAL MATTERS Certain legal matters with respect to the legality of the issuance of the shares of Common Stock offered hereby will be passed upon for the Company by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California, and for the U.S. Underwriters and International Managers by Brobeck, Phleger & Harrison LLP, Palo Alto, California. As of the date of this Prospectus, a member of Wilson Sonsini Goodrich & Rosati, Professional Corporation, and investment partnerships of which members of such firm are partners beneficially own 17,457 shares of the Company's Common Stock. EXPERTS The consolidated financial statements of MagiNet Corporation at December 31, 1994 and 1995 and June 30, 1996, and for each of the three years in the period ended December 31, 1995 and for the six months ended June 30, 1996, 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. 59 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. 60 MAGINET CORPORATION INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- 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
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 June 30, 1996, 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 and for the six months ended June 30, 1996. 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 June 30, 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1995 and for the six months ended June 30, 1996 in conformity with generally accepted accounting principles. Ernst & Young LLP Palo Alto, California August 21, 1996 F-2 MAGINET CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, ------------------ UNAUDITED PRO FORMA STOCKHOLDERS' EQUITY JUNE 30, JUNE 30, 1994 1995 1996 1996 -------- -------- -------- ------------- ASSETS Current assets: Cash and cash equivalents..... $ 10,532 $ 18,672 $ 14,772 Short-term investments........ 429 151 -- Accounts receivable........... 347 1,191 2,152 Other current assets.......... 351 624 1,930 -------- -------- -------- Total current assets........... 11,659 20,638 18,854 Video systems, net............. 10,704 20,961 27,854 Property and equipment, net.... 638 1,376 1,659 Prepaid royalties.............. 876 1,095 1,466 Other assets................... 122 2,470 2,352 -------- -------- -------- Total assets................... $ 23,999 $ 46,540 $ 52,185 ======== ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term debt............... $ 374 $ 97 $ 180 Accounts payable.............. 2,327 1,738 1,544 Accrued compensation.......... 54 340 510 Accrued interest.............. 16 1,016 1,070 Other accrued liabilities..... 1,137 2,905 1,979 -------- -------- -------- Total current liabilities...... 3,908 6,096 5,283 Deferred tax liability......... -- 544 915 Long-term debt................. -- 24,900 25,403 Minority interests in consolidated subsidiaries..... 167 389 421 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 June 30, 1996, respectively, all of which are convertible; aggregate liquidation preference of $56,572 at June 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 481 shares issued and outstanding at December 31, 1994 and 1995, and June 30, 1996, respectively (pro forma: $.001 par value, 45,000 shares authorized, 11,390 shares issued and outstanding at June 30, 1996)............ 9 23 255 11 Additional paid-in capital.... -- -- -- 53,485 Warrants to purchase common stock........................ -- 101 101 101 Accumulated deficit........... (12,678) (25,474) (32,800) (32,800) Cumulative translation adjustment................... -- (270) (634) (634) -------- -------- -------- -------- Total stockholders' equity.... 19,924 14,611 20,163 $ 20,163 -------- -------- -------- ======== Total liabilities and stockholders' equity.......... $ 23,999 $ 46,540 $ 52,185 ======== ======== ========
See accompanying notes. F-3 MAGINET CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, -------------------------- ------------------- 1993 1994 1995 1995 1996 ------- ------- -------- ----------- ------- (UNAUDITED) Revenue....................... $ 395 $ 2,342 $ 8,689 $ 3,302 $ 7,923 Costs and expenses: Direct costs................ 294 1,156 3,731 1,687 3,854 Depreciation and amortization............... 171 957 3,682 1,510 3,149 Operations expenses......... 464 2,876 3,108 1,213 1,016 Selling, general and administrative............. 1,497 4,294 8,420 3,563 4,652 Research and development.... 1,320 856 1,247 571 937 ------- ------- -------- ------- ------- Total costs and expenses...... 3,746 10,139 20,188 8,544 13,608 ------- ------- -------- ------- ------- Operating loss................ (3,351) (7,797) (11,499) (5,242) (5,685) Interest expense.............. (49) (319) (1,297) (42) (1,855) Interest income and other, net.......................... 21 66 306 46 473 ------- ------- -------- ------- ------- Loss before income taxes and minority interest in net losses of consolidated subsidiaries................. (3,379) (8,050) (12,490) (5,238) (7,067) Provision for income taxes.... -- -- (554) (300) (383) Minority interest in net losses of consolidated subsidiaries................. -- 124 248 153 124 ------- ------- -------- ------- ------- Net loss...................... $(3,379) $(7,926) $(12,796) $(5,385) $(7,326) ======= ======= ======== ======= ======= Pro forma net loss per share.. $ (1.03) $ (0.59) Shares used in computation of pro forma net loss per share........... 12,392 12,407
See accompanying notes. F-4 MAGINET CORPORATION CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (IN THOUSANDS)
PREFERRED STOCK COMMON STOCK CUMULATIVE TOTAL ---------------- ------------- ACCUMULATED TRANSLATION STOCKHOLDERS' SHARES AMOUNT SHARES AMOUNT WARRANTS DEFICIT ADJUSTMENT EQUITY ------- -------- ------ ------ -------- ----------- ----------- ------------- BALANCES AT DECEMBER 31, 1992................... 590 $ 2,018 285 $ 3 $ -- $ (1,373) $ -- $ 648 Issuance of Series B Convertible Preferred Stock (net of issuance costs of $61)......... 889 3,939 -- -- -- -- -- 3,939 Repurchase of Common Stock................. -- -- (21) -- -- -- -- -- Net loss............... -- -- -- -- -- (3,379) -- (3,379) ------- -------- --- ---- ----- -------- ----- ------- BALANCES AT DECEMBER 31, 1993................... 1,479 5,957 264 3 -- (4,752) -- 1,208 Exercise of stock options............... -- -- 12 6 -- -- -- 6 Issuance of Series C Convertible Preferred Stock (net of issuance costs of $1,656)...... 6,287 26,636 -- -- -- -- -- 26,636 Net loss............... -- -- -- -- -- (7,926) -- (7,926) ------- -------- --- ---- ----- -------- ----- ------- BALANCES AT DECEMBER 31, 1994................... 7,766 32,593 276 9 -- (12,678) -- 19,924 Exercise of stock options............... -- -- 31 14 -- -- -- 14 Warrants to purchase Common Stock issued in conjunction with senior debt financing............. -- -- -- -- 101 -- -- 101 Issuance of Series D Convertible Preferred Stock (net of issuance costs of $1,038)...... 1,239 7,638 -- -- -- -- -- 7,638 Translation adjustment............ -- -- -- -- -- -- (270) (270) Net loss............... -- -- -- -- -- (12,796) -- (12,796) ------- -------- --- ---- ----- -------- ----- ------- BALANCES AT DECEMBER 31, 1995................... 9,005 40,231 307 23 101 (25,474) (270) 14,611 Exercise of stock options............... -- -- 109 102 -- -- -- 102 Issuance of Common Stock................. -- -- 65 130 -- -- -- 130 Issuance of Series D Convertible Preferred Stock (net of issuance costs of $314)........ 1,904 13,010 -- -- -- -- -- 13,010 Translation adjustment............ -- -- -- -- -- -- (364) (364) Net loss............... -- -- -- -- -- (7,326) -- (7,326) ------- -------- --- ---- ----- -------- ----- ------- BALANCES AT JUNE 30, 1996................... 10,909 $ 53,241 481 $255 $ 101 $(32,800) $(634) $20,163 ======= ======== === ==== ===== ======== ===== =======
See accompanying notes. F-5 MAGINET CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, --------------------------- ------------------- 1993 1994 1995 1995 1996 ------- ------- --------- ----------- ------- (UNAUDITED) OPERATING ACTIVITIES Net loss..................... $(3,379) $(7,926) $ (12,796) $(5,385) $(7,326) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation................ 153 851 3,212 1,282 2,605 Amortization of prepaid royalties.................. 18 106 479 228 544 Amortization of Senior Secured Note financing costs...................... -- -- 145 -- 238 Interest on convertible subordinated debt.......... -- 192 -- -- -- Minority interests.......... -- (124) (248) (153) (124) Changes in operating assets and liabilities: Accounts receivable......... (46) (301) (844) (507) (961) Other current assets........ (90) (261) (273) (735) (1,306) Other assets................ 43 (105) (303) (270) (120) Accounts payable and other accrued liabilities........ 1,548 1,431 3,009 1,136 (525) ------- ------- --------- ------- ------- Total adjustments........... 1,626 1,789 5,177 981 351 ------- ------- --------- ------- ------- Net cash used in operating activities................. (1,753) (6,137) (7,619) (4,404) (6,975) ------- ------- --------- ------- ------- INVESTING ACTIVITIES Redemption (purchase) of available-for-sale securities.................. -- (429) 278 429 151 Investment in video systems.. (2,590) (8,670) (13,262) (8,353) (9,590) Investment in property and equipment................... (501) (262) (1,215) (246) (555) Nonrefundable prepaid royalty..................... -- -- (698) -- (915) ------- ------- --------- ------- ------- Net cash used in investing activities.................. (3,091) (9,361) (14,897) (8,170) (10,909) ------- ------- --------- ------- ------- FINANCING ACTIVITIES Proceeds from debt........... -- 374 6,000 5,000 586 Payment on debt.............. (257) -- (6,277) (256) -- Proceeds (payment) of note payable to stockholders..... 1,400 (1,400) -- -- -- Proceeds from Senior Secured Notes, net of issuance costs....................... -- -- 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 7 232 Proceeds from minority investors................... -- 291 470 470 156 ------- ------- --------- ------- ------- Net cash provided by financing activities........ 5,082 25,715 30,656 5,221 13,984 ------- ------- --------- ------- ------- Net increase (decrease) in cash and cash equivalents... 238 10,217 8,140 (7,353) (3,900) 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 $ 3,179 $14,772 ======= ======= ========= ======= ======= 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 $ -- $ -- ======= ======= ========= ======= ======= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Interest paid................ $ 18 $ 319 $ 187 $ 45 $ 1,592 ======= ======= ========= ======= =======
See accompanying notes. F-6 MAGINET CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1995 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. 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. The accompanying financial statements have been prepared assuming that the Company will remain in compliance with its senior note covenants by achieving its operating plan for the remainder of 1996 and 1997. If the Company were not able to achieve its operating plan, the Company may need to either raise additional equity capital, reduce expenses or both in order to remain in compliance with the senior note covenants. Management believes the Company will be able to remain in compliance with the senior note covenants, obtain waivers thereof or establish alternative debt financing through 1997. INTERIM FINANCIAL DATA The interim financial data for the six months ended June 30, 1995 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 period ended June 30, 1995. Operating results for the six months ended June 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 proposed 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 SIX MONTHS ENDED JUNE 30, 1995 IS UNAUDITED) Historical net loss per share information is as follows:
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ------------------------- ------------------ 1993 1994 1995 1995 1996 ------- ------- ------- -------- -------- Net loss per share.......... $(0.73) $(1.72) $(2.77) $(1.17) $(1.58) Shares used in computing historical net loss per share (in thousands)....... 4,598 4,606 4,626 4,617 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 SIX MONTHS ENDED JUNE 30, 1995 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 six months ended June 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, --------------- JUNE 30, 1994 1995 1996 ------- ------- -------- (IN THOUSANDS) Cash................................................ $ 908 $ 2,623 $ 2,299 Money market........................................ 3,496 12,768 9,778 Certificates of deposit............................. 599 3,432 2,695 U.S. treasury obligation............................ 3,000 -- -- U.S. commercial paper............................... 2,958 -- -- ------- ------- ------- Total............................................... $10,961 $18,823 $14,772 ======= ======= ======= Disclosed as: Cash and cash equivalents......................... $10,532 $18,672 $14,772 Short-term investments............................ 429 151 -- ------- ------- ------- Total............................................. $10,961 $18,823 $14,772 ======= ======= =======
During the six months ended June 30, 1995 and 1996, there were no gross cash flows from the purchases of available-for-sale securities. During the six months ended June 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 June 30, 1996, the Company held approximately $312,000 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 August 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, JUNE 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 $383 at June 30, 1996..................................... $2,045 $1,807 ====== ======
F-9 MAGINET CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1995 IS UNAUDITED) VIDEO SYSTEMS Video systems are stated at cost, net of accumulated depreciation, and consist of the following:
DECEMBER 31, ---------------- JUNE 30, 1994 1995 1996 ------- ------- -------- (IN THOUSANDS) Installed video systems......................... $ 7,592 $20,845 $25,932 Uninstalled video systems and installations-in- progress....................................... 3,935 3,674 7,812 ------- ------- ------- 11,527 24,519 33,744 Less accumulated depreciation................... (823) (3,558) (5,890) ------- ------- ------- $10,704 $20,961 $27,854 ======= ======= =======
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, -------------- JUNE 30, 1994 1995 1996 ------ ------- -------- (IN THOUSANDS) Computer and video testing equipment................ $ 703 $ 1,758 $2,347 Furniture and fixtures.............................. 117 277 310 ----- ------- ------ 820 2,035 2,657 Less accumulated depreciation....................... (182) (659) (998) ----- ------- ------ $ 638 $ 1,376 $1,659 ===== ======= ======
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 June 30, 1996, such owner's share of total outstanding voting securities had declined to 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 June 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 SIX MONTHS ENDED JUNE 30, 1995 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 second half 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 $592,000 at June 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 June 30, 1996 was approximately 7% per annum. The amount of restricted cash collateralized against the South Korean equipment lease line was $312,000 at June 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. The carrying value of the Senior Secured Notes approximates fair value at June 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 June 30, 1996, minimum lease commitments are as follows:
OPERATING LEASES -------------- (IN THOUSANDS) Six months ending December 31, 1996........................ $295 Years ending December 31, 1997............................. 318 1998..................................................... 153 1999..................................................... 23 2000..................................................... 8 ---- Total minimum payments required............................ $797 ====
Rent expense was approximately $143,000 and $291,000 for the six months ended June 30, 1995 and 1996 and $59,000, $222,000 and $320,000 for the years ended December 31, 1993, 1994 and 1995, respectively. F-11 MAGINET CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1995 IS UNAUDITED) 5. STOCKHOLDERS' EQUITY PREFERRED STOCK Preferred Stock authorized and outstanding at June 30, 1996 is as follows:
NUMBER OF SHARES ---------------------- AGGREGATE ISSUED AND LIQUIDATION AUTHORIZED OUTSTANDING AMOUNT PREFERENCE ---------- ----------- ------- ----------- (IN THOUSANDS, EXCEPT SHARES) Designated series (all convert- ible): A........................... 150,000 150,000 $ 277 $ 300 B........................... 1,328,930 1,328,927 5,680 5,980 C........................... 7,500,000 6,287,093 26,636 28,292 D........................... 3,142,858 3,142,858 20,648 22,000 ---------- ---------- ------- ------- 12,121,788 10,908,878 $53,241 $56,572 ========== ========== ======= =======
All series of Preferred Stock are convertible at the stockholder's option at any time into Common Stock on a one-for-one basis (subject to adjustment for certain dilutive events). All series have voting rights equal to the voting rights of the shares of Common Stock they would have upon conversion. Conversion is automatic upon the closing of an underwritten public offering with aggregate offering proceeds exceeding $25,000,000. At June 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 June 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 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 F-12 MAGINET CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1995 IS UNAUDITED) 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 2,000,000 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 SIX MONTHS ENDED JUNE 30, 1995 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...................................... 718,524 $ 2.00 Exercised.................................... (108,696) $ 0.95 Canceled..................................... (134,884) $ 0.99 -------------- Balance at June 30, 1996....................... 1,487,394 $ 1.55 ==============
As of June 30, 1996, 360,528 shares of Common Stock reserved under the Plans were available for granting of additional options. The price range at June 30, 1996 of options outstanding under the Plans is $0.45 to $2.00. The weighted average contractual life of the outstanding options at June 30, 1996 is 47 months. At June 30, 1996, the Company has reserved 1,847,922 shares of authorized Common Stock for issuance under the Plans. 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 June 30, 1996................................... 430,236 $ 1.21
WARRANTS As of June 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 June 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 June 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. F-14 MAGINET CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1995 IS UNAUDITED) 6. INCOME TAXES The provision for income taxes is comprised of the following:
YEAR ENDED DECEMBER 31, SIX MONTHS ------------------------- ENDED 1993 1994 1995 JUNE 30, 1996 -------- -------- ------- -------------- (IN THOUSANDS) State Current........................... $ -- $ -- $ 2 $ 2 Foreign Current........................... -- -- 8 10 Deferred.......................... -- -- 544 371 -------- -------- ------- ---- $ -- $ -- $ 554 $383 ======== ======== ======= ====
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, SIX MONTHS ------------------------- ENDED 1993 1994 1995 JUNE 30, 1996 ------- ------- ------- ------------- (IN THOUSANDS) Expected tax (benefit) at federal statutory rate.................. $(1,149) $(2,695) $(4,315) $(2,445) Net operating losses not benefit- ted............................. 1,149 2,695 4,315 2,445 State taxes...................... -- -- 2 2 Foreign withholding taxes........ -- -- 544 371 Other, net....................... -- -- 8 10 ------- ------- ------- ------- Provision for income taxes....... $ -- $ -- $ 554 $ 383 ======= ======= ======= =======
For the years ended December 31, 1993, 1994 and 1995 and the six months ended June 30, 1996 the Company had pre-tax losses from foreign operations of $408,000, $1,239,000, $3,990,000 and $2,430,000, 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-15 MAGINET CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1995 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, SIX MONTHS ------------------------ ENDED 1994 1995 JUNE 30, 1996 ----------- ----------- ------------- (IN THOUSANDS) Deferred tax assets: Federal and state net operating losses.......................... $ 3,450 $ 6,090 $ 7,620 Foreign net operating losses..... 540 1,890 2,670 Research credit carryforwards.... 150 200 210 Capitalized research & develop- ment............................ 90 130 160 Video systems reserves........... 520 600 590 Other............................ 50 90 85 ----------- ----------- -------- Total deferred tax assets........ 4,800 9,000 11,335 Valuation allowance for deferred tax assets...................... (4,800) (9,000) (11,335) ----------- ----------- -------- Net deferred tax assets.......... -- -- -- ----------- ----------- -------- Deferred tax liabilities: Foreign withholding taxes........ -- (544) (915) ----------- ----------- -------- Net deferred tax liability....... $ -- $ (544) $ (915) =========== =========== ========
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-16 MAGINET CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1995 IS UNAUDITED) 7. GEOGRAPHIC DATA Geographic information for the years ended December 31, 1993, 1994 and 1995 and the six months ended June 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, SIX MONTHS -------------------------- ENDED 1993 1994 1995 JUNE 30, 1996 ------- ------- -------- ------------- (IN THOUSANDS) Net revenue United States.................... $ -- $ -- $ -- $ 146 Pacific Rim...................... 395 2,342 8,520 7,287 Other............................ -- -- 169 490 ------- ------- -------- -------- $ 395 $ 2,342 $ 8,689 $ 7,923 ======= ======= ======== ======== Operating loss United States.................... $(3,111) $(6,763) $ (5,637) $ (2,056) Pacific Rim...................... (240) (941) (3,763) (1,872) Other............................ -- (10) (508) (581) Intercompany elimination......... -- (83) (1,591) (1,176) ------- ------- -------- -------- $(3,351) $(7,797) $(11,499) $ (5,685) ======= ======= ======== ======== Identifiable assets United States.................... $ 4,752 $23,925 $ 49,266 $ 56,543 Pacific Rim...................... 1,050 6,308 22,689 30,374 Other............................ -- 15 1,701 4,296 Intercompany elimination......... (1,091) (6,249) (27,116) (39,028) ------- ------- -------- -------- $ 4,711 $23,999 $ 46,540 $ 52,185 ======= ======= ======== ========
8. SUBSEQUENT EVENTS On August 8, 1996, the Board of Directors authorized the Company to proceed with an Initial Public Offering (IPO) of Common Stock and increased the authorized number of shares of Common Stock to 45,000,000. Upon completion of the IPO, all of the Company's 10,908,878 shares of convertible Preferred Stock outstanding as of June 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 June 30, 1996. On August 8, 1996, the Board of Directors approved the reincorporation of the Company in the State of Delaware, which is expected to be effective in October 1996. On August 8, 1996, the Board of Directors granted options under the 1992 Stock Option Plan and the Key Personnel Stock Option Plan to purchase 193,500 shares of common stock at an exercise price of $5.25 per share. These options were granted to provide additional incentives to retain management, key employees and consultants. The deemed fair value of common stock at this date was $5.25 per share. On August 8, 1996, the Board of Directors also approved, subject to stockholder approval which is expected to be obtained in September 1996, an amendment to the 1992 Stock Option Plan increasing the number of shares of Common Stock reserved for issuance thereunder by 1,800,000 shares to 3,647,922 shares. F-17 MAGINET CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1995 IS UNAUDITED) 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. F-18 [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............................................................. 6 Use of Proceeds.......................................................... 14 Dividend Policy.......................................................... 14 Capitalization........................................................... 15 Dilution................................................................. 16 Selected Consolidated Financial and Other Data........................... 17 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 18 Business................................................................. 28 Management............................................................... 39 Certain Transactions..................................................... 49 Principal Stockholders................................................... 50 Description of Capital Stock............................................. 52 Shares Eligible for Future Sale.......................................... 54 Underwriting............................................................. 57 Legal Matters............................................................ 59 Experts.................................................................. 59 Additional Information................................................... 60 Index to Consolidated Financial Statements............................... F-1
------------------ UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICI- PATING IN THE DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DE- LIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOT- MENTS OR SUBSCRIPTIONS. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 5,000,000 SHARES LOGO 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. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ + [FRONT COVER; INTERNATIONAL PROSPECTUS] + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subject to Completion, dated October 7, 1996 PROSPECTUS 5,000,000 SHARES LOGO COMMON STOCK ------------- Of the 5,000,000 shares of Common Stock, $.001 par value ("Common Stock"), of MagiNet Corporation ("MagiNet" or the "Company") being offered hereby, 1,000,000 shares are being offered initially outside the United States and Canada by the International Managers (the "International Offering") and 4,000,000 shares are being offered initially in the United States and Canada by the U.S. Underwriters (the "U.S. Offering"). Such offerings are referred to collectively as the "Offerings." Prior to the Offerings, there has been no public market for the Common Stock of the Company. It is currently estimated that the initial public offering price per share will be between $12.00 and $14.00 per share. See "Underwriting" for a discussion of factors to be considered in determining the initial public offering price. Application has been made to have the Common Stock approved for quotation 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 6. ------------- 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 $1,050,000 payable by the Company. (3) The Company has granted to the International Managers a 30-day option to purchase up to 150,000 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 600,000 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 [BACK COVER; INTERNATIONAL PROSPECTUS] - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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. 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............................................................. 6 Use of Proceeds.......................................................... 14 Dividend Policy.......................................................... 14 Capitalization........................................................... 15 Dilution................................................................. 16 Selected Consolidated Financial and Other Data........................... 17 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 18 Business................................................................. 28 Management............................................................... 39 Certain Transactions..................................................... 49 Principal Stockholders................................................... 50 Description of Capital Stock............................................. 52 Shares Eligible for Future Sale.......................................... 54 Underwriting............................................................. 57 Legal Matters............................................................ 59 Experts.................................................................. 59 Additional Information................................................... 60 Index to Consolidated Financial Statements............................... F-1
----------------- UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPAT- ING IN THE DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 5,000,000 SHARES LOGO 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........................................... $ 27,759 NASD Filing Fee................................................ 8,050 Nasdaq National Market Listing Fee............................. 50,000 Printing Fees and Expenses..................................... 150,000 Legal Fees and Expenses........................................ 500,000 Accounting Fees and Expenses................................... 250,000 Blue Sky Fees and Expenses..................................... 10,000 Transfer Agent and Registrar Fees.............................. 15,000 Miscellaneous.................................................. 39,191 ---------- Total........................................................ $1,050,000 ==========
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 March 31, 1994 to July 31, 1996, the Registrant issued and sold 201,192 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. 2. 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. 3. On August 31, 1992, the Registrant issued and sold 440,068 shares of Series B Preferred Stock to 11 investors at a sale price of $4.50 per share. 4. 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 5. 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. 6. 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. 7. 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. 8. 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. 9. 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. 10. 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. 11. 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. 12. 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. 13. 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 a sale price of $7.00, subject to adjustment of the number of shares and exercise price. 14. On May 30, 1996, the Registrant issued an aggregate of 341,259 shares of Series D Preferred Stock to seven investors, including the Company's President and Chief Executive Officer and Chief Financial Officer, at a sale price of $7.00 per share. In addition, the Registrant issued to such purchasers warrants to acquire up to an aggregate of 21,716 shares of Common Stock at an exercise price of $7.00 per share, subject to adjustment of the exercise price and number of shares. II-2 The sales of the above securities were deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act, or Regulation D promulgated thereunder, or Rule 701 promulgated under Section 3(b) of the Securities Act as transactions by an issuer not involving a public offering or transactions pursuant to compensatory benefit plans and contracts relating to compensation as provided under such Rule 701. The recipients of securities in each such transaction represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the share certificates and warrants issued in such transactions. All recipients had adequate access, through their relationships with the Company, to information about the Registrant. ITEM 16 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS ----------- 1.1* Form of U.S. Underwriting Agreement. 1.2* Form of International Underwriting Agreement. 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 Registrant and On Common Video Corporation 10.6+** Technology License Agreement between Registrant and Guestserve Development Group 10.7** Exclusive License Agreement between Registrant and Comsat Video Enterprises, Inc., dated March 15, 1993. 10.8** Exclusive Sublicense Agreement between Registrant 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 Registrant and Shangri-la Hotel & Resorts (undated). 10.13+** Revised Installation Agreement between Registrant and Shangri-La Hotel & Resorts, dated September 7, 1994. 10.14+** Guest Video Services Agreement between Registrant and Southern Pacific Hotel Corporation Limited, dated September 6, 1995. 10.15+** Master Guest Video Services Agreement by and among Registrant and Hyatt International-Asia Pacific Limited, Hyatt Chain Services Limited and Guestserve Development Group, dated August 11, 1995. 10.16+** Memorandum of Agreement between Registrant and Trinity Group, dated May 22, 1996. 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.
II-3 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 Sunnyale, 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 the Registrant, Hyatt International (Europe Africa Middle East) Ltd., Hyatt Chain Services Limited and Guestserve Development Group, dated November 15, 1995. 11.1** Calculation of earnings per share. 21.1** List of Subsidiaries of the Registrant. 23.1 Consent of Ernst & Young LLP, Independent Auditor. 23.2* Consent of Counsel (included in Exhibit 5.1). 24.1** Power of Attorney (see page II-5). 27.1** Financial Data Schedule.
- -------- * To be filed by amendment. ** Previously filed. + Confidential treatment has been requested with respect to certain portions of this exhibit pursuant to a request for confidential treatment filed with the Securities and Exchange Commission on September 18, 1996, as amended. Omitted portions have been filed separately with the Commission. (b) Financial Statement Schedules None. Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or notes thereto. ITEM 17. UNDERTAKINGS The undersigned Registrant hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. Insofar as indemnification by the Registrant for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions referenced in Item 14 of this Registration Statement or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer, or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered hereunder, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. 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-4 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE REGISTRANT HAS DULY CAUSED THIS AMENDMENT NO. 1 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 4TH DAY OF OCTOBER, 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. 1 TO REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED SIGNATURE TITLE DATE Chairman of the Kenneth B. Hamlet* Board, President October 4, 1996 - ------------------------------------- and Chief Executive (KENNETH B. HAMLET) Officer (Principal Executive Officer) /s/ James A. Barth Executive Vice - ------------------------------------- President, Chief October 4, 1996 (JAMES A. BARTH) Financial Officer and Secretary (Principal Financial and Accounting Officer) Director Robert R. Creager* October 4, 1996 - ------------------------------------- (ROBERT R. CREAGER) Director Stuart J. Ellman* October 4, 1996 - ------------------------------------- (STUART J. ELLMAN) Director Michael D. Granoff* October 4, 1996 - ------------------------------------- (MICHAEL D. GRANOFF) Director Michael Ramsay* October 4, 1996 - ------------------------------------- (MICHAEL RAMSAY) Director October 4, 1996 James D. Robinson IV* - ------------------------------------- (JAMES D. ROBINSON IV) /s/ James A. Barth -------------------------------- * By: (JAMES A. BARTH) (ATTORNEY-IN-FACT) II-5 EXHIBIT INDEX 1.1* Form of U.S. Underwriting Agreement. 1.2* Form of International Underwriting Agreement. 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 Registrant and On Common Video Corporation 10.6** Technology License Agreement between Registrant and Guestserve Development Group 10.7** Exclusive License Agreement between Registrant and Comsat Video Enterprises, Inc., dated March 15, 1993. 10.8** Exclusive Sublicense Agreement between Registrant 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 Registrant and Shangri-la Hotel & Resorts (undated). 10.13+** Revised Installation Agreement between Registrant and Shangri-La Hotel & Resorts, dated September 7, 1994. 10.14+** Guest Video Services Agreement between Registrant and Southern Pacific Hotel Corporation Limited, dated September 6, 1995. 10.15+** Master Guest Video Services Agreement by and among Registrant and Hyatt International-Asia Pacific Limited, Hyatt Chain Services Limited and Guestserve Development Group, dated August 11, 1995. 10.16+** Memorandum of Agreement between Registrant and Trinity Group, dated May 22, 1996.
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 Sunnyale, 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 the Registrant, Hyatt International (Europe Africa Middle East) Ltd., Hyatt Chain Services Limited and Guestserve Development Group, dated November 15, 1995. 11.1** Calculation of earnings per share. 21.1** List of Subsidiaries of the Registrant. 23.1 Consent of Ernst & Young LLP, Independent Auditor. 23.2* Consent of Counsel (included in Exhibit 5.1). 24.1** Power of Attorney (see page II-5). 27.1** Financial Data Schedule.
- -------- * To be filed by amendment. ** Previously filed. + Confidential treatment has been requested with respect to certain portions of this exhibit pursuant to a request for confidential treatment filed with the Securities and Exchange Commission on September 18, 1995. Omitted portions have been filed separately with the Commission. EX-10.25 2 BLOOMBERG INFORMATION TELEVISION AGREEMENT 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 [***] from the date hereof [***]. 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-10.27 3 MASTER GUEST VIDEO SERVICES AGREEMENT EXHIBIT 10.27 November 15, 1995 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 November, 1995 ("Effective Date") by and among Hyatt International (Europe Africa Middle East) Ltd., a Switzerland corporation ("Hyatt"), 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 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 warranteed 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 *** 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. November 15, 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- November 15, 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 entered into or have agreed to enter into agreements containing the same terms as herein with respect to Hyatt International properties in Asia, the Pacific 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- November 15, 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 party. 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- November 15, 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- November 15, 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 preliminarily 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 Hotel's 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- November 15, 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- November 15, 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- November 15, 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 offered 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- November 15, 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- November 15, 1995 transmission of Hotel Services shall be borne by Hyatt 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- November 15, 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, 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 for 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 be 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- November 15, 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 (Europe Africa Middle East) 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- November 15, 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 badges 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 [***] 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 [***] 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- November 15, 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 this 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- November 15, 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- November 15, 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- November 15, 1995 or features (and associated technologies) not provided by MagiNet or GDG, notwithstanding 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 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 VAR 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. MagiNet and GDG will be responsible at -18- November 15, 1995 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. 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 useage 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. -19- November 15, 1995 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 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 shall 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 *** 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. -20- November 15, 1995 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 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. *** 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. -21- November 15, 1995 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 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 is 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. -22- November 15, 1995 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: 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 licensors 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. -23- November 15, 1995 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, 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 Packs 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 -24- November 15, 1995 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 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 Parties' 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 -25- November 15, 1995 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 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. -26- November 15, 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. 23.3. 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. -27- November 15, 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 -28- November 15, 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. -29- November 15, 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 Parties 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 Parties 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. -30- November 15, 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 MagiNets 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 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 Master Agreement and the Individual Agreements shall be reimbursed to or for the Hyatt Parties and the -31- November 15, 1995 Hotels. For purposes of this paragraph "value" shall mean the value of (i) all fees, allowances and commissions, (ii) all equipment, (iii) 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 29 day of December 1995. MAGINET INTERNATIONAL CORP. HYATT INTERNATIONAL (EUROPE AFRICA MIDDLE EAST) LTD. By: /s/ Robert R. Creager By: /s/ Andre Pury, Sr. Title: President Title: /s/ Andre Pury, Sr. V.P. GUESTSERVE DEVELOPMENT HYATT CHAIN SERVICES LIMITED GROUP By: /s/ Philip S. Knudsen By: /s/ David Chan Title: Director Title: Director -32- November 15, 1995 EXHIBIT A TECHNICAL REQUIREMENTS ---------------------- -33- 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, MATV, 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 similar quality 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 material degradation in resolution, discoloration, focus, or brighten, nor multiple images (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 1 Khz SP mode, 100 Hz - 15000 Hz (10dB 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 100 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 IO 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 Toot 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 1 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 modem 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 Page 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 140 [RE units source c. Horizontal resolution: More than 360 lines, or as required for prevailing TV Standards d. Frequency Response 2 Mhz - 10dB; 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 interactve 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 other 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 Sub-Split 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 convertors 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 20dB 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 will 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 maximum available 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 2 dB). 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 for 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 IEC 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. 1. 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 be. 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 RG6 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 few than 400 scan lines of resolution. 1. 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 2. Pay TV 3. Free TV 4. Hotel Services & Information 5. Interactive services 6. Channel up and channel down 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 lines (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 GDG 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 listed 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 are available in every hotel. A blockbuster title is considered to be a movie that is released within the same theatrical release window or that immeadiatley 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 fides 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 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 Maginett and GDG will be responsible for 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 line 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 UPDATE 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 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. All 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 upgrade It 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 Replacement Content 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 offending 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 or 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 manufacturer's 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 standard. 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 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 is 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 in-room devices and remote control by the hotel engineering staff, which includes in room devices (begin with 5% stock) and other site replaceable items (jumper 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 we 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 and 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 retro-fitted 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 headend 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 & interactive 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 MATV 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 die features and functionality butt 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 materially better video quality in a system with similar features 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 now twenty-five inch (25") television set must be observed to be similar quality 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 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 material degradation in resolution, discoloration, focus, or brightness, nor multiple be 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 advantages then Maginet and GDG shall implement equivalent or alternative technology to owe 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 use reasonable best efforts, including employing new or alternative technologies to lower operating costs such that rates can be lowered 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 November 15, 1995 EXHIBIT B FORM OF INDIVIDUAL AGREEMENT ---------------------------- -34- 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 ondemand 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 (Europe Africa Middle East), 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 -1- (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: A) 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 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 MATV 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 commands 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 must meet or exceed all applicable Technical Requirements described in -3- (02/15/95) 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 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. (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 [***] 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 undertake routine 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'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- (02/15/95) (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 hand post 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 will 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 trill 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 MATV) 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 (Dr 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 he 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) , (ii) obtain injunctive and other equitable relief, and (iii) 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 at 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 ____________, 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) (1) 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. (m) 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 International, 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. 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) EXHIBIT A ---------- TECHNICAL REQUIREMENTS -19- (02/15/95) EX-23.1 4 CONSENT OF INDEPENDENT AUDIRORS EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and to the use of our report dated August 21, 1996, in Amendment No. 1 to the Registration Statement (Form S-1) and related Prospectus of MagiNet Corporation for the registration of 5,750,000 shares of its common stock. Ernst & Young LLP Palo Alto, California October 4, 1996 -----END PRIVACY-ENHANCED MESSAGE-----