-----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, PQadQr51cKtA3T0vYvqnFiBeyzoqpcsEgDmYxO2nw6+ScHbJMMI5vsufQOdLI9ZG r+vCylCfA9UQ4hxBBNl+Xg== 0001047469-99-011340.txt : 19990326 0001047469-99-011340.hdr.sgml : 19990326 ACCESSION NUMBER: 0001047469-99-011340 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990325 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LODGENET ENTERTAINMENT CORP CENTRAL INDEX KEY: 0000911002 STANDARD INDUSTRIAL CLASSIFICATION: CABLE & OTHER PAY TELEVISION SERVICES [4841] IRS NUMBER: 460371161 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-22334 FILM NUMBER: 99572816 BUSINESS ADDRESS: STREET 1: 3900 W. INNOVATION STREET CITY: SIOUX FALLS STATE: SD ZIP: 57107- BUSINESS PHONE: (605)-988-1000 MAIL ADDRESS: STREET 1: 808 WEST AVE N CITY: SIOUX FALLS STATE: SD ZIP: 57104 FORMER COMPANY: FORMER CONFORMED NAME: LNET INC DATE OF NAME CHANGE: 19930820 10-K 1 FORM 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) - ------------------------------------------------------------------- - ------------------------------------------------------------------- [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 or - ------------------------------------------------------------------- - ------------------------------------------------------------------- [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 Commission File Number: 0-22334 LODGENET ENTERTAINMENT CORPORATION ------------------------------------------------------ (Exact name of Registrant as specified in its charter) DELAWARE 46-0371161 ------------------------ ---------------------- (State of Incorporation) (IRS Employer Identification Number) 3900 WEST INNOVATION STREET, SIOUX FALLS, SOUTH DAKOTA 57107 ------------------------------------------------------------ (Address of Principal Executive Offices) (Zip Code) (605) 988-1000 ---------------------------------------------------- (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: NONE. Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.01 PAR VALUE. Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . -- -- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K. [ ] As of March 9, 1999, the aggregate market value of the common stock held by non-affiliates of the Registrant was approximately $87.3 million. The number of shares of common stock of the Registrant outstanding as of March 9, 1999 was 11,942,387 shares. DOCUMENTS INCORPORATED BY REFERENCE - Part III of this Form 10-K is incorporated by reference from Registrant's definitive proxy statement for the 1999 Annual Meeting of Stockholders, which will be filed within 120 days of the fiscal year ended December 31, 1998. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- This Report contains a total of 56 pages, excluding exhibits. The Exhibit index appears on page 27. TABLE OF CONTENTS Special Note Regarding Forward-Looking Statements ............................ 1 Item 1 - Business ............................................................ 1 Overview ............................................................ 1 Business Strategy ................................................... 2 ResNet Transaction .................................................. 3 Markets and Customers ............................................... 3 Services and Products ............................................... 4 Operations .......................................................... 5 Competition ......................................................... 8 Regulation .......................................................... 9 Employees ........................................................... 10 Item 2 - Properties .......................................................... 10 Item 3 - Legal Proceedings ................................................... 10 Item 4 - Submission of Matters to a Vote of Security Holders ................. 10 Item 5 - Market for Registrant's Common Equity and Related Stockholder Matters ............................................................. 11 Dividends ........................................................... 11 Stockholder Rights Plan ............................................. 11 Item 6 - Selected Financial Data ............................................. 15 Special Note Regarding Forward-Looking Statements ............................ 17 Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations ................................. 17 Item 8 - Financial Statements and Supplementary Data ......................... 26 Item 9 - Changes In and Disagreements with Accountants on Accounting and Financial Disclosure ................................. 26 Item 10 - Directors and Officers of the Registrant ........................... 26 Item 11 - Executive Compensation ............................................. 26 Item 12 - Security Ownership of Certain Beneficial Owners and Management ..... 26 Item 13 - Certain Relationships and Related Transactions ..................... 27 Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K .... 27
- ---------- As used herein (unless the context otherwise requires) "LodgeNet", the "Company" and/or the "Registrant" mean LodgeNet Entertainment Corporation and its consolidated subsidiaries. LodgeNet Entertainment Corporation i Form 10-K 1998 PART I SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Certain statements in this Annual Report on Form 10-K, including, without limitation, statements in Item 1, including certain statements under the headings "Overview", "Business Strategy", "Strategic Initiatives", "Services and Products", "Operations", "Competition" and "Regulation", in Item 3 under the heading "Legal Proceedings", and in Item 7 under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations," constitute "forward-looking statements" within the meaning of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended. When used in this Annual Report, the words "expects," "anticipates," "estimates," "believes," "no assurance" and similar expressions and statements which are made in the future tense, are intended to identify such forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause the Company's actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. In addition to the risks and uncertainties discussed in the foregoing sections, such factors include, among others, the following: the impact of competition and changes to the competitive environment for the Company's products and services, changes in technology, reliance on strategic partners, uncertainty of litigation, changes in government regulation and other factors detailed, from time to time, in the Company's filings with the Securities and Exchange Commission. These forward-looking statements speak only as of the date of this Annual Report. The Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in the Company's expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. ITEM 1 - BUSINESS OVERVIEW LodgeNet is a specialized communications company which provides video on-demand, network-based Nintendo-Registered Trademark- video games, cable television programming and other interactive entertainment and information services to the lodging industry. The Company is the second largest provider of these services to the lodging industry and currently serves over 4,500 hotel properties throughout the United States and Canada. From 1992 through 1998, the number of guest pay rooms the Company serves has grown at a compound annual rate of 34.0%, from 73,415 to 596,806, and the Company currently serves over 596,000 Guest Pay rooms. During the same period, the Company's revenues and EBITDA ("Earnings Before Interest, Taxes, Depreciation, and Amortization") have grown at compound annual rates of 38.0% and 55.2%, respectively, to $166.4 million and $48.6 million in 1998. The Company provides both Guest Pay and free-to-guest services to its clients. Guest pay services are purchased by guests on a per-view or hourly basis and include Guest Scheduled-SM- on-demand movies and network-based Nintendo video games. Guest pay packages may also include additional services, such as satellite-delivered basic and premium cable television programming, and other interactive entertainment and information services that are paid for by the hotel and provided to guests at no charge. Free-to-guest services typically involve a customized package of basic and premium cable television programming. Hotels purchase free-to-guest services from the Company and provide the services to their guests at no charge. The Company provides its services to various corporate-managed hotel chains such as Sheraton, Ritz-Carlton, Harrah's Casino Hotels, Delta Hotels and Resorts, Outrigger, La Quinta Inns, and Red Roof Inns, as well as many individual properties flying the Marriott, Holiday Inn, Hilton, Inter-Continental, Prince, Radisson, Westin, Doubletree, Embassy Suites, Wingate and other flags. The Company provides its services throughout the United States and Canada, and in other select countries through licensing arrangements with strategic partners. The Company's contracts are exclusive and typically have initial, non-cancelable terms of 5 to 7 years. The exclusive nature of these contracts allows the Company to estimate (based on certain operating assumptions) future revenues, cash flows and rates of return related to the contracts prior to making a capital investment decision. The average remaining life of the Company's existing guest pay contracts is over four years, with less than 8% of these contracts due to expire before 2000. LodgeNet Entertainment Corporation 1 Form 10-K 1998 The Company offers its interactive services by utilizing the two-way digital communications design of its proprietary b-LAN-Registered Trademark- system architecture. The design of this open-architecture, UNIX-based platform enables the Company to upgrade system software to support the introduction of new services and integrate new technologies as they become commercially available and economically viable. The Company believes the flexibility of its b-LAN system architecture has enabled it to provide innovative and creative solutions to the lodging industry, including: - achieving the industry's highest percentage of installed guest pay rooms offering on-demand movies (as compared to scheduled movies that can only be watched at predetermined times), - being the first in its industry to install and widely deploy network-based video games, - being the first in its industry to utilize an image-based menu and purchasing protocol using on-screen graphics to market movies and video games, rather than using simple text menus traditionally used by its competitors, - installing and testing an Internet browser that enables hotel guests to access and navigate the Internet from their guest room television, and - integrating and testing technology that is expected to allow the Company to cost-effectively provide plug-and-play, high-speed Internet access (at up to 50 times the speed of conventional modems) to hotel guest rooms and meeting spaces. The lodging market in the United States comprises approximately 3.6 million rooms. Due to certain economies of scale, guest pay service providers have traditionally targeted only large hotels with over 150 rooms, which represent a total of approximately 1.3 million rooms. In 1995, the Company redesigned its b-LAN system, enabling it to cost-effectively deliver on-demand movies and network-based video games to mid-size hotels of 75 to 150 rooms. As the mid-size hotel market has been historically under-served by guest pay providers, it represents a large (approximately 1.2 million rooms) and attractive market for the Company's services that generates financial returns that meet or exceed those achieved in larger hotels. Since 1995, the Company has added more than 170,000 rooms to its room base from mid-sized hotels. The Company's predecessor commenced business in 1980 as Satellite Movie Company, incorporated as a South Dakota corporation in February 1983 and changed its name to LodgeNet Entertainment Corporation in September 1991. On October 13, 1993, LodgeNet Entertainment Corporation changed its state of incorporation from South Dakota to Delaware by merging with and into the Company, its newly-formed Delaware subsidiary, which then adopted the LodgeNet name. The Company's principal executive offices are located at 3900 West Innovation Street, Sioux Falls, South Dakota 57107, (605) 988-1000. BUSINESS STRATEGY CONTINUE TO SELECTIVELY EXPAND THE COMPANY'S ROOM BASE. Within the Company's target market of hotels with 75 or more rooms, the Company believes substantial opportunity exists for continued, selective growth in its room base. The Company estimates that more than 400,000 rooms are presently not served by any guest pay vendor and fit its target economic profile. The Company also estimates that its competitors serve another 200,000 rooms under contracts due to expire before 2001. The Company believes that the cost-effective and flexible design of its scaleable b-LAN system, together with its expertise in installation, programming, technical support and customer service, will allow the Company to continue to expand its room base. Based on these strengths, the Company has increased its selectivity and is seeking higher rates of return on new contracts. Internationally, the Company intends to continue to expand into selected countries in Asia and Latin America and other regions through licensing agreements with established entities in these countries. Under these agreements, the Company does not provide any capital investment, it licenses its b-LAN system architecture and multimedia capabilities, sells equipment at cost plus an agreed markup and receives a royalty based on gross revenues. MAXIMIZE REVENUE PER GUEST PAY ROOM. The Company seeks to maximize the revenue generated by each of its installed guest pay rooms. To achieve this strategy, the Company intends to continue to install its interactive Guest Scheduled on-demand movie system and network-based Nintendo video game system in all new guest pay hotel rooms. From the Company's experience, rooms with these features generate significantly more revenue and gross profit than comparable rooms having only the scheduled format, which allows guests to watch movies only at predetermined times. In addition, beginning in the second quarter of 1999, the Company intends to install the Nintendo N64 game platform in all new guest pay rooms and upgrade selected existing guest pay rooms. The Company believes that this platform, which will offer guests network-based access to the most popular and advanced Nintendo video games, will generate more per room revenue than the current Nintendo system. LodgeNet Entertainment Corporation 2 Form 10-K 1998 To take advantage of the growth in the Internet, since mid-1997, the Company has been developing and testing an Internet browser service that enables a hotel guest to access and navigate the World Wide Web through the guest room television over the Company's b-LAN system architecture. During this time, the Company has been testing hardware platforms available from various vendors, seeking content relationships with a wide variety of Internet sites and has been enhancing its proprietary communications software. During the first six months of 1999, the Company intends to expand the test of the Internet browser service. The Company believes there may be significant opportunities to generate revenues from usage fees charged to the guests who utilize the service as well as from third-party providers of content, merchandise and information services who would pay the Company for electronic access to its valuable consumer base. In October 1998, the Company acquired the Connect Group Corporation. As a result of this acquisition, the Company acquired technology that it is integrating into its system which will allow hotel guests with laptop computers to connect to the Internet (without changing their system configurations) at access speeds up to 50 times faster than conventional modems, while bypassing the hotel's PBX system. The Company believes that the acquired technology is superior to and more cost efficient than other systems currently being offered in the lodging market. The Company further believes that this "managed connectivity" service may represent a significant opportunity to generate revenues from usage fees charged to guests who utilize the service or from hotels which want to provide the service as an amenity to their guests. The Company believes that high speed Internet services will attractively complement its existing service offerings. The Company's current installed guest pay base of over 596,000 rooms hosts more than 150 million guests each year (based on current average occupancy and length-of-stay data). The Company believes such guests represent a demographic profile which a variety of advertisers may find to be highly desirable. For example, since November 1998, the Company has installed an interactive in-room shopping service in over 375,000 guest rooms that enables the guest to browse through a video version of the SkyMall-Registered Trademark- catalog featuring quality merchandise from some of the country's leading retailers for which the Company is paid a fixed, monthly access fee. The Company is seeking other advertising-based arrangements, such as advertiser-supported visitor information services for specific cities, as well as other advertising strategies to deliver targeted product or service information directly to the consumer. The Company will evaluate these and other opportunities as well as appropriate business models that would enable the Company to increase the revenue generated per guest pay room. INCREASE OPERATING MARGINS. Complementing the Company's growth objective is its ongoing goal of increasing operating margins by reducing direct and overhead expenses, as measured on a percentage of revenue and on a per-installed unit basis. The EBITDA margin from the Company's lodging business has increased from 14.4% in 1992 to 30.5% in 1998. The Company achieved this result through reduced per-room operating costs as it leveraged its infrastructure over a larger base of installed rooms. RESNET TRANSACTION In January 1996, the Company formed ResNet Communications, Inc. ("ResNet Inc.") to extend its b-LAN system architecture and operational expertise into the multi-family dwelling unit ("MDU") market. Through ResNet Inc.'s majority owned subsidiary, ResNet Communications, LLC ("ResNet LLC"), the Company provided cable television and other interactive services to the MDU market. In July 1998, the Company decided to merge the ResNet business into a larger, and, it believes, more cost-effective operating entity. On November 30, 1998 (the "Closing Date"), the Company transferred the ResNet business, consisting of net assets totaling $31.3 million, to Global Interactive Communications Corporation ("GICC") in exchange for (i) a 30% equity interest in GICC, and (ii) notes receivable totaling $10.8 million. In addition to its ownership of the ResNet business, GICC holds certain cable and telephone system assets contributed by Shared Technologies Corporation, a Delaware corporation ("STC"), and Interactive Cable Systems, Inc., a California corporation ("ICS"). Beginning with the Closing Date, the Company will account for its investment in GICC on the equity method of accounting for an investment. As a result of this accounting treatment, and because the Company expects that there is a high probability that GICC will operate at a loss for the foreseeable future as it pursues its business plan, the Company expects to recognize continuing losses in connection with its investment in GICC, which losses will be reflected as "equity in losses of unconsolidated affiliates" in the Company's operating statements. As of the date of this Report, there is no public market for the securities of GICC, and there can be no assurance as to when any such market may develop. The financial and operating performance of GICC, the market acceptance for its securities and general market conditions, among other factors, are not subject to the Company's control and may each affect the value of the Company's investment in GICC. On the Closing Date, ResNet Inc., STC and ICS entered into a Stockholders Agreement providing among other things, for: (i) limitations on the transfer of the GICC Common Stock; (ii) preemptive rights; (iii) rights of first offer by other stockholders in the event of a sale of the GICC Common Stock by any stockholder; (iv) tag-along-rights by other stockholders to participate in an offer from a third party to any stockholder to purchase the GICC Common Stock; (v) registration rights; (vi) approval rights for LodgeNet Entertainment Corporation 3 Form 10-K 1998 sale of material assets; and (vii) the right to designate one director by a stockholder as long as a certain level of ownership of GICC is maintained. The Company has no continuing obligation to make any additional investments into GICC. MARKETS AND CUSTOMERS LARGE HOTEL MARKET. Historically, the Company's primary market for guest pay services has been large hotels with over 150 rooms located in metropolitan areas in the U.S. and Canada, and the Company estimates that this market segment contains approximately 1.3 million rooms. The Company currently provides its services to large hotels that are generally part of chains such as Sheraton, Ritz-Carlton, Harrah's Casino Hotels, Delta Hotels and Resorts, Outrigger, Holiday Inn, Inter-Continental, Embassy Suites, Prince, Radisson, Westin, Hilton and Marriott. No single contract represented greater than 10% of the Company's combined guest pay and free-to-guest revenues for the year ended December 31, 1998. MID-SIZE HOTEL MARKET. In 1995, LodgeNet redesigned its interactive system, enabling the Company to deliver on-demand movies and network-based video games more cost-effectively to mid-size hotels. Since 1995, the Company has also been targeting mid-size hotels of 75 to 150 rooms as part of its guest pay marketing strategy. Since 1995, the Company has added more than 170,000 rooms to its room base for mid-size hotels. The Company believes that this market segment, which the Company estimates contains approximately 1.2 million rooms, has not been broadly served by the guest pay industry because smaller average property sizes lack economies of scale. The mid-size hotel segment represents a large and attractive market for the Company's services that generates financial returns that meet or exceed those achieved in larger hotels. FREE-TO-GUEST MARKET. Almost all of the approximately 3.6 million hotel rooms in the United States are served by some form of free-to-guest television service. Free-to-guest television typically involves a package of basic and premium programming which the hotel purchases and provides at no charge to its guests. These services can be purchased on a stand-alone basis or as part of a package which includes guest pay services. SERVICES AND PRODUCTS GUEST PAY SERVICES. The Company's primary source of revenue is providing in-room, interactive television services to the lodging industry, for which the hotel guest pays on a per-view or per-play basis. The high-speed, two-way digital communications design of the Company's proprietary b-LAN system architecture enables the Company to provide sophisticated interactive features such as on-demand movies and network-based Nintendo video games. Guest pay packages also include a variety of other interactive services, such as satellite-delivered basic and premium cable television programming, folio review, video checkout, guest satisfaction survey, advertising and merchandising services that are paid for by the hotel and provided to guests free of charge. Guest pay services include in-room television viewing of recently released major motion pictures and independent films for which a hotel guest pays on a per-view basis. The Company's Guest Scheduled interactive video on-demand system allows guests to choose from an expanded menu of video selections and individually start the selected video at their convenience rather than restricting them to a predetermined start time. It has been the Company's experience that rooms having the on-demand format generate significantly greater movie revenues than comparable rooms having only the pre-scheduled format. As of December 31, 1998, the Company served over 596,000 guest pay rooms, of which approximately 582,000, or 97.5%, featured the Company's interactive on-demand system. The Company's original scheduled guest pay service, which is provided in less than 3% of the Company's guest pay rooms, offers guests a choice of up to nine movie titles shown at predetermined times, offering a new film approximately every half hour. The Company continuously monitors guests' entertainment selections and adjusts its programming to respond to viewing patterns. The system also enables hotel owners to broadcast informational and promotional messages. In May 1993, the Company entered into a non-exclusive license agreement with Nintendo to provide hotels with a network-based Nintendo video game playing system. In May 1998, this agreement was revised and extended for ten years. Pursuant to this extended agreement, Nintendo of America, Inc. will provide the Company with access to its new Nintendo N64 video games. As with the Nintendo video game playing system, the Company will use its proprietary high-speed b-LAN system architecture to allow guests to play the video games over the hotel's master antenna television system. The Company anticipates that it will begin deploying the Nintendo N64 video game platform in the second quarter of 1999. Hotel guests are charged a fee based on the amount of time they play the video games. Presently, the Company generally charges $6.95 per hour of play. The Company had over 546,000 rooms installed with the Nintendo video game systems as of December 31, 1998. The revenues generated from the guest pay service are dependent upon three factors at each location: (i) the occupancy rate at the property; (ii) the "buy rate" or percentage of occupied rooms that buy movies or video games/information services at the LodgeNet Entertainment Corporation 4 Form 10-K 1998 property; and (iii) the price of the movie, video game or service. For example, a property installed with the Company's interactive system with a 70% occupancy rate, a buy rate of 10.5% and an $8.95 movie price will generate an average of $20.00 of gross movie revenue per installed room per month, plus additional gross revenues of $3.60 per month from video games, free-to-guest and other services, resulting in total gross revenue per room per month of $23.60, assuming an average of 30.4 days in the month. Occupancy rates vary (a) by property based on the property's competitive position within its marketplace, (b) over time based on seasonal factors, and (c) as a result of changes in general economic conditions. Buy rates generally reflect the hotel's guest mix profile, the popularity of the motion pictures available and the guests' other entertainment alternatives. Buy rates also vary over time with general economic conditions. Movie price levels are established by the Company and are set based on the guest mix profile at each property and overall economic conditions. Movie prices are set by the Company on a title by title basis, but are generally $7.95, $8.95 or $9.95. Prices may be higher in some locations and for certain highly popular titles. The cost of installation varies depending on the size of the hotel property and the configuration of the system being installed. The average installed cost of a new on-demand guest pay room with interactive and video game services capabilities, including the headend equipment and, in some cases, televisions, is currently approximately $375 to $385 per room. In addition to hotel commissions and royalties paid to movie studios, operating costs of the guest pay systems include in-room movie schedules and information cards, preview tapes or discs, tape duplication, taxes, freight, insurance, personal property taxes, maintenance and data line costs. In exchange for a contract renewal or significant contract extension the Company typically invests from $75 to $175 per room, depending on the length of the extended contract period and the upgrade services installed. FREE-TO-GUEST SERVICES. In addition to guest pay services, the Company provides television programming for which the hotel, rather than its guests, pays the charges. Free-to-guest services allow a hotel to receive one or more satellite-distributed programming channels via a satellite earth station. These channels are then distributed to guest rooms over the hotel's existing master antenna system. For free-to-guest services, the hotel pays the Company a fixed monthly charge per room for each programming channel selected and provides these channels to its guests free of charge. Premium channels, such as HBO, Showtime and The Disney Channel, broadcast major motion pictures and specialty programming, while non-premium channels, such as CNN, ESPN and WTBS, broadcast news, sports and informational programs. Premium programming suppliers typically contract only with cable companies and other large volume subscribers, such as the Company, and will not generally provide programming directly to individual hotel properties. The Company successfully competes with local cable television operators by customizing packages of programming to provide only those channels desired by the hotel subscriber, which typically reduces the overall cost of the services provided. ENTERTAINMENT HARDWARE. The Company also sells and leases entertainment hardware, including satellite earth stations, televisions and off-air signal reception and processing equipment, to the lodging industry. The Company believes that this service complements its goal of being a full-service provider of in-room entertainment and information services to the lodging industry. OPERATIONS CONTRACTS. The Company provides guest pay services under contracts with lodging properties that generally run for a term of 5 to 7 years. During the four years ended December 31, 1998, the average initial term of new guest pay contracts exceeded 6 years. Under these contracts, the Company installs its system into the hotel free of charge and retains ownership of all equipment utilized in providing the service. Traditionally, the hotel provides and owns the television set; however, the Company in some cases provides televisions incorporating the Company's integrated guest pay terminal units to hotels which meet certain economic criteria. The Company's contracts generally provide that the Company will be the exclusive provider of in-room, on-demand television entertainment services to the hotels, permit the Company to set the movie price and allow the Company to terminate the contract if the hotel is not meeting the Company's economic criteria. The contracts also typically grant the Company a right of first refusal regarding the provision of additional video related services to the hotel. The hotels collect the viewing charges from their guests and retain a commission, which varies depending on the size and profitability of the system and other factors. At the scheduled expiration of a contract, the Company generally seeks to extend the contract on substantially similar terms. The average remaining life of the Company's current guest pay contracts is over four years, with less than 8% of these contracts coming up for renewal before 2000. The Company typically enters into a separate contract with each hotel for the services provided. The terms contained in the contracts with the corporate-managed hotels in any one chain generally are negotiated by that chain's corporate management, LodgeNet Entertainment Corporation 5 Form 10-K 1998 and the hotels subscribe at the direction of corporate management. In the case of franchised hotels, the contracts are generally negotiated separately with each hotel. TECHNOLOGY, PRODUCT DEVELOPMENT AND PATENTS. The Company designs and develops high quality interactive, multimedia entertainment and information systems. Because such systems utilize an open architecture, UNIX-based platform incorporating industry standard interfaces, the Company can upgrade system software to support the introduction of new services or integrate new technologies as they become economically viable. The Company's interactive system incorporates the Company's scaleable proprietary b-LAN system architecture with commercially manufactured, readily available components and hardware such as video cassette players, modulators and computers. The Company's b-LAN system architecture utilizes the Company's proprietary, two-way digital communications design to process and respond to input commands from the viewer very rapidly. This capability enables the Company to provide sophisticated interactive features such as network-based Nintendo video games and on-demand movies, and a variety of other interactive services such as folio review, video checkout, Internet browsing, guest surveying, advertising and shopping services. The Company has installed an interactive in-room shopping service in over 375,000 guest rooms that enables the guest to browse through a video version of the SkyMall catalog featuring quality merchandise from the country's leading retailers. The Company is currently testing an Internet browser that enables the hotel guest to access and navigate the Internet from any guest room television in the hotel, and the Company intends to install and test the Internet browser at additional hotels over the next several months. In October 1998, the Company acquired Connect Group Corporation. As a result of this acquisition, the Company is integrating and testing technology that will allow hotel guests with laptop computers to connect to the Internet from guest or meeting rooms. Such access can be up to 50 times faster than the speed of conventional modems and bypasses the hotel's PBX system. The Company's guest pay systems consist of equipment located within the guest room connected via a local-area cable distribution network to a headend located elsewhere in the hotel. Typical in-room equipment includes a terminal unit, a hand-held remote control and a video game controller. The in-room terminal unit may be integrated within the television set or located behind or on top of the set. Movie programming originates from video cassette players located within the headend rack and is transmitted to individual rooms over the hotel's master antenna system. Video game programs are downloaded into dedicated video game processors also located within the headend rack. The guest's keystrokes are transmitted from the room to the game processor using the Company's proprietary high-speed communications infrastructure and the video signal produced by the game processor is transmitted to the guest room over the hotel's master antenna system. Both movie and video game starts are controlled automatically by the system computer. The system computer also automatically records the purchase of a guest pay movie or video game and reports billing data to the hotel's accounting system, which automatically posts the charge to the guest's bill. Although the Company's products are compatible with all brands of televisions, the Company has arrangements with Zenith Electronics Corporation, Phillips Consumer Electronics Company, and Sony Electronics, Inc., leading suppliers of televisions to the lodging industry and other markets, who provide the Company with commercial televisions into which the Company can integrate its custom-designed circuit boards. The Company is also working with other television manufacturers to integrate the Company's systems into their commercial television sets. Integration eliminates the need for an external terminal unit and costs less than an external unit of comparable utility. The Company designs its systems through its staff of 68 software and hardware engineers and support personnel (as of December 31, 1998). Development activities are oriented toward the continued enhancement and cost reduction of the Company's system and the further development of additional interactive, multimedia entertainment and information services, such as Internet, advertising and shopping services. It is the Company's policy to apply for patents on those product designs which management believes may be of significance to the Company. The Company owns six United States patents, cross-licenses other industry-related technologies and patent rights, and has other applications for patents pending in the U.S. Patent and Trademark Office dealing with various aspects of the Company's interactive multimedia systems. The Company uses a number of registered and unregistered trademarks for its products and services. The Company has applications for registration pending for certain of the unregistered trademarks, and those trademarks for which the Company has not sought registration are governed by common law and state unfair competition laws. Because the Company believes that these trademarks are significant to the Company's business, the Company has taken legal steps to protect its trademarks in the past and intends to actively protect these trademarks in the future. The Company believes that its trademarks are generally well recognized by consumers of its products and are associated with a high level of quality and value. LodgeNet Entertainment Corporation 6 Form 10-K 1998 SALES AND MARKETING. The Company focuses its sales and marketing strategies on acquiring new contracts from hotels, extending and retaining existing contracts, and marketing the Company's guest pay and other interactive services to the hotel guest. The Company's sales and marketing organization consisted of 67 employees as of December 31, 1998, including national account representatives, who develop relationships with national hotel franchise organizations and management groups, and regional sales representatives who maintain relationships primarily with regional hotel management and ownership organizations. The Company markets its services and products to hotels by advertising in industry trade publications, attending industry trade shows, direct marketing and telemarketing. Sales activities are coordinated from the Company's headquarters. The Company markets its services to hotel guests by means of an image-based menu and purchasing protocol using on-screen graphics and a movie promotional channel which contains movie and video game programming information and highlights the feature film selections of the month. In-room marketing advertisements are designed and produced by the Company's marketing department. The system also generates a "Welcome Channel", which appears on-screen when the television is turned on and describes the programming and interactive services available through the Company's system. INSTALLATION AND SERVICE OPERATIONS. The Company believes that high quality and consistent systems support and maintenance are essential to competitive success in its industry. The Company's installation and service organization consists of 269 employees in 28 locations in the United States and Canada, as of December 31, 1998. The Company emphasizes the use of Company-employed installation and service personnel, but also uses Company-trained subcontractors in areas where there is not a sufficient concentration of Company-served hotels to warrant a Company-employed service representative. Currently, the Company's in-house installation and service organization has responsibility for approximately 87% of the guest pay hotel rooms served by the Company. Service personnel are responsible for systems maintenance and distribution and collection of video cassettes. The Company's installation personnel prepare site surveys to determine the type of equipment to be installed at each particular hotel, install the Company's systems, train the hotel staff to operate the systems and perform preliminary quality control tests. The Company maintains a toll-free customer support hot line, TechConnection, which is monitored 24 hours a day by trained support technicians. The on-line diagnostic capability of the Company's system enables the Company to identify and resolve a majority 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. PROGRAMMING. The Company obtains non-exclusive rights to show recently released major motion pictures from motion picture studios pursuant to a master agreement with each studio. The license period and percentage fee for each movie are negotiated separately, with the studio receiving a percentage of the Company's gross revenue from the movie. For recently released motion pictures, the Company typically obtains rights to exhibit the picture after the film has been in theaters, but prior to its release to the home video market or exhibition on cable television. Generally, studios make master video tapes of their movies available for duplication sufficiently in advance of the release dates for the lodging industry so that all of the Company's hotels can offer the movies as of the first date they are available for exhibition. The Company obtains independent films, most of which are non-rated and intended for mature audiences, for a one-time flat fee that is nominal in relation to the licensing fees paid for major motion pictures and which permits the Company to duplicate the films as necessary to supply copies to its hotel sites. The Company obtains its selection of Nintendo video games pursuant to a ten year non-exclusive license agreement with Nintendo entered into in 1998. Under the terms of the agreement, the Company pays Nintendo a monthly fee based on the number of rooms offering Nintendo video game services. The Company continuously monitors guests' entertainment selections and adjusts its programming to respond to viewing patterns. The Company obtains its basic and premium cable television programming pursuant to multi-year license agreements generally containing automatic renewal provisions and pays its programming suppliers a fixed, monthly fee for each room or subscriber receiving the service. Management believes that relations with the programming suppliers are good and expects to renew these contracts as necessary on competitive terms. SYSTEMS PRODUCTION GROUP AND EQUIPMENT SUPPLIERS. The Company contracts directly with various electronics firms for the manufacture and assembly of its systems hardware, the design of which is controlled by the Company. The Company has found these suppliers to be dependable and able to meet delivery schedules on time. The Company believes that, in the event of a termination of any of its sources, with proper notification from the supplier, alternate suppliers could be located without incurring significant costs or delays. Certain electronic component parts used within the Company's products are available from a limited number of suppliers and can be subject to temporary shortages because of general economic conditions and the demand and supply for such component parts. If the Company were to experience a shortage of any given electronic part, the Company LodgeNet Entertainment Corporation 7 Form 10-K 1998 believes that alternative parts could be obtained or system design changes implemented. In such event, the Company could experience a temporary reduction in the rate of new room installations and/or an increase in the cost of such installations. All other components of the Company's systems are standard commercial products, such as computers, video cassette players, modulators and amplifiers, that are available from multiple sources. The Company believes its anticipated growth can be accommodated through existing suppliers. The headend electronics are assembled at the Company's facilities for testing prior to shipping. The Company samples the room units at the supplier's facilities periodically for reliability. Following assembly of headend equipment with a configuration designed specifically for a particular customer, the system is shipped to the location, where it is installed by Company-employed technicians or Company-trained subcontractors. COMPETITION The Company is the second largest provider of interactive and cable television services to the lodging industry, currently serving over 700,000 hotel rooms. The Company's largest competitor is On Command Corporation ("OCC"), the successor corporation resulting from the 1996 merger of SpectraVision, Inc. and On Command Video Corporation. Based upon publicly available information, the Company estimates that OCC currently serves approximately 929,000 hotel rooms. The Company also competes with Hospitality Networks, SVI, SeaChange, Time Warner, Cox Cable and TCI. There are also a number of potential competitors that could use their existing infrastructure to provide in-room entertainment services to the lodging industry, including franchised cable operators, wireless cable operators, telecommunications companies and DBS providers. Some of these potential competitors are already providing free-to-guest services to the lodging industry and have announced plans to offer guest pay services. Some of these companies may have substantially greater financial and other resources than the Company, and it is possible that such competitors may develop a technology that is more cost effective than the Company's proprietary b-LAN system architecture. To respond to competition, the Company will need to continue to enhance its in-room entertainment systems, expand its operations and meet the increasing demands for competitive pricing, service quality and availability of value-added product offerings. Competition with respect to new guest pay contracts centers on a variety of factors, depending upon the features important to a particular hotel. Among the more important factors are: (i) the features and benefits of the entertainment systems; (ii) the quality of the vendor's technical support and maintenance services; (iii) the financial terms and conditions of the proposed contract (including payments to the hotel); and (iv) the ability to complete system installation in a timely and efficient manner. In addition, with respect to hotel properties already receiving in-room entertainment services, the incumbent provider may have certain informational and installation cost advantages as compared to outside competitors. The Company believes that its competitive advantages include: (i) its proprietary b-LAN system architecture that enables the Company to deliver a broad range of interactive features and services such as on-demand movies and network-based Nintendo video games; (ii) the flexible design of the Company's system which enables it to add enhancements or integrate new technologies as they become commercially available and economically viable; (iii) high quality customer support and nationwide field service operations; and (iv) an experienced management team and professional and well-trained sales organization. The Company believes that its success in securing contracts reflects the strong competitive position of the Company's products and services. Because of the high level of penetration in the large hotel segment of the lodging industry already achieved by guest pay providers, most of the growth opportunities in this market segment have traditionally involved securing contracts to serve hotels that are served by a competing vendor. An incumbent provider may have certain information and installation cost advantages as compared to outside competitors. These circumstances have led to increasing competition for contract renewals, particularly at hotels operated by major hotel chains. The Company believes that certain major hotel chains have awarded contracts based primarily on the level and nature of financial and other incentives offered by the guest pay provider. Even if it were able to do so, the Company may not always be willing to match the incentives provided by its competitors, some of which have greater access to financial and other resources than the Company. Because free-to-guest service providers generally have substantially comparable access to the satellite delivered programming that comprises the free-to-guest services, competition in this segment has been based primarily on price and customer service. While the Company believes that its proprietary b-LAN system architecture is comparable or superior to the systems currently being used by its competitors in the lodging industry, there can be no assurance that such competitors will not develop a cost-effective system that is comparable or superior to the Company's system. In order to broaden its market opportunities, the Company over time has redesigned its system to permit the delivery of on-demand movies and network-based video games to LodgeNet Entertainment Corporation 8 Form 10-K 1998 mid-size hotels of 75 to 150 rooms, a market segment the Company believes has been historically under-served by guest pay providers. There can be no assurance that competitors will not develop a cost-effective system that would allow them to target this market segment. Further, there can be no assurance that the Company will continue its current level of success in obtaining new contracts from hotels currently served by other vendors or previously unserved, or that the Company will be able to retain contracts with hotels it serves when those contracts expire. Although in the free-to-guest market the local franchised cable operator in a hotel's market may have a substantial market presence, such operators typically offer the hotel owner only standard packages of programming developed for the residential market and not the lodging market, and at a fixed price per room based on all the channels provided. The Company competes with the franchised cable operator for free-to-guest contracts by customizing packages of programming to provide only those channels desired by the hotel, typically reducing the overall cost per room. Competitive pressures in the guest pay and free-to-guest segments could result in reduced market share for the Company, higher hotel commissions, lower margins and increased expenditures on marketing, product development and systems installation, each of which could adversely affect the Company's financial condition and operating results. REGULATION TELECOMMUNICATIONS ACT OF 1996. The Telecommunications Act of 1996 (the "Act") is intended, in part, to promote substantial competition for telephone and video services and will alter federal, state and local laws and regulations regarding telecommunications providers and services. The Act generally removes previous restrictions preventing cable firms, telephone companies, long distance carriers and public utilities from entering into certain new markets, removes many cross-ownership restrictions and modifies rate regulations applicable to franchised cable operators. In particular, the Act authorizes local telephone companies to provide video programming directly to subscribers in their service areas and eliminates the requirement that "private cable" operators serve only buildings "under common ownership, management or control," but preserves the requirement that such operations not use closed transmission paths to cross public rights-of-way. The Act also permits franchised cable operators to offer bulk discounts to multiple dwelling units; provided, however, that such discounts may not constitute "predatory pricing." Prior to the adoption of the Act, franchised cable operators were subject to a uniform rate requirement which generally prohibited such bulk discounts. There are rulemakings and appellate litigation resulting from Commission decisions in those rulemakings that interpret and implement the provisions of the Act. It is anticipated that the Act will stimulate increased competition generally in the telecommunications and cable industries which may adversely impact the Company. No assurance can be given that changes in current or future laws or regulations adopted by the FCC or state or local regulatory authorities would not have a material adverse effect on the Company's business. As a result of the Act, the Company's business may be adversely affected by the entry of additional competitors in the multichannel video programming distribution market. In part, the Company's competitiveness also will depend upon the outcome of various FCC rulemaking proceedings to interpret and implement the provisions of the Act. It is not possible at this time to predict the outcome of those rulemaking proceedings or their effect on the Company. CABLE TELEVISION REGULATION. The Communications Act of 1934, as amended by the Cable Communications Policy Act of 1984 (the "1984 Cable Act"), the Cable Television Consumer Protection and Competition Act of 1992 (the "Cable Act"), and the Act, governs the regulation of "cable systems." The law defines a "cable system" as a facility, consisting of a set of closed transmission paths and associated signal generation, reception, and control equipment that is designed to provide cable service which includes video programming and which is provided to multiple subscribers within a community, but the law exempts from that definition, among other facilities, a facility that serves subscribers without using any public rights-of-way. The Company constructs and operates separate headend systems at each hotel or transmits cable signals from microwave transmitters to each separate property, and those systems do not use public rights-of-way. Thus, with respect to its private cable systems, the Company is not required to comply with many of the FCC's rules relating to cable systems, including, among other things, rate regulation and the requirement to obtain a franchise from local government authorities in order to provide video services. As a "multichannel video programming distributor" ("MVPD"), however, the Company is subject to various provisions of the Communications Act of 1934, as amended. Laws and regulations applicable to MVPDs generally apply to the Company. These include laws and regulations that benefit the Company, such as provisions that ensure the Company access to programming on fair, reasonable and nondiscriminatory terms, as well as provisions that subject the Company to additional requirements, such as the requirement to obtain consent from broadcasters in order to retransmit their signals over the Company's systems. LodgeNet Entertainment Corporation 9 Form 10-K 1998 TELEPHONE COMPANY ENTRY INTO CABLE TELEVISION. The Act allows telephone companies to compete directly with franchised and private cable operators by repealing the previous telephone company-cable cross-ownership ban and replacing the FCC's video dialtone regulations with an "open video system" ("OVS") plan by which local exchange carriers can provide cable service in their telephone service area. The FCC has adopted regulations prohibiting an OVS operator from discriminating among programmers and ensuring that OVS rates, terms, and conditions for service are reasonable and nondiscriminatory. Further, those regulations prohibit a local exchange carrier, OVS operator or its affiliates from occupying more than one-third of a system's activated channels when demand for channels exceeds supply, although there are no numeric limits. Additional OVS regulations include rules governing channel sharing; extending the FCC's sports exclusivity, network nonduplication, and syndicated exclusivity regulations; and controlling the positioning of programmers on menus and program guides. Local franchising authorities may require OVS operators to pay "franchise fees" only to the extent that the OVS provides or its affiliates provide cable services over the OVS; such fees may not exceed the franchise fees charged to cable operators in the area, and the OVS provider may pass through the fees as a separate subscriber bill item. OVS operators are subject to local franchising authorities' general right-of-way management regulations. ELECTRIC UTILITY ENTRY INTO CABLE AND TELECOMMUNICATIONS. The Act provides that registered utility holding companies and subsidiaries may provide telecommunications services (including cable television) notwithstanding the Public Utility Holding Company Act. Electric utilities must establish separate subsidiaries, known as "exempt telecommunications companies" and must apply to the FCC for operating authority. Large utility holding companies may become significant competitors to both cable television and other telecommunications providers. The foregoing does not purport to describe all present and proposed federal, state and local regulations and legislation relating to the video programming industry. Other existing federal, state and local laws and regulations currently are, or may be, the subject of a variety of judicial proceedings, legislative hearings, and administrative and legislative proposals that could change in varying degrees, the manner in which private cable operators and other video programming distributors operate. The Company cannot estimate the outcome of these proceedings or their impact upon its operations at this time. EMPLOYEES As of December 31, 1998, the Company had 706 employees in the United States and Canada. None of these employees is covered by a collective bargaining agreement. The Company has not experienced any significant labor problems and believes that its relationship with its employees is good. ITEM 2 - PROPERTIES The Company's National Headquarters and Distribution Center, including its principal executive offices, is located on an approximately 23 acre site in Sioux Falls, South Dakota. Construction of the approximately $15 million facility was completed in December 1997. The National Headquarters and Distribution Center occupies approximately 228,500 square feet including approximately 126,500 square feet for executive, administrative and support functions, approximately 60,000 square feet for assembly and distribution functions, and approximately 42,000 square feet for warehouse space. The opening of the National Headquarters and Distribution Center allowed the Company to consolidate all of its local operations into a single, multipurpose facility which is designed to enhance operational efficiency and to facilitate any necessary future expansion needs of the Company. The Company believes that the site of its National Headquarters and Distribution Center is sufficient to accommodate its foreseeable local operational space requirements. The Company leases 19 facilities, in various locations, from unaffiliated third parties. These facilities are combination warehouse/office facilities for installation and service operations and are located throughout the country. Each of these facilities occupies less than 3,500 square feet. ITEM 3 - LEGAL PROCEEDINGS The Company is subject to litigation arising in the ordinary course of business. As of the date hereof, the Company believes the resolution of such litigation will not have a material adverse effect upon the Company's financial condition or results of operations. LodgeNet Entertainment Corporation 10 Form 10-K 1998 ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On September 30, 1998, the Company solicited the consent of the holders of the Company's 10.25% Senior Notes Due 2006 (the "Notes") to amend the indenture governing the Notes to (1) Permit the Company to (i) cause ResNet Communications, Inc. ("ResNet Inc."), a subsidiary of the Company, to contribute the operations of its subsidiary, ResNet Communications, L.L.C. ("ResNet LLC") to a newly-formed joint venture company, Global Interactive Communications Corporation ("GICC"), (ii) to make up to $5 million of additional investments in GICC, and (iii) to enter into transactions with GICC so long as the transactions are at arm's length and in the ordinary course of business, and (2) Authorize the Trustee to execute and deliver a supplemental indenture and any instrument, agreement or other document, and take any other action reasonably requested by the Company, to effect the proposed amendments. Registered holders of the Notes, of record as of the close of business on September 30, 1998, who provided their valid consent to the proposed amendment prior to October 15, 1998, were entitled to an amount equal to $2.50 per $1,000 of principal of such holder's Notes. The holders of 100% of the Notes, determined as of the record date for the consent solicitation, consented to the proposed amendments to the indenture. There were no other matters submitted to a vote of security holders during the quarter ended December 31, 1998. PART II ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock currently trades on the NASDAQ National Market System ("NASDAQ NMS") under the symbol "LNET". The Company's Common Stock began trading on the NASDAQ NMS on October 14,1993 upon the effectiveness of its initial public offering. As of March 9, 1999 there were outstanding 11,942,387 shares of the Company's Common Stock. The following table sets forth, for the fiscal quarters indicated, the range of high and low sales prices of the Company's Common Stock as reported by NASDAQ NMS.
Quarter Ended High Low ------------------ ------ ------ March 31, 1997 $17.38 $10.50 June 30, 1997 12.00 8.00 September 30, 1997 13.25 9.00 December 31, 1997 14.00 10.50 March 31, 1998 12.25 10.38 June 30, 1998 12.50 8.00 September 30, 1998 10.00 6.50 December 31, 1998 7.63 5.13
On March 9, 1999, the closing price of the Company's Common Stock, as reported by NASDAQ NMS was $7.3125. Stockholders are urged to obtain current market quotations for the Company's Common Stock. As of March 9, 1999 there were 164 stockholders of record of the Company with approximately 87% of the shares held in "street name". The Company estimates that as of March 9, 1999 there were more than 2,000 stockholders of the Company. DIVIDENDS No dividends have been paid to date on the Common Stock of the Company. Management of the Company does not intend to pay any cash dividends on Common Stock of the Company in the foreseeable future, rather, it is expected that the Company will retain earnings to finance its operations and growth. The terms and conditions of the Company's 10.25% Senior Notes and of the Company's bank credit facility (See "Item 7 -- Management's Discussion and Analysis of Financial Condition and Results of Operations" elsewhere herein) both contain covenants which restrict and limit payments or distributions in respect of the Common Stock of the Company. LodgeNet Entertainment Corporation 11 Form 10-K 1998 STOCKHOLDER RIGHTS PLAN On February 28, 1997, the Board of Directors of the Company authorized and adopted a stockholder rights plan ("Rights Plan"). The Rights Plan is intended to maximize stockholder value by providing flexibility to the Board of Directors in the event that an offer for the Company is received that is either inadequate or not in the best interest of all stockholders. The Rights Plan had been under consideration by the Board of Directors for almost a year prior to its adoption and is in a form recommended by the Company's outside legal counsel and financial advisors, which form is similar to that adopted by many other public companies. Pursuant to the Rights Plan, the Board of Directors declared a dividend distribution of one "Right" for each outstanding share of common stock, par value $.01 per share (the "Common Stock") of the Company to stockholders of record at the close of business on March 10, 1997 (the "Record Date"). In general, each Right, when exercisable, entitles the registered holder to purchase from the Company one one-thousandth of a share of a new series of preferred stock, designated as Series A Participating Preferred Stock, par value $.01 per share (the "Preferred Stock"), at a price of $60.00 (the "Purchase Price"), subject to adjustment. The terms of the Rights are set forth in a Rights Agreement (the "Rights Agreement") between the Company and Harris Trust and Savings Bank, as "Rights Agent". The following summary description of the Rights and the terms of the Rights Agreement does not purport to be complete and is qualified in its entirety by reference to the Rights Agreement incorporated by reference as an exhibit hereto. Initially, the Rights will be attached to all Common Stock certificates representing shares then outstanding, and no separate Rights certificates will be distributed. The Rights will separate from the Common Stock and a "Distribution Date" will occur upon the earliest of (i) a public announcement that a person, entity or group of affiliated or associated persons and/or entities (an "Acquiring Person") has acquired, or obtained the right to acquire, beneficial ownership of 15% or more of the outstanding shares of Common Stock, other than as a result of repurchases of stock by the Company or certain inadvertent actions by institutional or certain other stockholders, or (ii) ten days (unless such date is extended by the Board of Directors) following the commencement of (or a public announcement of an intention to make) a tender offer or exchange offer which would result in any person, entity or group affiliated or associated persons and/or entities becoming an Acquiring Person. Until the Distribution Date the Rights will be evidenced, with respect to any of the Common Stock certificates outstanding as of the Record Date, by such Common Stock certificate together with a Summary of Rights. The Rights Agreement provides that, until the Distribution Date, the Rights will be transferred with and only with Common Stock certificates. From as soon as practicable after the Record Date and until the Distribution Date (or earlier redemption or expiration of the Rights), new Common Stock certificates issued after the Record Date upon transfer or new issuance of the Common Stock will contain a notation incorporating the Rights Agreement by reference. Until the Distribution Date (or earlier redemption or expiration of the Rights), the surrender for transfer of any certificates for Common Stock outstanding as of the Record Date (with or without the Summary of Rights attached) will also constitute the transfer of the Rights associated with the Common Stock represented by such certificate. As soon as practicable following the Distribution Date, separate certificates evidencing the Rights ("Rights Certificates") will be mailed to holders of record of the Common Stock as of the close of business on the Distribution Date, and the separate Rights Certificates alone will evidence the Rights. The Rights are not exercisable until the Distribution Date. The Rights will expire on the earliest of (i) February 28, 2007, (ii) consummation of a merger transaction with a Person or group who acquired Common Stock pursuant to a Permitted Offer (as defined below), and is offering in the merger the same price per share and form of consideration paid in the Permitted Offer, or (iii) redemption or exchange of the Rights by the Company as described below. The number of Rights associated with each share of Common Stock shall be proportionately adjusted to prevent dilution in the event of a stock dividend on, or a subdivision, combination or reclassification of, the Common Stock. The Purchase Price payable, and the number of shares of Preferred Stock or other securities or property issuable, upon exercise of the Rights are subject to adjustment from time to time to prevent dilution (i) in the event of a stock dividend on, or a subdivision, combination or reclassification of the Preferred Stock, (ii) upon the grant to holders of the Preferred Stock of certain rights or warrants to subscribe for Preferred Stock, certain convertible securities or securities having the same or more favorable rights, privileges and preferences as the Preferred Stock at less than the current market price of the Preferred Stock, or (iii) upon the distribution to holders of the Preferred Stock of evidences of indebtedness or assets (excluding regular quarterly cash dividends out of earning or retained earnings) or of subscription rights or warrants (other than those referred to above). With certain exceptions, no adjustments in the Purchase Price will be required until cumulative adjustments require an adjustment of at least 1% in such Purchase Price. LodgeNet Entertainment Corporation 12 Form 10-K 1998 In the event that, after the first date of public announcement by the Company or an Acquiring Person that an Acquiring Person has become such, the Company is involved in a merger or other business combination transaction (whether or not the Company is the surviving corporation) or 50% or more of the Company's assets or earning power are sold (in one transaction or a series of transactions), proper provision shall be made so that each holder of a Right (other than an Acquiring Person) shall thereafter have the right to receive, upon the exercise thereof at the then current Purchase Price, that number of share of common stock of either the Company, in the event that it is the surviving corporation of a merger or consolidation, or the acquiring company (or, in the event there is more than one acquiring company, the acquiring company receiving the greatest portion of the assets or earning power transferred) which at the time of such transaction would have a market value of two times the Purchase Price (such right being called the "Merger Right"). In the event that a Person becomes the beneficial owner of 15% or more of the outstanding shares of Common Stock (unless pursuant to a tender offer or exchange offer for all outstanding shares of Common Stock at a price and on terms determined prior to the date of the first acceptance of payment for any of such shares by at least a majority of the members of the Board of Directors who are not officers of the Company and are not Acquiring Persons or Affiliates or Associates thereof to be both adequate and otherwise in the best interests of the Company and its stockholders (a "Permitted Offer")), then proper provision shall be made so that each holder of a Right will for a 60-day period (subject to extension under certain circumstances) thereafter have the right to receive upon exercise that number of shares of Common Stock (or, at the election of the Company, which election may be obligatory if sufficient authorized shares of Common Stock are not available, a combination of Common Stock, property, other securities (e.g., Preferred Stock) and/or a reduction in the exercise price of the Right) having a market value of two times the Purchase Price (such right being called the "Subscription Right"). The holder of a Right will continue to have the Merger Right whether or not such holder exercises the Subscription Right. Notwithstanding the foregoing, upon the occurrence of any of the vents giving rise to the exercisability of the Merger Right or the Subscription Right, any Rights that are or were at any time after the Distribution Date owned by an Acquiring Person shall immediately become null and void. At any time prior to the earlier to occur of (i) a Person becoming an Acquiring Person or (ii) the expiration of the Rights, the Company may redeem the Rights in whole, but not in part, at a price of $.01 per Right (the "Redemption Price"), which redemption shall be effective upon the action of the Board of Directors. Additionally, the Company may thereafter redeem the then outstanding Rights in whole, but not in part, at the Redemption Price (i) if such redemption is incidental to a merger or other business combination transaction or series of transactions involving the Company but not involving an Acquiring Person or certain related Persons or (ii) following an event giving rise to, and the expiration of the exercise period for, the Subscription Right if and for as long as the Acquiring Person triggering the Subscription Right beneficially owns securities representing less than 15% of the outstanding shares of Common Stock and at the time of redemption there are no other Acquiring Persons. The redemption of Rights described in the preceding sentence shall be effective only as of such time when the Subscription Right is not exercisable, and in any event, only after ten business days' prior notice. Upon the effective date of the redemption of the Rights, the right to exercise the Rights will terminate and the only right of the holders of Rights will be to receive the Redemption Price. Subject to applicable law, the Board of Directors, at its option, may at any time after a Person becomes an Acquiring Person (but not after the acquisition by such Person of 50% or more of the outstanding Common Stock), exchange all or part of the then outstanding and exercisable Rights (except for Rights which have become void) for shares of Common Stock at a rate of one share of Common Stock per Right or, alternatively, for substitute consideration consisting of cash, securities of the Company or other assets (or any combination thereof). The Preferred Stock purchasable upon exercise of the Rights will be nonredeemable and junior to any other series of preferred stock the Company may issue (unless otherwise provided in the terms of such stock). If issued, each share of Preferred Stock will have a preferential quarterly dividend in an amount equal to 1,000 times the dividend, if any, declared on each share of Common Stock, but in no event less than $25.00. In the event of liquidation, the holders of shares of Preferred Stock will receive a preferred liquidation payment equal to the greater of $1,000.00 or 1,000 times the payment made per share of Common Stock. Each share of Preferred Stock will have 1,000 votes, voting together with the shares of Common Stock. The rights of the Preferred Stock as to dividends, liquidation and voting, and in the event of mergers and consolidations, are protected by customary antidilution provisions. Fractional shares of Preferred Stock will be issuable; however, (i) the Company may elect to distribute depositary receipts in lieu of such fractional share and (ii) in lieu of fractional shares other than fractions that are multiples of one one-thousandth of a share, an adjustment in cash will be made based on the market price of the Preferred Stock on the last trading date prior to the date of exercise. LodgeNet Entertainment Corporation 13 Form 10-K 1998 Until a Right is exercised, the holder thereof, as such, will have no rights as a stockholder of the Company, including, without limitation, the right to vote or to receive dividends. The Company and the Rights Agent retain broad authority to amend the Rights Agreement; however, following any Distribution Date any amendment may not adversely affect the interests of holders of Rights. LodgeNet Entertainment Corporation 14 Form 10-K 1998 ITEM 6 - SELECTED FINANCIAL DATA The following is a summary of Selected Financial Data. The data should be read in conjunction with the Company's Consolidated Financial Statements, the notes thereto, and "Management's Discussion and Analysis of Financial Condition and Results of Operations", all included elsewhere herein. Dollar amounts are in thousands, except for per share and per room amounts.
YEAR ENDED DECEMBER 31, -------------------------------------------------------- 1994 1995 1996 1997 1998 -------- -------- -------- -------- -------- STATEMENT OF OPERATIONS DATA: Revenues: Guest Pay $ 29,927 $ 50,758 $ 84,504 $116,276 $146,481 Free-to-guest 8,397 8,060 8,645 8,496 7,854 Other 2,070 4,395 4,572 10,938 12,016 -------- -------- -------- -------- -------- Total revenues 40,394 63,213 97,721 135,710 166,351 Direct costs 18,181 28,910 44,379 58,512 74,008 -------- -------- -------- -------- -------- Gross profit 22,213 34,303 53,342 77,198 92,343 Operating expenses 24,573 36,741 58,428 85,262 102,282 -------- -------- -------- -------- -------- Operating loss (2,360) (2,438) (5,086) (8,064) (9,939) Equity in losses of unconsolidated affiliates -- -- -- -- 6,550 Interest expense 966 4,522 8,243 17,001 23,048 -------- -------- -------- -------- -------- Loss before income taxes, extraordinary loss and cumulative effect of (3,326) (6,960) (13,329) (25,065) (39,537) accounting change Provision for income taxes -- 66 28 344 375 -------- -------- -------- -------- -------- Loss before extraordinary loss and cumulative effect of accounting change (3,326) (7,026) (13,357) (25,409) (39,912) Extraordinary loss (1) 1,324 -- 3,253 -- -- Cumulative effect of accounting change (2) -- -- -- 210 -- -------- -------- -------- -------- -------- Net loss $ (4,650) $ (7,026) $(16,610) $(25,619) $(39,912) -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Per common share (basic and diluted): Loss before extraordinary loss and cumulative effect of accounting change $ (.45) $ (.96) $ (1.40) $ (2.25) $ (3.45) Extraordinary loss (.18) -- (.34) -- -- Cumulative effect of accounting change -- -- -- (.02) -- -------- -------- -------- -------- -------- Net loss $ (.63) $ (.96) $ (1.74) $ (2.27) $ (3.45) -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- OTHER DATA: EBITDA (3) $ 9,301 $ 15,898 $ 24,729 $ 35,696 $ 48,576 EBITDA margin (3) 23.0% 25.1% 25.3% 26.3% 29.2% Capital expenditures $ 43,521 $ 51,497 $ 84,256 $104,377 $ 69,660 Depreciation and amortization 11,661 18,336 29,815 43,760 55,215 Annualized EBITDA (4) 11,250 18,246 27,290 39,090 55,536 Ratio of earnings to fixed charges (5) -- -- -- -- -- Ratio of long-term debt to annualized EBITDA (4) 2.49x 3.15x 6.57x 4.67x 4.72x Ratio of EBITDA to interest expense (3) 9.63x 3.52x 3.00x 2.10x 2.11x OPERATING DATA: Guest Pay rooms served (6) On-demand 119,680 209,487 358,842 484,070 581,893 Scheduled 65,351 58,720 41,403 27,781 14,913 -------- -------- -------- -------- -------- Total Guest Pay rooms 185,031 268,207 400,245 511,851 596,806 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Rooms with Nintendo-Registered Trademark- game systems (6) 69,806 163,879 322,903 448,969 546,324 Free-to-guest rooms served (6) 220,534 249,779 294,882 341,030 384,324 Total rooms served (6) (7) 314,184 388,088 516,348 613,407 703,325 Average monthly revenue per Guest Pay room: Movie revenue $ 15.03 $ 17.08 $ 18.38 $ 17.86 $ 18.44 Video game/information services 1.01 2.21 2.93 3.28 3.62 -------- -------- -------- -------- -------- Total $ 16.04 $ 19.29 $ 21.31 $ 21.14 $ 22.06 -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
LodgeNet Entertainment Corporation 15 Form 10-K 1998
AS OF DECEMBER 31, --------------------------------------------------- 1994 1995 1996 1997 1998 ------- -------- -------- -------- -------- BALANCE SHEET DATA: Cash and cash equivalents $ 4,302 $ 2,252 $ 86,177 $ 1,021 $ 5,240 Total assets 88,265 125,507 279,768 260,294 306,030 Long-term debt 28,000 57,497 179,233 182,691 262,375 Total stockholders' equity 47,942 42,726 75,552 49,579 11,774
- ---------- (1) In 1994 -- loss on early termination of the Company's bank credit facility of $1.3 million. In 1996 -- loss on early redemption of 9.95% and 10.35% Senior Notes of $3.3 million. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere herein. (2) Represents a charge for the effect of adopting EITF Issue 97-13 related to accounting for certain business reengineering costs. (3) EBITDA ("Earnings Before Interest, Taxes, Depreciation and Amortization") is not intended to represent an alternative to net income or cash flows from operating, financing or investing activities (as determined in accordance with generally accepted accounting principles) as a measure of performance. Rather, it is included herein because EBITDA is a widely accepted financial indicator used by certain investors and financial analysts to assess and compare companies on the basis of operating performance. Management believes that EBITDA provides an important additional perspective on the Company's operating results and the Company's ability to service its long-term debt and to fund the Company's continuing growth. EBITDA has been presented excluding equity in losses of unconsolidated affiliates and the restructuring charge for the ResNet merger in 1998. (4) "Annualized EBITDA" represents the sum of the quarterly EBITDA for the two most recently completed fiscal quarters multiplied by two. (5) Earnings is defined as net loss before income taxes, extraordinary items and fixed charges, except where capitalized. Fixed charges is defined as the portion of rental expense under operating leases representing interest, and interest, including amortization of debt expense, whether expensed or capitalized. Earnings were insufficient to cover fixed charges for the years ended December 31 by the amounts indicated: 1994 -- $(3,326); 1995 -- $(6,960); 1996 -- $(13,329); 1997 -- $(25,065); and 1998 -- $(38,799). (6) At end of year. (7) Total rooms served include those rooms receiving one or more of the Company's services, including rooms served by international licensees. LodgeNet Entertainment Corporation 16 Form 10-K 1998 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Certain statements in this Annual Report on Form 10-K, including, without limitation, statements in Item 1, including certain statements under the headings "Overview", "Business Strategy", "Strategic Initiatives", "Services and Products", "Operations", "Competition" and "Regulation", in Item 3 under the heading "Legal Proceedings", and in Item 7 under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations," constitute "forward-looking statements" within the meaning of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended. When used in this Annual Report, the words "expects," "anticipates," "estimates," "believes," "no assurance" and similar expressions and statements which are made in the future tense, are intended to identify such forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause the Company's actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. In addition to the risks and uncertainties discussed in the foregoing sections, such factors include, among others, the following: the impact of competition and changes to the competitive environment for the Company's products and services, changes in technology, reliance on strategic partners, uncertainty of litigation, changes in government regulation and other factors detailed, from time to time, in the Company's filings with the Securities and Exchange Commission. These forward-looking statements speak only as of the date of this Annual Report. The Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in the Company's expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO, THE CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE HEREIN. OVERVIEW LodgeNet is a specialized communications company which provides video on-demand, network-based video games, cable television programming and other interactive entertainment and information services to the lodging market utilizing its proprietary b-LAN system architecture. LODGING SERVICES GUEST PAY SERVICES. Guest Pay services are purchased by guests on a per-view or hourly basis and include Guest Scheduled on-demand movies and network-based Nintendo video games. Guest Pay packages may also include additional services such as satellite-delivered basic and premium cable television programming, and other interactive entertainment and information services that are paid for by the hotel and provided to guests at no charge. The growth that the Company has experienced has principally resulted from its rapid expansion of guest pay services, which the Company began installing in 1986. In May 1992, the Company introduced and began installing its on-demand Guest Pay service. It has been the Company's experience that rooms featuring the "on-demand" Guest Pay service generate significantly more revenue and gross profit per room than comparable rooms having only the scheduled format. The following table sets forth information in regard to Guest Pay rooms installed as of December 31:
1996 1997 1998 ----------------- ----------------- ----------------- Rooms % Rooms % Rooms % ------- ----- ------- ----- ------- ----- Scheduled 41,403 10.3 27,781 5.4 14,913 2.5 On-demand 358,842 89.7 484,070 94.6 581,893 97.5 ------- ----- ------- ----- ------- ----- Total 400,245 100.0 511,851 100.0 596,806 100.0 ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- ------- -----
The Company's Guest Pay revenues depend on a number of factors, including the number of rooms equipped with the Company's systems, Guest Pay buy rates, hotel occupancy rates, hotel guest demographics, the popularity, selection and pricing of the Company's program offerings and the length of time programming is available to the Company prior to its release to the home video and cable television markets. The primary direct costs of providing Guest Pay services are (i) license fees paid to studios for non-exclusive distribution rights to recently-released major motion pictures, (ii) nominal one-time license fees paid for independent films, (iii) license fees for video games and other services, and (iv) the commission retained by the hotel. Guest Pay operating expenses include costs of system maintenance and support, in-room marketing, video tape duplication and distribution, data retrieval, insurance and personal property taxes. LodgeNet Entertainment Corporation 17 Form 10-K 1998 The Company provides video games and interactive multimedia entertainment and information services including folio review, video check-out, guest satisfaction survey, advertising, and merchandising services through its guest pay systems. In 1993, the Company entered into a seven-year non-exclusive license agreement with Nintendo of America, Inc. ("Nintendo") to provide hotels with a network-based Super Nintendo-Registered Trademark- video game playing system. During 1998, the Company entered into a new ten year non-exclusive license agreement with Nintendo to become the first provider of Nintendo 64 ("N64-Registered Trademark-") video games to the lodging industry. The Company anticipates the rollout of the N64 game technology to begin during the second quarter of 1999. The following table sets forth the number of guest pay rooms with game systems installed as of December 31:
1996 1997 1998 ------- ------- ------- Super Nintendo-Registered Trademark- game systems rooms 322,903 448,969 546,324
FREE-TO-GUEST SERVICES. In addition to Guest Pay services, the Company provides cable television programming for which the hotel, rather than its guests, pays the charges. Free-to-guest services include the satellite delivery of various programming channels through a satellite earth station, which generally is owned or leased by the hotel. The hotel pays the Company a fixed monthly charge per room for each programming channel provided. The Company obtains its free-to-guest programming pursuant to multi-year agreements with the programmers and pays a fixed monthly fee per room, which varies depending on incentive programs in effect from time to time from the programming networks. In April 1996, the Company entered into an agreement with PRIMESTAR Partners (since succeeded by PRIMESTAR, Inc. ("PRIMESTAR")) pursuant to which the Company was appointed as the exclusive third-party provider (other than partners in PRIMESTAR and their affiliated distributors) of the PRIMESTAR-Registered Trademark- DBS (digital direct broadcast satellite) signal to the lodging industry. Pursuant to this agreement, the Company pays a fee to PRIMESTAR for access to the PRIMESTAR DBS signal, which enables the Company to provide free-to-guest digital satellite programming to a broader segment of the lodging industry than can be cost-effectively served with traditional C-band satellite systems. The following table sets forth the number of free-to-guest rooms served as of December 31:
1996 1997 1998 ------- ------- ------- At hotels with Guest Pay services 178,779 246,054 288,979 At hotels with only free-to-guest services 116,103 94,976 95,345 ------- ------- ------- Total rooms with free-to-guest services 294,882 341,030 384,324 ------- ------- ------- ------- ------- -------
RESIDENTIAL SERVICES In January 1996, the Company formed ResNet for the purpose of extending the Company's proprietary b-LAN system architecture and operational expertise into the multi-family dwelling unit ("MDU") market. In October 1996, TCI Satellite Entertainment, Inc. (since succeeded by PRIMESTAR MDU, Inc. ("PRIMESTAR MDU")), agreed to invest up to $40 million in cash and satellite receiving equipment in ResNet in exchange for up to a 36.99% interest in ResNet and agreed to provide ResNet with long-term PRIMESTAR DBS signals for the MDU market on a nationwide basis. Effective November 30, 1998, the ResNet business was merged with two non-affiliated entities to form a new entity, Global Interactive Communications Corporation ("GICC"). The Company has a 30% equity interest in GICC, whose business will consist of providing cable television programming and telecommunications services to the MDU market. The agreement between ResNet and PRIMESTAR MDU mentioned in the preceding paragraph was terminated in conjunction with the ResNet merger transaction. The Company will account for its investment in GICC on the equity method of accounting for an investment. As a result of this accounting treatment, and because the Company expects that there is a high probability that GICC will operate at a loss for the foreseeable future as it pursues its business plan, the Company expects to recognize continuing losses in connection with its investment in GICC, which losses will be reflected as "equity in losses of unconsolidated affiliates" in the Company's operating statements. As of the date of this report, there is no public market for the securities of GICC, and there can be no assurance as to when any such market may develop. The financial and operating performance of GICC, the market acceptance for its securities and general market conditions, among other factors, are not subject to the Company's control and may each affect the value of the Company's investment in GICC. The Company has no continuing obligation to make any additional investments into GICC. LodgeNet Entertainment Corporation 18 Form 10-K 1998 RESULTS OF OPERATIONS -- YEARS ENDED DECEMBER 31, 1998 AND 1997 REVENUE ANALYSIS The Company's total revenue for 1998 increased 22.6%, or $30.6 million, in comparison to 1997. The following table sets forth the components of the Company's revenue (in thousands) for the years ended December 31:
1997 1998 ---------------------- ---------------------- Percent Percent of Total of Total Amount Revenues Amount Revenues -------- -------- -------- -------- Guest Pay $116,276 85.7 $146,481 88.1 Free-to-guest 8,496 6.3 7,854 4.7 Other 10,938 8.0 12,016 7.2 -------- -------- -------- -------- Total $135,710 100.0 $166,351 100.0 -------- -------- -------- -------- -------- -------- -------- --------
GUEST PAY SERVICES. Guest Pay revenues increased 26.0%, or $30.2 million, in 1998 as compared to 1997. This increase is attributable to a 20.7% increase in the average number of installed Guest Pay rooms, all of which were installed with the Company's on-demand technology, and to a 4.4% increase in average monthly revenue per Guest Pay room. The following table sets forth information with respect to Guest Pay rooms for the years ended December 31:
1997 1998 ------ ------ Average monthly revenue per room: Movie revenue $17.86 $18.44 Video game and other service revenue 3.28 3.62 ------ ------ Total per Guest Pay room $21.14 $22.06 ------ ------ ------ ------
Average movie revenue per room, for all Guest Pay rooms, increased 3.2% from the prior year due to the combination of higher average buy rates and higher average movie prices, partially offset by a decline in hotel occupancy rates. Average video game and other service revenue per room, for all Guest Pay rooms, increased 10.4% from the prior year, primarily as a result of an increase in the number of rooms with information and other services installed, partially offset by a decrease in average monthly video game revenue per room. FREE-TO-GUEST SERVICES. Free-to-guest revenues decreased 7.6%, or $642,000, in 1998 as compared to 1997. The decrease is primarily the result of a 6.5% decrease in the average number of rooms at hotels receiving only free-to-guest services during the period (although total rooms receiving free-to-guest services increased 12.7%). OTHER. Revenue from other sources includes cable television revenue generated by the residential services segment (which was $5,376,000 in 1998 compared to $2,700,000 in 1997), revenue from international license arrangements, and revenue from the sale of televisions, system equipment, and service parts and labor. The increase in 1998 from the prior year of $1.1 million, or 9.9%, is primarily due to increased cable television revenue generated by the residential services segment of $2.7 million, partially offset by decreased television sales of $1.3 million and decreased sales of system equipment. LodgeNet Entertainment Corporation 19 Form 10-K 1998 EXPENSE ANALYSIS DIRECT COSTS. The following table sets forth information regarding the Company's direct costs (in thousands) and gross profit margin for the years ended December 31:
1997 1998 -------- -------- Direct costs: Guest Pay $ 45,632 $ 60,538 Free-to-guest 5,663 6,373 Other 7,217 7,097 -------- -------- $ 58,512 $ 74,008 -------- -------- -------- -------- Gross profit margin: Guest Pay 60.8% 58.7% Free-to-guest 33.3% 18.9% Other 34.0% 40.9% Composite 56.9% 55.5%
Guest Pay direct costs increased 32.7% to $60.5 million in 1998 from $45.6 million in the prior year. Since Guest Pay direct costs (primarily studio and other license fees, video game license fees and the commission retained by the hotel) are primarily based on related revenue, such direct costs generally vary directly with revenue. As a percentage of Guest Pay revenue, such costs increased from 39.2% in 1997 to 41.3% in 1998. The relative increase in Guest Pay direct costs as a percentage of revenue in 1998 as compared to the prior year is primarily the result of (i) an increase in the percentage of revenue from cable television services which generally earns a lower profit margin than on-demand services and (ii) higher video game costs (which are incurred based on the number of rooms receiving video game services rather than the number of game buys). Free-to-guest direct costs increased 12.5% to $6.4 million in 1998 from $5.7 million in the prior year. As a percentage of free-to-guest revenue, free-to-guest direct costs increased to 81.1% in 1998 from 66.7% in the prior year. The relative increase in free-to-guest direct costs as a percentage of revenue is due to increased signal carriage fees owed to PRIMESTAR under the agreement previously described and decreased incentive discounts realized from programming networks. Direct costs associated with other revenue decreased 1.7% to $7.1 million from $7.2 million in the prior year. As a percentage of related revenues, such direct costs decreased to 59.1% in 1998 from 66.0% in 1997, reflecting the effect of (i) increased cable television revenue generated by the residential services segment which generally earns a higher profit margin than the other sources of other revenue, and (ii) decreased sales of televisions which generally earn a lower profit margin than the other sources of other revenue. The Company's overall gross profit increased 19.6% in 1998 to $92.3 million on a 22.6% increase in revenues compared to 1997. The Company's overall gross profit margin was 55.5% in 1998 and 56.9% for the prior year. OPERATING EXPENSES. The following table sets forth information in regard to the Company's operating expenses (in thousands) for the years ended December 31:
1997 1998 --------------------- --------------------- Percent Percent of Total of Total Amount Revenues Amount Revenues -------- -------- -------- -------- Operating expenses: Guest Pay operations $ 20,785 15.3% $ 25,167 15.1% Selling, general and 20,717 15.3% 18,600 11.2% administrative Restructuring charge -- -- 3,300 2.0% Depreciation and amortization 43,760 32.2% 55,215 33.2% -------- -------- -------- -------- Total operating expenses $ 85,262 62.8% $102,282 61.5% -------- -------- -------- -------- -------- -------- -------- --------
Guest Pay operations expenses consist of costs directly related to the operation of systems at the hotel sites as well as at residential sites serviced by the residential services segment. Excluding the expenses incurred to operate the systems at residential LodgeNet Entertainment Corporation 20 Form 10-K 1998 sites, which were $2.9 million in 1998 and $1.4 million in 1997, expenses related to Guest Pay operations increased 14.8%, or $2.9 million, in 1998 from $19.4 million in the previous year. This increase is primarily attributable to the 20.7% increase in average installed Guest Pay rooms in 1998 as compared to 1997, partially offset by lower average operating and service expenses incurred on a per room basis. Per average installed Guest Pay room, such expenses were $3.35 per month in 1998 as compared to $3.52 per month in 1997. Selling, general and administrative expenses (including $2.2 million and $1.8 million of expenses incurred by the residential services segment in 1998 and 1997, respectively) decreased 10.2%, or $2.1 million, in 1998 from $20.7 million in 1997. This decrease is primarily due to reduced legal expenses of $1.5 million resulting from the resolution of the Company's patent litigation matters. As a percentage of revenue, general and administrative expenses represented 11.2% of total revenue in 1998 as compared to 15.3% in 1997. The $3.3 million restructuring charge recorded in 1998 represents costs incurred related to the Company's merger of its ResNet business as previously described. Such costs include professional services fees, employee costs, and the write-off of certain capitalized software development costs. Depreciation and amortization expenses increased 26.2% to $55.2 million in 1998 from $43.8 million in the prior year. This increase is primarily attributable to the increase in the number of installed Guest Pay and game service equipped rooms previously described, as well as the associated software costs and other capitalized costs such as service vans, equipment and computers that are related to the increased number of rooms in service since the prior year. Additionally, increases in administrative and facility related assets, as well as an increase of $2.1 million related to the residential services segment ($3.6 million in 1998 compared to $1.5 million in 1997), have contributed to the increased depreciation and amortization. OPERATING LOSS. The Company's operating loss, as a result of the factors previously described, increased to $9.9 million in 1998 from $8.1 million in 1997. Excluding the results of ResNet, the Company's operating loss was $807,000 in 1998 and $5.0 million in 1997. EQUITY IN LOSSES OF UNCONSOLIDATED AFFILIATES. The Company obtained equity interests in two entities during 1998. First, the Company acquired a 10% interest in Across Media Networks, LLC ("AMN"), a company engaged in the creation and distribution of digitally produced on-screen content for television and the Internet. The Company has applied the equity method of accounting for this investment to reflect the fact that the Company has had certain financing obligations to AMN. Losses of $5.8 million related to this investment were recorded in 1998. Second, as previously described, the merger of ResNet with two other entities effective November 30, 1998 to form GICC resulted in the Company obtaining a 30% equity interest in GICC. The Company's portion of GICC's 1998 loss was $738,000. INTEREST EXPENSE. Interest expense, net of interest income, increased to $23.0 million in 1998 from $17.0 million in 1997 due to increases in long-term debt to fund the Company's continuing expansion of its business. The average principal amount of long-term debt outstanding during 1998 was approximately $236.4 million (at a weighted average interest rate of approximately 9.9%) as compared to an average principal amount outstanding of approximately $183.4 million (at a weighted average interest rate of approximately 10.3%) during 1997. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. As a result of the issuance of EITF Issue 97-13 related to accounting for certain business reengineering costs, the Company recorded a charge of $210,000 in 1997 to write-off previously capitalized costs, in accordance with the new accounting pronouncement. NET LOSS. For the reasons previously described, the Company's net loss increased to $39.9 million in 1998 from a net loss of $25.6 million in the prior year. EBITDA. As a result of increasing revenues from guest pay services, and the other factors previously described, EBITDA ("Earnings Before Interest, Income Taxes and Depreciation and Amortization") excluding the restructuring charge related to the ResNet merger and equity in losses of unconsolidated affiliates increased 36.1% to $48.6 million in 1998 as compared to $35.7 million in 1997. As a percentage of total revenue, EBITDA excluding the restructuring charge increased to 29.2% in 1998 as compared to 26.3% in 1997. Excluding the results of ResNet, EBITDA was $50.8 million in 1998 and $37.3 million in 1997. As a percentage of revenue, EBITDA was 31.6% in 1998 and 28.0% in 1997, excluding the results of ResNet. EBITDA is not intended to represent an alternative to net income or cash flows from operating, financing or investing activities (as determined in accordance with generally accepted accounting principles) as a measure of performance. Rather, it is included herein because EBITDA is a widely accepted financial indicator used by certain investors and financial analysts to assess and compare LodgeNet Entertainment Corporation 21 Form 10-K 1998 companies on the basis of operating performance. Management believes that EBITDA provides an important additional perspective on the Company's operating results and the Company's ability to service its long-term debt and to fund the Company's continuing growth. RESULTS OF OPERATIONS -- YEARS ENDED DECEMBER 31, 1997 AND 1996 REVENUE ANALYSIS The Company's total revenue for 1997 increased 38.9%, or $38.0 million, in comparison to 1996. The following table sets forth the components of the Company's revenue (in thousands) for the years ended December 31:
1996 1997 --------------------- --------------------- Percent Percent of Total of Total Amount Revenues Amount Revenues -------- -------- -------- -------- Guest Pay $ 84,504 86.5 $116,276 85.7 Free-to-guest 8,645 8.8 8,496 6.3 Other 4,572 4.7 10,938 8.0 -------- -------- -------- -------- Total $ 97,721 100.0 $135,710 100.0 -------- -------- -------- -------- -------- -------- -------- --------
GUEST PAY SERVICES. Guest Pay revenues increased 37.6%, or $31.8 million, in 1997 as compared to 1996. This increase is attributable to a 38.7% increase in the average number of installed Guest Pay rooms, all of which were installed with the Company's on-demand technology, partially offset by a .8% decrease in average monthly revenue per Guest Pay room. The following table sets forth information with respect to Guest Pay rooms for the years ended December 31:
1996 1997 ------- ------- Average monthly revenue per room: Movie revenue $ 18.38 $ 17.86 Video game and other service revenue 2.93 3.28 ------- ------- Total per Guest Pay room $ 21.31 $ 21.14 ------- ------- ------- -------
Average movie revenue per room, for all Guest Pay rooms, decreased 2.8% from the prior year due to the combination of lower average buy rates and lower average hotel occupancy, partially offset by increased average movie prices and the comparative increase in the proportion of on-demand rooms. Average video game and other service revenue per room, for all Guest Pay rooms, increased 11.9% from the prior year, primarily as a result of an increase in the number of rooms with information and other services installed. Average monthly video game revenue per room was $2.25 and $2.26 during 1997 and 1996, respectively. FREE-TO-GUEST SERVICES. Free-to-guest revenues decreased 1.7%, or $149,000, in 1997 as compared to 1996. This decrease is the result of the combination of an 18.2% decrease in the number of rooms receiving only free-to-guest services from 1996, offset by increasing revenue per room resulting from additional programming services taken by hotels, as well as programming price increases. OTHER. Revenue from other sources includes cable television revenue generated by the residential services segment, revenue from international license arrangements, and revenue from the sale of televisions, system equipment, and service parts and labor. The increase in 1997 from the prior year of $6.4 million, or 139%, is primarily due to increased cable television revenue generated by the residential services segment of $2.4 million; increased television sales of $1.5 million; increased sales of system equipment of $864,000; increased service parts and labor of $450,000 and increased revenue earned under international license arrangements of $318,000. LodgeNet Entertainment Corporation 22 Form 10-K 1998 EXPENSE ANALYSIS DIRECT COSTS. The following table sets forth information regarding the Company's direct costs (in thousands) and gross profit margin for the years ended December 31:
1996 1997 -------- -------- Direct costs: Guest Pay $ 33,981 $ 45,632 Free-to-guest 6,784 5,663 Other 3,614 7,217 -------- -------- $ 44,379 $ 58,512 -------- -------- -------- -------- Gross profit margin: Guest Pay 59.8% 60.8% Free-to-guest 21.5% 33.3% Other 21.0% 34.0% Composite 54.6% 56.9%
Guest Pay direct costs increased 34.3% to $45.6 million in 1997 from $34.0 million in the prior year. Since Guest Pay direct costs (primarily studio and other license fees, video game license fees and the commission retained by the hotel) are primarily based on related revenue, such direct costs generally vary directly with revenue. As a percentage of Guest Pay revenue, such costs decreased from 40.2% in 1996 to 39.2% in 1997. The relative decrease in Guest Pay direct costs as a percentage of revenue in 1997 as compared to the prior year is primarily the result of lower movie-related costs due to proportionately lower revenue from newly-released motion pictures. Free-to-guest direct costs decreased 16.5% to $5.7 million in 1997 from $6.8 million in the prior year. As a percentage of free-to-guest revenue, free-to-guest direct costs decreased to 66.7% in 1997 from 78.5% in the prior year. This decrease is due to incentive discounts earned from programming networks, partially offset by higher costs for both premium and non-premium programming. Direct costs associated with other revenue increased 99.7% to $7.2 million from $3.6 million in the prior year. As a percentage of related revenues, such direct costs decreased to 66.0% in 1997 from 79.0% in 1996, reflecting the effect of (i) increased cable television revenue generated by the residential services segment, (ii) increased system equipment sales and revenue from service parts and labor, both of which have higher margins than the other sources of other revenue, and (iii) increased revenue generated under international license arrangements. The Company's overall gross profit increased 44.7% in 1997 to $77.2 million on a 38.9% increase in revenues compared to 1996. The Company's overall gross profit margin was 56.9% in 1997 and 54.6% for the prior year. OPERATING EXPENSES. The following table sets forth information in regard to the Company's operating expenses (in thousands) for the years ended December 31:
1996 1997 --------------------- --------------------- Percent Percent of Total of Total Amount Revenues Amount Revenues -------- -------- -------- -------- Operating expenses: Guest Pay operations $ 15,032 15.4% $ 20,785 15.3% Selling, general and 13,581 13.9% 20,717 15.3% administrative Depreciation and amortization 29,815 30.5% 43,760 32.2% -------- -------- -------- -------- Total operating expenses $ 58,428 59.8% $ 85,262 62.8% -------- -------- -------- -------- -------- -------- -------- --------
Guest Pay operations expenses consist of costs directly related to the operation of systems at the hotel sites as well as at residential sites serviced by the residential services segment. Excluding the expenses incurred to operate the systems at residential sites, which were $1.4 million in 1997 and none in 1996, expenses related to Guest Pay operations increased 28.9%, or $4.3 million, in 1997 from $15.0 million in the previous year. This increase is primarily attributable to the 38.7% increase in LodgeNet Entertainment Corporation 23 Form 10-K 1998 average installed Guest Pay rooms in 1997 as compared to 1996, partially offset by lower average operating and service expenses incurred on a per room basis. Per average installed guest pay room, such expenses were $3.52 per month in 1997 as compared to $3.79 per month in 1996. Selling, general and administrative expenses increased 52.5%, or $7.1 million in 1997 from $13.6 million in the prior year. This increase reflects the effect of substantially increased legal expenses, an increase in the number of development and administrative personnel, increased facilities-related expenses, and an increase of $1.8 million related to the residential services segment. As a percentage of revenue, general and administrative expenses represented 15.3% of total revenue in 1997 as compared to 13.9% in the year earlier period. Depreciation and amortization expenses increased 46.8% to $43.8 million in 1997 from $29.8 million in the prior year. This increase is primarily attributable to the increase in the number of installed Guest Pay and game service equipped rooms previously discussed, as well as the associated software costs and other capitalized costs such as service vans, equipment and computers that are related to the increased number of rooms in service since the prior year. Additionally, increases in administrative and facility related assets, as well as an increase of $1.0 million related to the residential services segment, have contributed to the increased depreciation and amortization. OPERATING LOSS. The Company's operating loss, as a result of the factors previously discussed, increased to $8.1 million in 1997 from $5.1 million in 1996. INTEREST EXPENSE. Interest expense, net of interest income, increased to $17.0 million in 1997 from $8.2 million in 1996 due to increases in long-term debt to fund the Company's continuing expansion of its businesses. The average principal amount of long-term debt outstanding during 1997 was approximately $183.4 million (at a weighted average interest rate of approximately 10.3%) as compared to an average principal amount outstanding of approximately $65.4 million (at a weighted average interest rate of approximately 10.0%) during 1996. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. As a result of the issuance of EITF Issue 97-13 related to accounting for certain business reengineering costs, the Company recorded a charge of $210,000 in 1997 to write-off previously capitalized costs, in accordance with the new accounting pronouncement. NET LOSS. For the reasons previously discussed, the Company's net loss increased to $25.6 million in 1997 from a net loss of $16.6 million in the prior year. EBITDA. As a result of increasing revenues from guest pay services, and the other factors previously discussed, EBITDA increased 44.3% to $35.7 million in 1997 as compared to $24.7 million in 1996. EBITDA as a percentage of total revenue increased to 26.3% in 1997 as compared to 25.3% in 1996. SEASONALITY The Company's quarterly operating results are subject to fluctuation depending upon hotel occupancy rates and other factors. Typically, occupancy rates are higher during the second and third quarters due to seasonal travel patterns. LIQUIDITY AND CAPITAL RESOURCES Historically, the growth of the Company's business has required substantial amounts of capital. The Company has incurred operating and net losses due in large part to the depreciation, amortization and interest expenses related to the capital expenditures required to expand its lodging and residential businesses. Historically, cash flow from operations has not been sufficient to fund the cost of expanding the Company's business and to service existing indebtedness. During 1998, capital expenditures were $69.7 million (of which $14.2 million was incurred by ResNet) and net cash provided by operating activities was $13.2 million (after the reduction of net cash used in operating activities of $5.0 million from ResNet). Capital expenditures were $104.4 million during 1997 (of which approximately $16.8 million was incurred by ResNet), and net cash provided by operating activities was $16.7 million (after the reduction of net cash used in operating activities of $3.5 million from ResNet). Depending on the rate of growth of its lodging business and other factors, the Company expects to incur capital expenditures between approximately $50 to $60 million in 1999. In addition, the Company's cash requirements during 1999 and 2000 are expected to include (i) payments to OCC in connection with the settlement of the litigation between the Company and LodgeNet Entertainment Corporation 24 Form 10-K 1998 OCC in equal amounts of $5.85 million on each of July 15, 1999 and July 15, 2000 pursuant to the terms of the multiple cross licenses and (ii) deferred purchase payments of up to $1 million in each of 1999 and 2000 in connection with the Company's acquisition of Connect Group Corporation. Pursuant to an agreement reached with PRIMESTAR, the Company may purchase the 5% equity interest in GICC currently held by PRIMESTAR during 1999, at a cash price of up to $5.4 million in certain circumstances. The foregoing statements regarding capital expenditures and cash requirements are forward-looking statements and there can be no assurance in this regard. The actual amount and timing of the Company's capital expenditures will vary (and such variations could be material) depending upon the number of new contracts for services entered into by the Company, the costs of installations and other factors. On February 25, 1999, the Company amended and restated its existing bank credit facility. This amended facility consists of a $150 million secured bank credit facility which combines a $75 million term loan ("Term Loan") and a $75 million revolving loan facility ("Revolving Loan"). Proceeds under the Term Loan were used to repay amounts outstanding under the revolving loan facility that existed prior to the amendment and restatement. Minimum required repayments of borrowings under the Term Loan for the respective years are (in thousands of dollars): 2001 -- $15,000; 2002 -- $18,750; 2003 -- $18,750; 2004 -- $22,500. As previously described, effective November 30, 1998, the Company contributed its interest in the ResNet business to GICC. The Company has no continuing obligation to fund any of GICC's operating and/or investing activities. During 1998, the Company provided $19.3 million to fund ResNet's operating and investing activities, all of which funding occurred prior to November 30, 1998. The Company believes that its operating cash flows and borrowings available under the Revolving Loan will be sufficient to fund the Company's future growth as contemplated under its current business plan, depending on the rate of the Company's growth and other factors. However, if the Company's plans or assumptions change, if its assumptions prove to be inaccurate or if the Company experiences unanticipated costs or competitive pressures, the Company may be required to seek additional capital sooner than currently anticipated. There can be no assurance that the Company will be able to obtain financing, or, if such financing is available, that the Company will be able to obtain it on acceptable terms. Failure to obtain additional financing, if needed, could result in the delay or abandonment of some or all of the Company's expansion plans. YEAR 2000 INFORMATION The Company is engaged in a comprehensive review of internal computer systems and software and external business relationships in regard to Year 2000 issues. STATE OF READINESS. The Company has a project team comprised of key members from cross-organization departments. The team's objectives are to gather information and facilitate research on Year 2000 issues that could affect the Company, and to take necessary actions to eliminate or minimize the impact of such issues. Internally, the Company has nearly completed its efforts to identify the computer hardware and software that is used both at its in-house facilities as well as at its hotel properties. Research and testing of these systems for Year 2000 compliance is underway. The Company expects to substantially complete its research and testing of internal computer hardware and software by the end of the second quarter of 1999. Correction or replacement of hardware and software containing Year 2000 issues is in progress and is estimated for completion by the end of the third quarter of 1999. Externally, the Company is working to identify third party business relationships that are impacted by the Year 2000 issue. Research and review of these relationships is underway including contacting the third parties to solicit information and assurances relating to potential Year 2000 issues and reviewing responses. The Company expects to complete its review of third party relationships by the end of the second quarter of 1999, although no assurance can be given as to the Year 2000 remediation of third parties. COSTS ASSOCIATED WITH YEAR 2000 ISSUES. Incremental costs are expected to be comprised primarily of costs to purchase software upgrades and hardware. Additionally, external consulting, programming and training costs may be incurred. Estimated costs of Year 2000 compliance are not fully determined at this time. The Company expects to incur less than $500,000 in aggregate out-of-pocket costs in 1998 and 1999 to complete its Year 2000 compliance program, excluding the cost of internal staffing. As of December 31, 1998, the Company has incurred out-of-pocket costs totaling $185,000 toward Year 2000 compliance efforts. Such funds have been provided from the Company's bank credit facility. Although the Company intends to develop and implement, if necessary, appropriate contingency plans to mitigate to the extent possible the effects of any Year 2000 noncompliance, such plans may not be adequate and the cost of Year 2000 compliance may be greater than $500,000. LodgeNet Entertainment Corporation 25 Form 10-K 1998 RISKS ASSOCIATED WITH YEAR 2000 ISSUES. The Company is highly dependent upon its own information technology systems and those of its suppliers and customers. The Company's or a third party's failure to correct a material Year 2000 problem could result in a failure of or interruption in the Company's business activities and operations. Such interruptions and failures could materially and adversely affect the Company's results of operations, liquidity and financial condition. The Company's Year 2000 project is expected to reduce significantly the Company's level of uncertainty and the possibility of significant or long-lasting interruptions of the Company's business operations; however, the Company believes that it is impossible to predict all of the areas in which material problems may arise. CONTINGENCY PLANS. The Company has not yet completed specific contingency plans for Year 2000 issues. The Company is in the process of identifying the most reasonably likely worst-case scenarios, so that it may attempt to secure alternate vendors and service providers for these functions as well as to develop alternative systems which could be used to process data. While the Company anticipates achieving Year 2000 compliance in a timely manner, there can be no assurance that all processes will be compliant, that there will be no significant delay or loss of revenues, or that no material supply sources will be interrupted. However, the Company believes that its planning and action efforts will help reduce any loss or disruption. MARKET RISK DISCLOSURES The Company's bank credit facility described in Note 9 to the financial statements as well as in Management's Discussion and Analysis of Financial Condition and Results of Operations carries interest rate risk. Amounts borrowed under this facility are subject to interest rates based on the lender's base rate of either the prime interest rate or the eurodollar rate. Should the lender's base rate change, the Company's interest expense will increase or decrease accordingly. As of December 31, 1998, the Company had borrowed approximately $76.5 million subject to interest rate risk. On this amount, a 1% increase in the lender's base interest rate would cost the Company $765,000 in additional gross interest expense on an annual basis. ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See "Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K" for the Company's Consolidated Financial Statements, the Notes thereto and Schedules filed as a part of this report. ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Except as hereinafter noted, the information concerning directors and executive officers of the Company is incorporated by reference from the sections entitled "Executive Officers", "Election of Directors - Board of Directors and Nominees" and "Compliance with Reporting Requirements of Section 16 of the Exchange Act" of the Company's definitive Proxy Statement to be filed pursuant to Regulation 14A within 120 days after the end of the last fiscal year. ITEM 11 - EXECUTIVE COMPENSATION Information concerning executive remuneration and transactions is incorporated by reference from the section entitled "Beneficial Ownership of Principal Stockholders and Management" of the Company's definitive Proxy Statement to be filed pursuant to Regulation 14A within 120 days after the end of the last fiscal year. ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information concerning security ownership of certain beneficial owners and management is incorporated by reference from the section entitled "Beneficial Ownership of Principal Stockholders and Management" of the Company's definitive Proxy Statement to be filed pursuant to Regulation 14A within 120 days after the end of the last fiscal year. LodgeNet Entertainment Corporation 26 Form 10-K 1998 ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information concerning certain relationships and related transactions with management is incorporated by reference from the section entitled "Certain Transactions with Management and Others" of the Company's definitive Proxy Statement to be filed pursuant to Regulation 14A within 120 days after the end of the fiscal year. PART IV ITEM 14 -- EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES -- Reference is made to the "Index to Consolidated Financial Statements" of LodgeNet Entertainment Corporation, located at page F - 1 of this PART IV, for a list of the financial statements and schedules for the year ended December 31, 1998 included herein. (b) REPORTS ON FORM 8-K -- During the quarter ended December 31, 1998, the Company filed one report on Form 8-K, dated December 15, 1998, reporting on the transfer of the ResNet business to GICC. (c) EXHIBITS -- Following is a list of Exhibits filed with this report. Exhibits 10.1 and 10.2 constitute management contracts. Exhibits 10.3, 10.7, 10.8, 10.9, 10.10, 10.11, and 10.12 constitute compensatory plans. EXHIBIT NO. 3.1 Certificate of Incorporation of the Company (1) 3.2 By-Laws of the Registrant (1) 4.1 Registration Rights Agreement dated as of December 16, 1996, between LodgeNet Entertainment Corporation and Morgan Stanley & Co. Incorporated, NatWest Capital Markets Limited and Montgomery Securities (8) 4.2 Indenture dated as of December 19, 1996, between LodgeNet Entertainment Corporation and Marine Midland Bank, as trustee, including the form of Senior Note (8) 4.3 Form of Senior Notes (included in Exhibit 4.2) 4.4 First Supplemental Indenture dated October 15, 1998, among LodgeNet Entertainment Corporation and Marine Midland Bank, as trustee, to the Indenture dated December 19, 1996 (see Exhibit 4.2) 10.1 Form of Employment Agreement between the Company and each of Tim C. Flynn and Scott C. Petersen (1) 10.2 Form of Agreement between the Company and each of David M. Bankers, John M. O'Haugherty, Douglas D. Truckenmiller and Steven D. Truckenmiller (1) 10.3 LodgeNet Entertainment Corporation Stock Option Plan (as amended and restated effective August 15, 1996) (8) 10.6 License Agreement dated May 2, 1993 between Nintendo of America, Inc. and LodgeNet Entertainment Corporation (2) 10.7 Stock Option Agreements dated as of February 29, 1988 between the Company and Tim C. Flynn, as extended by Extension Agreement dated as of July 15, 1991 (2) 10.8 Stock Option Agreements dated as of February 29, 1988 between the Company and Scott C. Petersen, as extended by Extension Agreement dated as of July 15, 1991 (2) 10.9 Stock Option Agreement dated as of December 31, 1992 between the Company and John M. O'Haugherty (2) 10.10 Stock Option Agreement dated as of December 31, 1992 between the Company and David M. Bankers (2) LodgeNet Entertainment Corporation 27 Form 10-K 1998 10.11 Form of Stock Option Agreement for Non-Employee Directors (3) 10.12 Form of Incentive Stock Option Agreement for Key Employees (3) 10.13 Securities Purchase Agreement, by and between LodgeNet Entertainment Corporation, John Hancock Mutual Life Insurance Company, Allstate Life Insurance Company, Connecticut Mutual Life Insurance and CMA Life Insurance Company, dated as of August 9, 1995 (4) 10.14 Amendment to Securities Purchase Agreement, dated as of December 19, 1996 (8) 10.15 Form of Executive Severance Agreement between the Company and each of Tim C. Flynn, Scott C. Petersen, Jeffrey T. Weisner, John M. O'Haugherty, David M. Bankers, Douglas D. Truckenmiller, Steven D. Truckenmiller and Eric R. Jacobsen; all dated of July 25, 1995 (5) 10.16 Video Services Agreement by and among GE Capital-ResCom L.P. and ResNet Communications, Inc. and LodgeNet Entertainment Corporation dated as of February 9, 1996 (6)+ 10.17 Amended and Restated Loan Agreement by and among LodgeNet Entertainment Corporation, the Banks Signatory thereto, National Westminster Bank Plc, as Agent for such Banks, and National Westminster bank of Canada, as an Issuing bank, dated December 19, 1996 (8) 10.18 Equipment Sales Agreement between ResNet Communications, Inc. and TCI Satellite Entertainment, Inc., dated as of October 21, 1996 (7) 10.19 Subordinated Convertible Term Loan Agreement between ResNet Communications, Inc. and TCI Satellite Entertainment, Inc., dated as of October 21, 1996 (7) 10.20 Option Agreement between ResNet Communications, Inc. and TCI Satellite Entertainment, Inc., dated as of October 21, 1996 (7) 10.21 Standstill Agreement between LodgeNet Entertainment Corporation and TCI Satellite Entertainment, Inc., dated as of October 21, 1996 (7) 10.22 Stockholders' Agreement between LodgeNet Entertainment Corporation and TCI Satellite Entertainment, Inc., dated as of October 21, 1996 (7) 10.23 Subscription Agreement between ResNet Communications, Inc. and TCI Satellite Entertainment, Inc., dated as of October 21, 1996 (7) 10.24 First Amendment, dated October 17, 1996, to License Agreement between Nintendo of America, Inc. and LodgeNet Entertainment Corporation (8) 10.25 Exchange Agreement, dated November 30, 1998, among Shared Technologies Communications Corporation, Interactive Cable Systems, Inc., ResNet Communications, LLC, ResNet Communications, Inc. and Global Interactive Technologies Corporation (9) 10.26 Stockholders Agreement dated November 30, 1998, by and among Global Interactive Technologies Corporation, Shared Technologies Communications Corporation, Interactive Cable Systems, Inc. and ResNet Communications, LLC (9) 10.27 Consent and Restructuring Agreement dated November 6, 1998, by and among ResNet Communications, LLC, ResNet Communications, Inc., and PrimeStar MDU 10.28 Second Amended and Restated Credit Agreement dated as of February 25, 1999, by and among LodgeNet Entertainment Corporation, National Westminster Bank Plc, BankBoston, N.A., Morgan Stanley Senior Funding, Inc. and the Lenders Named Therein LodgeNet Entertainment Corporation 28 Form 10-K 1998 10.29 Confidential License Agreement for Use of Nintendo Video Game Systems with Hotel Entertainment System, dated May 12, 1998, between LodgeNet Entertainment Corporation and Nintendo of America Inc. + 12.1 Statement Regarding Computation of Ratios 21.1 Subsidiaries of the Company (10) 23.1 Consent of Independent Public Accountants - --------- + Confidential Treatment has been requested with respect to certain portions of these agreements. (1) Incorporated by Reference to the Company's Amendment No. 1 to Registration Statement on Form S-1, as filed with the Securities and Exchange Commission, September 24, 1993. (2) Incorporated by Reference to the Company's Amendment No. 2 to Registration Statement on Form S-1, as filed with the Securities and Exchange Commission, October 13, 1993. (3) Incorporated by Reference to the Annual Report on Form 10-K for the year ended December 31, 1993, as filed with the Securities and Exchange Commission, March 25, 1994. (4) Incorporated by Reference to the Quarterly Report on Form 10-Q for the quarter ended June 30, 1995, as filed with the Securities and Exchange Commission, August 14, 1995. (5) Incorporated by Reference to the Quarterly Report on Form 10-Q for the quarter ended September 30, 1995, as filed with the Securities and Exchange Commission, November 14, 1995. (6) Incorporated by Reference to the Annual Report on Form 10-K for the year ended December 31, 1995, as filed with the Securities and Exchange Commission, April 1, 1996. (7) Incorporated by Reference to TCI Satellite Entertainment, Inc.'s Amendment No. 1 to Registration Statement on Form 10 as filed with the Securities and Exchange Commission, October 29, 1996. (8) Incorporated by Reference to the Annual Report on Form 10-K for the year ended December 31, 1996, as filed with the Securities and Exchange Commission, March 17, 1997. (9) Incorporated by Reference to the Form 8-K as filed with the Securities and Exchange Commission, December 15, 1998. (10) Incorporated by Reference to the Annual Report on Form 10-K for the year ended December 31, 1997, as filed with the Securities and Exchange Commission, March 25, 1998. LodgeNet Entertainment Corporation 29 Form 10-K 1998 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Sioux Falls, State of South Dakota, on March 25, 1999. LodgeNet Entertainment Corporation By: /s/ SCOTT C. PETERSEN --------------------------------------- Scott C. Petersen, President and Chief Executive Officer LodgeNet Entertainment Corporation 30 Form 10-K 1998 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. SIGNATURE TITLE DATE --------- ----- ---- /s/ SCOTT C. PETERSEN President and Chief Executive March 25, 1999 - ------------------------ Officer, Director (Principal Scott C. Petersen Executive Officer) /s/ JEFFREY T. WEISNER Senior Vice President March 25, 1999 - ------------------------ Chief Financial Officer Jeffrey T. Weisner (Principal Financial Officer) /s/ RONALD W. PIERCE Vice President and Corporate March 25, 1999 - ------------------------ Controller (Principal Ronald W. Pierce Accounting Officer) /s/ TIM C. FLYNN Chairman of the Board March 25, 1999 - ------------------------ and Director Tim C. Flynn /s/ DAVID AUSTAD Director March 25, 1999 - ------------------------ David Austad /s/ LAWRENCE FLINN, JR. Director March 25, 1999 - ------------------------ Lawrence Flinn, Jr. /s/ RICHARD R. HYLLAND Director March 25, 1999 - ------------------------ Richard R. Hylland /s/ R. F. LEYENDECKER Director March 25, 1999 - ------------------------ R. F. Leyendecker LodgeNet Entertainment Corporation 31 Form 10-K 1998 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS LODGENET ENTERTAINMENT CORPORATION AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page Report of Independent Public Accountants ................................ F - 2 Consolidated Balance Sheets as of December 31, 1997 and 1998 ............ F - 3 Consolidated Statements of Operations -- Three Years Ended December 31, 1998 ..................................... F - 4 Consolidated Statements of Stockholders' Equity -- Three Years Ended December 31, 1998 ..................................... F - 5 Consolidated Statements of Cash Flows -- Three Years Ended December 31, 1998 ..................................... F - 6 Notes to Consolidated Financial Statements .............................. F - 7 INDEX TO FINANCIAL SCHEDULES Report of Independent Public Accountants on Schedule .................... F - 22 Schedule II -- Valuation and Qualifying Accounts ........................ F - 23
LodgeNet Entertainment Corporation F - 1 Form 10-K 1998 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To LodgeNet Entertainment Corporation: We have audited the accompanying consolidated balance sheets of LodgeNet Entertainment Corporation (a Delaware corporation) and Subsidiaries as of December 31, 1997 and 1998, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1998. 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 financial position of LodgeNet Entertainment Corporation and Subsidiaries as of December 31, 1997 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Minneapolis, Minnesota February 12, 1999 (except for Note 9, as to which the date is February 25, 1999) LodgeNet Entertainment Corporation F - 2 Form 10-K 1998 LODGENET ENTERTAINMENT CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollar amounts in thousands)
December 31, -------------------------- 1997 1998 ---------- ---------- Assets Current assets: Cash and cash equivalents $ 1,021 $ 5,240 Accounts receivable, net of allowance for doubtful accounts 21,835 27,586 Prepaid expenses and other 3,457 6,086 ---------- ---------- Total current assets 26,313 38,912 Property and equipment, net of accumulated depreciation 218,948 209,437 Investments in and advances to unconsolidated affiliates -- 32,701 Debt issuance costs, net of accumulated amortization 7,641 6,637 Other assets, net 7,392 18,343 ---------- ---------- $ 260,294 $ 306,030 ---------- ---------- ---------- ---------- Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 16,792 $ 13,705 Current maturities of long-term debt 705 5,718 Accrued expenses 8,148 9,410 Deferred revenue 2,069 2,318 ---------- ---------- Total current liabilities 27,714 31,151 Long-term debt 182,691 262,375 Minority interest in consolidated subsidiary 310 730 ---------- ---------- Total liabilities 210,715 294,256 ---------- ---------- Commitments and contingencies (Note 10) Stockholders' equity: Common stock, $.01 par value, 20,000,000 shares authorized; 11,322,058 and 11,942,387 shares outstanding at December 31, 1997 and 1998, respectively 113 119 Additional paid-in capital 120,792 123,706 Accumulated other comprehensive loss (699) (1,512) Accumulated deficit (70,627) (110,539) ---------- ---------- Total stockholders' equity 49,579 11,774 ---------- ---------- $ 260,294 $ 306,030 ---------- ---------- ---------- ----------
The accompanying notes are an integral part of these consolidated balance sheets. LodgeNet Entertainment Corporation F - 3 Form 10-K 1998 LODGENET ENTERTAINMENT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Dollar amounts, except per share amounts, in thousands)
Years Ended December 31, --------------------------------------------------- 1996 1997 1998 ------------- ------------- ------------- Revenues: Guest Pay $ 84,504 $ 116,276 $ 146,481 Free-to-guest 8,645 8,496 7,854 Other 4,572 10,938 12,016 ------------- ------------- ------------- Total revenues 97,721 135,710 166,351 ------------- ------------- ------------- Direct costs: Guest Pay 33,981 45,632 60,538 Free-to-guest 6,784 5,663 6,373 Other 3,614 7,217 7,097 ------------- ------------- ------------- Total direct costs 44,379 58,512 74,008 ------------- ------------- ------------- Gross profit 53,342 77,198 92,343 ------------- ------------- ------------- Operating expenses: Guest Pay operations 15,032 20,785 25,167 Selling, general and administrative 13,581 20,717 18,600 Restructuring charge (Note 3) -- -- 3,300 Depreciation and amortization 29,815 43,760 55,215 ------------- ------------- ------------- Total operating expenses 58,428 85,262 102,282 ------------- ------------- ------------- Operating loss (5,086) (8,064) (9,939) Equity in losses of unconsolidated affiliates -- -- 6,550 Interest expense, net 8,243 17,001 23,048 ------------- ------------- ------------- Loss before income taxes, extraordinary loss, and cumulative effect of change in accounting principle (13,329) (25,065) (39,537) Provision for income taxes 28 344 375 ------------- ------------- ------------- Loss before extraordinary loss and cumulative effect of change in accounting principle (13,357) (25,409) (39,912) Extraordinary loss (Note 15) 3,253 -- -- Cumulative effect of change in accounting principle (Note 16) -- 210 -- ------------- ------------- ------------- Net loss $ (16,610) $ (25,619) $ (39,912) ------------- ------------- ------------- ------------- ------------- ------------- Per common share (basic and diluted): Loss before extraordinary loss and cumulative effect of change in accounting principle $ (1.40) $ (2.25) $ (3.45) Extraordinary loss (0.34) -- -- Cumulative effect of change in accounting principle -- (0.02) -- ------------- ------------- ------------- Net loss $ (1.74) $ (2.27) $ (3.45) ------------- ------------- ------------- ------------- ------------- ------------- Weighted average shares outstanding (basic and diluted) 9,570,779 11,271,064 11,579,457 ------------- ------------- ------------- ------------- ------------- -------------
The accompanying notes are an integral part of these consolidated financial statements. LodgeNet Entertainment Corporation F - 4 Form 10-K 1998 LODGENET ENTERTAINMENT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Dollar amounts in thousands)
Accumulated Common Stock Additional Other ----------------------- Paid-in Accumulated Comprehensive Shares Amount Capital Deficit Loss Total ---------- ------ ------------ ------------ ------------- ------------ Balance, December 31, 1995 7,352,113 $ 74 $ 71,234 $ (28,398) $ (184) $ 42,726 Issuance of common stock 3,680,000 36 44,599 -- -- 44,635 Common stock option activity 93,256 1 34 -- -- 35 Comprehensive loss: Net loss -- -- -- (16,610) -- (16,610) Foreign currency translation adjustment -- -- -- -- 94 94 ----------- Comprehensive loss (16,516) Change of interest in subsidiary -- -- 4,672 -- -- 4,672 ---------- ------ ------------ ------------ ------------- ------------ Balance, December 31, 1996 11,125,369 111 120,539 (45,008) (90) 75,552 Common stock option activity 196,689 2 332 -- -- 334 Comprehensive loss: Net loss -- -- -- (25,619) -- (25,619) Foreign currency translation adjustment -- -- -- -- (609) (609) ----------- Comprehensive loss (26,228) Change of interest in subsidiary -- -- (79) -- -- (79) ---------- ------ ------------ ------------ ------------- ------------ Balance, December 31, 1997 11,322,058 113 120,792 (70,627) (699) 49,579 Issuance of common stock 350,000 3 3,081 -- -- 3,084 Common stock option activity 270,329 3 253 -- -- 256 Comprehensive loss: Net loss -- -- -- (39,912) -- (39,912) Foreign currency translation adjustment -- -- -- -- (813) (813) ----------- Comprehensive loss (40,725) Change of interest in subsidiary -- -- (420) -- -- (420) ---------- ------ ------------ ------------ ------------- ------------ Balance, December 31, 1998 11,942,387 $ 119 $ 123,706 $ (110,539) $ (1,512) $ 11,774 ---------- ------ ------------ ------------ ------------- ------------ ---------- ------ ------------ ------------ ------------- ------------
The accompanying notes are an integral part of these consolidated financial statements. LodgeNet Entertainment Corporation F - 5 Form 10-K 1998 LODGENET ENTERTAINMENT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollar amounts in thousands)
Years Ended December 31, ------------------------------------------ 1996 1997 1998 ---------- ---------- ---------- Operating activities: Net loss $ (16,610) $ (25,619) $ (39,912) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 29,815 43,760 55,215 Gain on sale of property and equipment -- -- (309) Non-cash portion of extraordinary loss 434 -- -- Non-cash portion of restructuring charge -- -- 840 Equity in losses of unconsolidated affiliates -- -- 6,550 Change in operating assets and liabilities: Accounts receivable (6,278) (3,288) (6,157) Prepaid expenses and other (473) (1,138) (2,659) Accounts payable 1,864 1,053 (2,770) Accrued expenses and deferred revenue 1,433 1,524 1,677 Other (623) 361 768 ---------- ---------- ---------- Net cash provided by operating activities 9,562 16,653 13,243 ---------- ---------- ---------- Investing activities: Property and equipment additions (84,256) (96,290) (68,733) Proceeds from sale of property and equipment -- -- 412 Business acquisitions -- (8,087) (927) Investment in unconsolidated affiliates -- -- (8,330) Proceeds from sale of interest in subsidiary 5,396 -- -- ---------- ---------- ---------- Net cash used for investing activities (78,860) (104,377) (77,578) ---------- ---------- ---------- Financing activities: Proceeds from long-term debt 150,000 -- 1,000 Repayments of long-term debt (33,095) (583) (6,148) Borrowings under revolving credit facility 55,958 3,000 73,500 Repayments of revolving credit facility (55,958) -- -- Debt issuance costs (7,969) (141) -- Proceeds from issuance of common stock 44,635 -- -- Stock issuance costs (477) -- -- Stock option activity 35 334 256 ---------- ---------- ---------- Net cash provided by financing activities 153,129 2,610 68,608 ---------- ---------- ---------- Effect of exchange rates on cash 94 (42) (54) ---------- ---------- ---------- Increase (decrease) in cash and cash equivalents 83,925 (85,156) 4,219 Cash and cash equivalents at beginning of period 2,252 86,177 1,021 ---------- ---------- ---------- Cash and cash equivalents at end of period $ 86,177 $ 1,021 $ 5,240 ---------- ---------- ---------- ---------- ---------- ----------
The accompanying notes are an integral part of these consolidated financial statements. LodgeNet Entertainment Corporation F - 6 Form 10-K 1998 LODGENET ENTERTAINMENT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 -- THE COMPANY LodgeNet Entertainment Corporation ("LodgeNet" or the "Company") and its wholly-owned Canadian subsidiary assemble, install and operate guest pay movie systems and provide cable television programming, network-based video games and other interactive entertainment and information systems to the lodging industry, primarily in the United States and Canada. ResNet Communications, Inc. ("ResNet Inc."), a wholly-owned subsidiary of the Company, was the majority owner of ResNet Communications, LLC ("ResNet LLC") until November 30, 1998, at which time ResNet LLC was merged with two other entities to form a new entity (see Note 3). ResNet LLC installed and operated private cable television systems in multi-family residential properties nationwide. The Company's operating performance and outlook are strongly influenced by such factors as overall occupancy levels, guest demographics, and economic conditions in the lodging industry, the number of lodging rooms equipped with the Company's systems, the number and type of guest pay product offerings, the popularity and availability of programming, and competitive factors. The rapid growth of the Company's business has required capital resources in excess of operating cash flows. While the Company's working capital, operating cash flows and its revolving credit facility are expected to be sufficient to fund its growth, the Company may, depending on its rate of growth, require additional growth capital in subsequent years. NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements include the accounts of the Company, its wholly-owned Canadian subsidiary, and ResNet Inc. Affiliated companies in which LodgeNet does not have a controlling interest are accounted for using the equity method. All significant inter-company accounts and transactions have been eliminated in consolidation. FOREIGN CURRENCY TRANSLATION -- The assets and liabilities of the Company's Canadian subsidiary were translated at year-end exchange rates. Income statement items were translated at average exchange rates during the periods. USE OF ESTIMATES -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions about certain matters and items. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities, at the date of the financial statements; and the reported amounts of revenues, expenses and costs during the reporting periods. The ultimate outcome of the matters and items may be different from the estimates and assumptions. FAIR VALUE OF FINANCIAL INSTRUMENTS -- The carrying amounts for items comprising current assets and current liabilities approximate fair value due to the short period to maturity of these items. The fair value of long-term debt instruments is estimated by reference to current yields to maturity on similar instruments or quotes where available. The fair value of the warrants issued during 1995 was estimated using option valuation techniques. LodgeNet Entertainment Corporation F - 7 Form 10-K 1998 PROPERTY AND EQUIPMENT -- Property and equipment is stated at cost, including certain payroll costs related to the installation of new systems. Maintenance costs, which do not significantly extend the useful lives of the respective assets, and repairs are charged to operations as incurred. Depreciation of guest pay and free-to-guest systems begins when such systems are installed and activated. Depreciation of other equipment begins when such equipment is placed in service. The Company attributes no salvage value to any equipment. Depreciation and amortization are computed using the straight-line method over the following useful lives:
Years ----- Buildings 30 Guest Pay systems: System components 5 - 7 In-room equipment 2 - 5 Free-to-guest systems 5 - 7 Other equipment 3 - 10
SOFTWARE DEVELOPMENT -- The Company has capitalized certain costs of developing software for its guest pay systems in accordance with AICPA Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use". Capitalized costs are reported at the lower of unamortized cost or net realizable value, and are amortized over the system's estimated useful life, not to exceed five years. Guest pay system development costs capitalized were $1,616,000, $2,100,000 and $2,405,000 during the years ended December 31, 1996, 1997 and 1998, respectively. Amortization of such costs was $599,000, $797,000 and $1,138,000 for the years ended December 31, 1996, 1997 and 1998, respectively. The Company charged $216,000, $410,000, and $252,000 to operations during the years ended December 31, 1996, 1997 and 1998, respectively, related to research and development activities. REVENUE RECOGNITION -- Revenue and related costs are recognized when services are rendered. The Company has obtained certain programming agreements which provide for the receipt of low-cost programming in the earlier years of such agreements. The Company's policy is to record the costs of such programming on a straight-line basis. During 1997, the Company entered into a new long term agreement with a major programming source, superseding a previous programming agreement. As a result, the recognition of approximately $1.2 million of previously deferred programming cost reductions was accelerated in 1997. At December 31, 1996, 1997 and 1998 the Company had recorded deferred cost reductions relating to such agreements of $1,835,000, $450,000 and $85,000, respectively. CONCENTRATION OF CREDIT RISKS AND CUSTOMER DATA -- The Company has derived virtually all of its revenue from entities in the lodging industry, however, no individual customer accounted for 10% or more of total revenue in any period presented in the accompanying consolidated statements of operations. The allowance for doubtful accounts was $800,000 at December 31, 1997 and 1998. The provision for doubtful accounts was $922,000 in 1996, $820,000 in 1997, and $848,000 in 1998. INCOME TAXES -- The Company accounts for income taxes under the liability method, in accordance with the requirements of Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes". Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax basis of assets and liabilities. Measurement is based on enacted tax rates applicable to the periods in which such differences are expected to reverse. COMPREHENSIVE INCOME -- During 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income" which requires companies to report all changes in equity during a period, except those resulting from investments by owners and distributions to owners, in a financial statement for the period in which they are recognized. The Company has chosen to disclose comprehensive income, which is comprised of net income and foreign currency translation adjustments, in the consolidated statement of stockholders' equity. Comprehensive income amounts in prior years' financial statements have been restated to conform to the requirements of SFAS No. 130. LodgeNet Entertainment Corporation F - 8 Form 10-K 1998 LOSS PER SHARE COMPUTATION -- During 1997, the Company adopted SFAS No. 128, "Earnings Per Share". SFAS No. 128 changes the manner in which earnings per share ("EPS") are calculated and presented. The new standard requires the computation and disclosure of two EPS amounts, basic and diluted. Basic EPS is computed based only on the weighted average number of common shares actually outstanding during the period. Diluted EPS is computed based on the weighted average number of common shares outstanding plus all potentially dilutive common shares outstanding during the period. Weighted average options on 1,458,839, 1,597,331, and 1,736,333 shares of common stock were not included in computing diluted EPS because their effects were antidilutive for the years ended December 31, 1996, 1997, and 1998, respectively. STOCK-BASED COMPENSATION -- The Company measures compensation costs associated with its stock option plans in accordance with the provisions of Accounting Principles Board Opinion No. 25, as permitted by SFAS No. 123. The effect of fair value based measurement of such costs on net loss and net loss per share, in accordance with SFAS No. 123, is disclosed on a pro forma basis in Note 12. STATEMENTS OF CASH FLOWS -- Cash equivalents are comprised of demand deposits and temporary investments in highly liquid securities having original maturities of 90 days or less. Cash paid for interest was $7,870,000, $17,828,000, and $21,633,000 during the years ended December 31, 1996, 1997, and 1998, respectively. Equipment acquired under capital lease arrangements totaled $1,002,000, $1,106,000, and $885,000 during the years ended December 31, 1996, 1997, and 1998, respectively. During 1998, non-cash activities included the acquisition of license rights valued at $15,709,000 in exchange for notes payable issued by the Company (see Note 10) and the issuance of 350,000 common shares valued at $3,084,000 as part of an acquisition completed during the year (see Note 4). RECLASSIFICATIONS -- Certain items in the consolidated financial statements have been reclassified to conform to 1998 classifications. Such reclassifications had no effect on previously reported net loss or stockholders' equity. NOTE 3 -- RESNET MERGER Effective November 30, 1998, the operations of the Company's majority-owned subsidiary, ResNet Communications, LLC ("ResNet LLC"), were merged with two non-affiliated entities to form a new entity, Global Interactive Communications Corporation ("GICC"). GICC's business will consist of providing cable television programming and telecommunications services to the multi-family dwelling unit market. The Company contributed net assets totaling $31.3 million in exchange for (i) a 30% equity interest in GICC, and (ii) notes receivable totaling $10.8 million. In addition, the Company advanced GICC $1.5 million under the terms of a secured note agreement. The notes receivable consist of four separate instruments as follows: SENIOR TERM NOTE - The Company loaned $1.5 million to GICC under this note. Subject to certain extension and default provisions contained in the agreement, the note is due May 30, 1999. Interest is charged at a rate of 10% and is also due May 30, 1999. The note, along with GICC's other senior indebtedness, is secured by substantially all of the assets of GICC. JUNIOR TERM NOTE - The Company loaned $2.9 million to GICC under this note. Subject to certain extension and default provisions contained in the agreement, the note is due May 30, 1999. Interest is charged at a rate of 10% and is also due May 30, 1999. The note ranks consistent with GICC's senior indebtedness in terms of security. CAPITAL ADVANCE NOTE - The Company loaned $3.0 million to GICC under this note. Beginning in June 1999, four quarterly installments of $750,000 (plus accrued interest charged at a rate of 10%) are required. The capital advance note is subordinate to the senior and junior term notes described above. LodgeNet Entertainment Corporation F - 9 Form 10-K 1998 CAPITAL LEASE AGREEMENT - GICC acquired equipment valued at $4.9 million in exchange for a capital lease note. The note requires GICC to make 60 equal monthly payments of $106,000. The note is secured by the assets subject to the capital lease agreement. In connection with this transaction, the Company incurred $3.3 million of costs during the fourth quarter including professional services fees, employee costs, and the write-off of certain capitalized software development costs. These costs are reported as a restructuring charge in the 1998 consolidated statement of operations. The Company's interest in GICC approximated its proportionate share of the independently appraised value of GICC. Accordingly, no gain or loss was recognized as a result of this transaction. As more fully described in Note 14, the Company may be required to acquire an additional 5% of GICC in 1999. NOTE 4 -- ACQUISITION In October 1998, the Company completed the acquisition of Connect Group Corporation ("CGC"), in exchange for initial consideration of approximately $4.0 million, including acquisition costs, consisting of $927,000 and 350,000 shares of LodgeNet common stock. CGC developed technology that the Company intends to use to provide high speed Internet access to hotel guests and operators. The acquisition has been accounted for as a purchase and the excess of the initial consideration over the fair value of CGC's net assets of approximately $4.0 million has been recorded as an intangible asset and is being amortized on a straight-line basis over 10 years. The pro forma results for 1996, 1997 and 1998, assuming the transaction had been made as of the beginning of those years, would not be materially different from reported results. In addition to the approximate $4.0 million of initial consideration, the purchase agreement contains provisions for additional consideration to be paid to the selling shareholders contingent on the performance of the acquired technology in its application to the lodging industry. Depending on the performance of the technology, as defined in the purchase agreement, the Company may have to provide additional consideration of up to $1,000,000 on both the first and second anniversary dates of the transaction. NOTE 5 -- PROPERTY AND EQUIPMENT, NET Property and equipment was comprised as follows at (in thousands of dollars):
December 31, ------------------------- 1997 1998 ---------- ---------- Land, building and equipment $ 40,051 $ 48,105 Free-to-guest equipment 11,855 16,237 Cable television equipment 13,877 -- Guest pay systems: Installed 220,778 257,980 System components 30,720 24,933 Software costs 8,053 8,640 ---------- ---------- Total 325,334 355,895 Less - depreciation and (106,386) (146,458) amortization ---------- ---------- Property and equipment, net $ 218,948 $ 209,437 ---------- ---------- ---------- ----------
LodgeNet Entertainment Corporation F - 10 Form 10-K 1998 NOTE 6 -- INVESTMENTS IN AFFILIATES The Company obtained equity interests in two entities during 1998. First, in February 1998, the Company acquired a 10% interest in Across Media Networks, LLC ("AMN"), a company engaged in the creation and distribution of digitally produced on-screen content for television and the Internet. The Company has applied the equity method of accounting for this investment to reflect the fact that the Company has had certain financing obligations to AMN. Losses of $5.8 million related to this investment were recorded in 1998. Second, as previously described, the merger of ResNet with two other entities effective November 30, 1998 to form GICC resulted in the Company owning 30% of GICC. The Company's portion of GICC's 1998 loss was $738,000. Summarized unaudited financial information of these affiliates follows (in thousands of dollars). The results of operations includes full year results for AMN and results for GICC since inception on November 30, 1998.
1998 (Unaudited) ----------- Summary Results of Operations: Net sales $ 2,400 Gross profit $ (1,452) Net loss $ (7,919) Summary Balance Sheet: Current assets $ 15,037 Non-current assets 85,796 ----------- Total assets $ 100,833 ----------- ----------- Current liabilities $ 24,566 Non-current liabilities 27,715 Stockholders' equity 48,552 ----------- Total liabilities and $ 100,833 stockholders' equity ----------- -----------
NOTE 7 -- DEBT ISSUANCE COSTS Costs associated with the issuance of debt securities and with obtaining credit facilities are capitalized and amortized over the term of the related borrowing or facility. The Company capitalized $7,969,000 and $140,000 of debt issuance costs during the years ended December 31, 1996 and 1997, respectively. No debt issuance costs were incurred in 1998. Amortization of such costs was $564,000 in 1996, $1,008,000 in 1997, and $1,004,000 in 1998. The 1996 amortization excludes $434,000 recorded as an extraordinary loss resulting from the early redemption of the Company's 9.95% and 10.35% Senior Notes (see Note 15). The components of the debt issuance costs recorded in the balance sheets are as follows (in thousands of dollars):
December 31, ---------------------- 1997 1998 -------- -------- Debt issuance costs $ 8,960 $ 8,960 Accumulated (1,319) (2,323) amortization -------- -------- $ 7,641 $ 6,637 -------- -------- -------- --------
LodgeNet Entertainment Corporation F - 11 Form 10-K 1998 NOTE 8 -- ACCRUED EXPENSES Accrued expenses were comprised as follows at (in thousands of dollars):
December 31, --------------------- 1997 1998 ------- ------- Accrued taxes $ 1,034 $ 1,345 Accrued compensation 2,567 2,427 Accrued interest 2,274 3,689 Other 2,273 1,949 ------- ------- $ 8,148 $ 9,410 ------- ------- ------- -------
NOTE 9 -- LONG-TERM DEBT AND CREDIT FACILITIES Long-term debt was comprised as follows at (in thousands of dollars):
December 31, ------------------------- 1997 1998 ---------- ---------- Revolving Credit Facility $ 3,000 $ 76,500 10.25% Senior Notes 150,000 150,000 11.50% Senior Notes 30,000 30,000 Less - unamortized discount (1,169) (954) Capital leases 1,565 1,326 Other -- 11,221 ---------- ---------- 183,396 268,093 Less current maturities (705) (5,718) ---------- ---------- $ 182,691 $ 262,375 ---------- ---------- ---------- ----------
REVOLVING CREDIT FACILITY -- On February 25, 1999, the Company amended and restated its bank credit facility, increasing the size of the facility to $150 million, comprised of a $75 million term loan and a $75 million revolving credit facility. The $76.5 million outstanding at December 31, 1998 under the previous revolving credit facility was repaid with proceeds from the term loan. In addition to the $75 million term loan, the facility provides a $75 million revolving credit facility, which may be increased at the Company's request to $100 million, subject to certain limitations. Quarterly repayments on the term loan begin in February 2001 and are as follows for the respective fiscal years (in thousands of dollars): 2001 -- $15,000; 2002 -- $18,750; 2003 -- $18,750; 2004 -- $22,500. The revolving credit facility matures in February 2005. Loans under the amended and restated facility will bear interest at the Company's option of (1) the bank's prime rate plus a margin of from 1.00% to 1.75%, depending on leverage as defined, or (2) the eurodollar rate plus a margin of from 2.00% to 2.75%, depending on leverage as defined. The margins applicable to the bank's prime rate and/or the eurodollar rate loans are subject to quarterly adjustment as defined in the agreement. The loans will be secured by a first priority security interest in all of the Company's assets. The facility includes terms and conditions which require the maintenance of certain financial ratios and place limitations on capital expenditures, additional indebtedness, liens, investments, guarantees and certain payments or distributions in respect of the common stock. As of December 31, 1998, the Company was in compliance with all covenants, terms and conditions of its previous revolving credit facility. As of the date of closing, the Company was in compliance with all covenants, terms and conditions of the amended and restated bank credit facility. The amended facility provides for the issuance of letters of credit up to $12 million, subject to customary terms and conditions. As of December 31, 1998, the Company had outstanding letters of credit totaling $6.5 million under its previous revolving credit facility. LodgeNet Entertainment Corporation F - 12 Form 10-K 1998 10.25% SENIOR NOTES -- In December 1996, the Company issued $150 million of unsecured 10.25% Senior Notes (the "10.25% Notes"), due December 15, 2006. The 10.25% Notes are unsecured, rank PARI PASSU in right of payment with future unsubordinated unsecured indebtedness and rank senior in right of payment to all subordinated indebtedness of the Company. The 10.25% Notes require semi-annual interest payments and contain covenants which, among other matters, restrict the ability of the Company to incur additional indebtedness, create liens, pay dividends or make certain distributions in respect of its common stock; redeem capital stock; issue or sell stock of subsidiaries in certain circumstances; effect certain business combinations; and effect certain transactions with affiliates or stockholders. As of December 31, 1998, the Company was in compliance with all covenants, terms, and conditions of the 10.25% Notes. The 10.25% Notes are redeemable at the option of the Company, in whole or in part, on or after December 15, 2001, initially at 105.125% of their principal amount (plus accrued and unpaid interest) declining ratably to 100% of their principal amount (plus accrued and unpaid interest) on or after December 15, 2003. In addition, at any time prior to December 15, 1999, the Company may redeem up to 35% of the aggregate principal amount of the 10.25% Notes with the proceeds of one or more public equity offerings. 11.50% SENIOR NOTES -- During 1995, the Company issued $30 million principal amount of unsecured 11.50% Senior Notes (the "11.50% Notes"). Mandatory annual principal payments of $6 million commence in July 2001 continuing through July 2005. Semi-annual interest payments are required. The Company issued a total of 480,000 warrants (see Note 13) to purchase common stock of the Company in connection with the issuance of the 11.50% Notes and the value of the warrants, $1.68 million, was recorded as additional paid-in capital and shown as a discount on the 11.50% Notes. As part of the refinancing transaction in which the 10.25% Notes were issued, the holders of the 11.50% Notes adopted the covenants and ranking of the 10.25% Notes. Long-term debt has the following scheduled principal maturities for the years ended December 31 (in thousands of dollars): 1999 -- $5,718; 2000 -- $5,778; 2001 -- $21,190; 2002 -- $24,797; 2003 -- $25,564; thereafter -- $185,046. At December 31, 1997 and 1998, the estimated fair value of the Company's debt was $189.7 million and $268.0 million, respectively, which differs from the recorded amounts of $183.4 million and $268.1 million, respectively. NOTE 10 -- COMMITMENTS AND CONTINGENCIES PROGRAMMING AGREEMENTS -- The Company, through programming agreements, provides guest pay and free-to-guest programming services to the lodging and multi-family residential unit industries. These agreements provide that the Company receives monthly revenue for such services. Such agreements contain various restrictions, including default and termination procedures, and generally range from five to seven years in duration. The Company has also entered into agreements with certain networks and studios which provide their programs for redistribution. Under these agreements, the Company pays fees which are based on revenue generated, or on rate schedules based on the number of sites under license by the Company. The agreements contain various restrictions, including default and termination procedures, and generally range from three to five years in duration. SIGNAL CARRIAGE AGREEMENT -- The Company and PRIMESTAR Partners, L.P. (since succeeded by PRIMESTAR, Inc. ("PRIMESTAR") have entered into a Signal Carriage Agreement (the "Agreement") under which, in exchange for exclusive distribution of satellite-delivered free-to-guest programming to the lodging industry, the Company agreed to share certain operating cash flows, as defined in the agreement, with PRIMESTAR. Under the cash flow sharing arrangement, which is measured on an annual basis, the Company receives the first $1.8 million of cash flows, PRIMESTAR receives the next $1.8 million and all amounts thereafter are shared evenly. The Company paid PRIMESTAR $207,000 under this arrangement for the year ending December 31, 1997 and has recognized an obligation of $781,000 for the year ending December 31, 1998. The Agreement has an initial term of 15 years and includes various restrictions, including default and termination provisions. LodgeNet Entertainment Corporation F - 13 Form 10-K 1998 PURCHASE COMMITMENTS -- The Company has purchase commitments, in the ordinary course of business, none of which are expected to result in losses. OPERATING LEASES -- The Company has entered into certain operating leases, which at December 31, 1998 require future minimum lease payments, as follows (in thousands of dollars): 1999 -- $324; 2000 -- $299; 2001 -- $271; 2002 -- $163; 2003 and thereafter -- $67. LITIGATION -- Since the first quarter of 1995, the Company has been engaged in legal proceedings resulting from a lawsuit filed by On Command Video Corporation ("On Command") asserting patent infringement by the Company relating to its on-demand video system. During the third quarter of 1998, the Company entered into an agreement with On Command to settle all matters of pending litigation between the companies and enter into cross licensing arrangements regarding the use of each of the companies' patented technologies. The cross licensing arrangements, in consideration of the relative fair value of the patents involved, provides for the Company to make cash payments to On Command totaling approximately $16 million plus interest, payable in three annual installments which commenced in September 1998. The Company has capitalized the present value of the obligation to On Command based on the fair value of the license rights acquired. The fair value of the license rights acquired will be amortized over the remaining average lives of the underlying patents. The Company is subject to other litigation arising in the ordinary course of its businesses. As of the date hereof, in the opinion of management, the resolution of such other litigation will not have a material adverse effect on the Company's financial position or results of operations. NOTE 11 -- STOCKHOLDERS' EQUITY PREFERRED STOCK -- There are 5,000,000 shares of preferred stock, $.01 par value, authorized by the Company's certificate of incorporation, of which none were outstanding at December 31, 1996 and 1997. The Board of Directors may authorize the issuance of preferred stock, $.01 par value, in one or more series and with rights and privileges for each issue as determined by the Board of Directors. STOCKHOLDER RIGHTS PLAN -- On February 28, 1997, the Board of Directors of the Company authorized and adopted a Stockholder Rights Plan. Pursuant to the rights plan, the Board of Directors declared a dividend distribution of one right for each outstanding share of common stock of the Company to stockholders of record at the close of business on March 10, 1997. Initially, the rights will be attached to all common stock certificates and no separate rights certificates will be distributed. The rights will separate from the common stock and be distributed upon the occasion of (i) a public announcement that a person, group or entity has acquired or obtained the right to acquire 15% or more of the common stock of the Company or (ii) ten days following the commencement of, or an announcement of the intention to make, a tender or exchange offer which would result in a person, group or entity becoming the holder of 15% or more of the Company's common stock. The rights are not exercisable until distributed. In general, each right, when exercisable, initially entitles the registered holder to purchase from the Company one-thousandth of a share of a new series of preferred stock, designated as Series A Participating Preferred Stock, par value $.01, at a price of $60.00 per share. In certain other events, after the rights have become exercisable, each right entitles the holder to purchase for $60.00 an amount of common stock of the Company, or in certain circumstances securities of the acquirer, having a then-current market value of two times the exercise price of the right. The rights include anti-dilution provisions in the event of a stock dividend, split-up or reclassification of the common stock. The preferred stock purchasable upon exercise of the rights will be non-redeemable and junior to any other issue of preferred stock the Company might issue, and will include dividend and liquidation preferences. No stockholder privileges attach to the rights until exercised. LodgeNet Entertainment Corporation F - 14 Form 10-K 1998 NOTE 12 -- STOCK OPTION PLANS The Company has stock options plans which provide for the granting of up to 2,726,792 non-qualified or incentive stock options on the Company's common stock. Certain officers, directors and key employees have been granted options to purchase common stock of the company under these plans. Options become exercisable in accordance with vesting schedules determined by a committee of the Board of Directors, and generally expire ten years after date of grant. No options had expired as of December 31, 1998 and outstanding options expire beginning in 2001 through 2008. The following is a summary of the stock option activity for the years ending December 31:
Weighted Average Options Exercise Outstanding Price ----------- -------- Balance at December 31, 1995 1,318,426 $ 4.21 Options granted 239,000 12.66 Options exercised (93,256) .62 Options forfeited/canceled (12,500) 8.51 ---------- Balance at December 31, 1996 1,451,670 5.79 Options granted 257,832 14.99 Options exercised (196,689) 1.08 Options forfeited/canceled (7,000) 9.06 ---------- Balance at December 31, 1997 1,505,813 7.91 Options granted 634,656 12.72 Options exercised (270,329) .81 Options forfeited/canceled (107,800) 12.84 ---------- Balance at December 31, 1998 1,762,340 $ 10.45 ---------- ----------
The following is a summary of stock options outstanding as of December 31, 1998:
Outstanding Options Exercisable Options -------------------------------- -------------------- Weighted Average Weighted Weighted Remaining Average Average Exercise Term Exercise Exercise Price Range Number in Years Price Number Price ---------------- --------- --------- -------- ------- -------- $0.23 to $0.46 84,819 4.8 $0.23 84,819 $0.23 $2.77 to $3.23 237,022 4.6 $2.89 237,022 $2.89 $6.46 to $9.79 300,499 7.1 $8.57 176,499 $8.57 $10.38 to $13.29 724,000 8.2 $11.41 228,750 $11.38 $14.00 to $20.00 416,000 8.6 $16.51 73,875 $15.60 --------- ------- 1,762,340 7.4 $10.45 800,965 $7.46 --------- ------- --------- -------
The weighted average "fair value" of options granted during the year ended December 31 was as follows:
1996 1997 1998 ------- ------- ------- Weighted average fair value per option granted $ 6.01 $ 7.13 $ 4.36 ------- ------- ------- ------- ------- -------
The "fair value" of each option granted was estimated as of the grant date using the Black-Scholes option valuation model under the following assumptions: (i) dividend yield - none, (ii) weighted average risk-free interest rate - 6.40% in 1996, 6.22% in 1997, 5.15% in 1998; (iii) weighted average expected life - 5.0 years, and (iv) weighted average expected volatility - 44.0% in 1996, 44.5% in 1997, 45.3% in 1998. LodgeNet Entertainment Corporation F - 15 Form 10-K 1998 The Company accounts for its stock option compensation plans in accordance with the provisions of Accounting Principles Board Opinion No. 25. Accordingly, because the Company's stock option plans are fixed plans and options are issued at market value, no compensation cost has been charged to operations for any period presented. Had compensation cost been determined in accordance with SFAS No. 123, net loss and loss per share would have increased, and the effect of such increases, reflected on those items on a pro forma basis, would have been as follows (in thousands of dollars, except per share amounts):
1996 1997 1998 -------- -------- -------- Net loss As reported $(16,610) $(25,619) $(39,912) Pro forma (18,047) (27,423) (42,677) Loss per share As reported $ (1.74) $ (2.27) $ (3.45) Pro forma (1.89) (2.43) (3.69)
NOTE 13 -- WARRANTS In connection with the 1995 issuance of the 11.5% Senior Notes (see Note 9), the Company issued a total of 480,000 warrants to purchase common stock of the Company. Each warrant entitles the holder to purchase one share of common stock at an exercise price of $7.00 per share. The warrants include demand registration rights and anti-dilution provisions, and such warrants expire on July 15, 2005. The portion of the proceeds from the 1995 debt issuance deemed attributable to the warrants was recorded as additional paid-in capital. NOTE 14 -- SALE OF EQUITY INTEREST IN SUBSIDIARY In October 1996, the Company and ResNet Inc. entered into agreements with TCI Satellite Entertainment, Inc. (since succeeded by PRIMESTAR MDU, Inc. ("PRIMESTAR")) to sell a portion of ResNet Inc. to PRIMESTAR. Under the terms of the agreement, a 4.99% equity interest in ResNet Inc. was sold to PRIMESTAR in exchange for $5.4 million in cash. The proceeds related to the change in equity interest were in excess of the Company's carrying value for its investment, and such excess, approximately $4.7 million after transaction expenses, was reflected as a credit to paid-in capital. In June 1997, ResNet LLC was formed and the agreements previously entered into by PRIMESTAR and ResNet Inc. were amended, under substantially similar terms, to reflect ResNet LLC as the operating entity of the ResNet business. Under a convertible note agreement (the "Convertible Note"), PRIMESTAR had agreed to advance up to $34.6 million to ResNet LLC during the five year period ending October 21, 2001. Use of the proceeds of the Convertible Note were limited to the purchase of satellite receiving equipment from PRIMESTAR. Amounts outstanding under the Convertible Note were periodically convertible into additional equity interests in ResNet LLC. Such conversions were mandatory, subject only to regulatory limitations on the size of the equity interest that PRIMESTAR could hold in ResNet LLC. Under these conversion features, PRIMESTAR had obtained rights to acquire an additional 9.81% equity interest (incremental to the 4.99% interest acquired in 1996) in ResNet LLC as of November 30, 1998, the date of the ResNet merger transaction (see Note 3). Due to the regulatory limitations described above, these rights were unable to be exercised. No amounts are due to PRIMESTAR under this convertible note agreement at December 31, 1998. In connection with the merger transaction described in Note 3, ResNet LLC and PRIMESTAR agreed to terminate the convertible note agreement. The companies further agreed that if GICC and PRIMESTAR were unable to reach agreement by April 1, 1999 with respect to a new agreement for PRIMESTAR to furnish GICC with nationwide access to certain satellite programming signals, that ResNet LLC would acquire PRIMESTAR's 5% LodgeNet Entertainment Corporation F - 16 Form 10-K 1998 equity interest in GICC that was obtained as part of the merger transaction for $5.4 million. Consideration for this 5% interest is payable in part by satellite receiving equipment held by the Company that was previously purchased from PRIMESTAR. Such amount will be valued at the price paid for the equipment by the Company. Remaining amounts to equal the $5.4 million will be payable in cash by April 9, 1999. NOTE 15 -- EXTRAORDINARY LOSS Concurrently with the issuance of its 10.25% Senior Notes in 1996, the Company redeemed its 9.95% and 10.35% Senior Notes due August 15, 2003. As a consequence of the early redemption of the 9.95% and 10.35% Senior Notes, the Company incurred a make-whole premium of $2,819,000 and wrote off related, unamortized debt issuance costs of $434,000. NOTE 16 -- CHANGE IN ACCOUNTING PRINCIPLE Effective in the fourth quarter of 1997, the Company adopted the provisions of Issue No. 97-13, "Accounting for Costs Incurred in Connection with a Consulting Contract or an Internal Project That Combines Business Process Reengineering and Information Technology Transformation" issued by the Emerging Issues Task Force of the Financial Accounting Standards Board. This new pronouncement requires that certain costs associated with business process reengineering activities should be expensed as incurred rather than capitalized. As a result, the Company recorded a $210,000 charge in the 1997 Consolidated Statement of Operations, reflected as a cumulative effect of a change in accounting principle, to write-off business process reengineering costs that had been previously capitalized. NOTE 17 -- INCOME TAXES The provisions for income taxes consisted of state income taxes. The Company and its subsidiaries file separate federal income tax returns. At December 31, 1998, the Company had net operating loss carry-forwards in excess of $85 million for federal income tax purposes. Such carry-forwards expire beginning in 2001 through 2013, and federal tax regulations limit the availability and timing of usage of carry-forwards. Significant components of the Company's deferred tax liabilities and assets were as follows at (in thousands of dollars):
December 31, ----------------------- 1997 1998 -------- -------- Deferred tax liabilities: Tax over book depreciation $ (5,207) $ (2,759) -------- -------- Deferred tax assets: Net operating loss carry-forwards 25,283 28,900 Reserves and accruals 1,081 1,769 Deferred programming 153 29 -------- -------- 26,517 30,698 -------- -------- Net deferred tax assets 21,310 27,939 Valuation allowance (21,310) (27,939) -------- -------- Net deferred taxes $ -- $ -- -------- -------- -------- --------
The Company established the valuation allowance for deferred tax assets after considering its historical financial performance, existing deferred tax liabilities, and certain information about future years. NOTE 18 -- RELATED PARTY TRANSACTIONS During 1998, the Company advanced $1.9 million to two officers under the terms of promissory notes providing for total advances of $2.0 million. The notes are payable by the officers at the earlier of (i) demand of the Company or, (ii) November 9, 1999. Interest is payable monthly at the rate applicable to the Company under its revolving credit facility. The notes are secured by shares of the Company's stock held by the officers. LodgeNet Entertainment Corporation F - 18 Form 10-K 1998 NOTE 19 -- SUBSEQUENT EVENTS FINANCING ACTIVITIES - Effective February 25, 1999, the Company amended and restated its bank credit facility. See Note 9 for a description of the transaction and the terms of the credit facility. PRIMESTAR TRANSACTION ANNOUNCEMENT - In January 1999, Hughes Electronics Corporation ("Hughes") announced that it reached an agreement with PRIMESTAR to acquire PRIMESTAR's digital broadcast satellite (DBS) business and plans to combine the business with Hughes' DIRECTV unit. It was further announced that over the next approximately two years, PRIMESTAR subscribers will be transitioned to DIRECTV service. The Company has approximately 200,000 lodging rooms which receive cable television programming via the PRIMESTAR DBS technology. Management is actively pursuing several options with respect to this matter to ensure that cable television service to its lodging customers is not disrupted, and believes that a transition solution will be obtained which will avoid a material adverse impact to the Company's operations or financial position. LodgeNet Entertainment Corporation F - 18 Form 10-K 1998 NOTE 20 -- SEGMENT INFORMATION During 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." Prior to the ResNet merger described in Note 3, the Company's operations were classified into two business segments, lodging and residential. The lodging segment utilizes interactive systems designed, assembled and operated by the Company to provide guest room entertainment, information and convenience services to the lodging industry. The residential segment used systems designed, built and operated by the Company to provide cable television programming and other entertainment services to multifamily residences. The Company's operations will not include the residential segment subsequent to the ResNet merger. The accounting policies of the reportable segments are the same as those described in Note 2. The company evaluates performance of its operating segments based on operating results before depreciation and amortization, excluding any non recurring charges. There were no intersegment sales and transfers. Summarized financial information concerning the Company's reportable segments is shown in the following table (in thousands of dollars). The information for 1997 and 1996 has been restated to conform to the 1998 presentation. The "Other" column includes corporate related items and, as it relates to segment profit (loss), income and expense not allocated to reportable segments.
Lodging Residential Other Total -------- ----------- -------- -------- 1996 Revenues $ 97,389 $ 332 $ - $ 97,721 Segment profit (loss) 24,552 149 (41,311) (16,610) Total assets 274,219 5,548 - 279,767 Capital expenditures 78,738 5,518 - 84,256 1997 Revenues $133,010 $ 2,700 $ - $135,710 Segment profit (loss) 37,407 (2,055) (60,971) (25,619) Total assets 238,869 21,425 - 260,294 Capital expenditures 87,615 16,762 - 104,377 1998 Revenues $160,975 $ 5,376 $ - $166,351 Segment profit (loss) 50,438 (2,237) (88,113) (39,912) Total assets 306,030 - - 306,030 Capital expenditures 55,458 14,202 - 69,660
The following table presents the details of the "Other" segment profit (loss):
1996 1997 1998 ------- ------- ------- Restructuring charge $ - $ - $ 3,300 Depreciation and amortization 29,815 43,760 55,215 Interest expense, net 8,243 17,001 23,048 Equity in losses of unconsolidated affiliates - - 6,550 Extraordinary loss 3,253 - - Cumulative effect of change in accounting principle - 210 - Total $41,311 $60,971 $88,113
LodgeNet Entertainment Corporation F - 19 Form 10-K 1998 The following table presents revenues by country based on the location of the customer:
1996 1997 1998 ------- -------- -------- United States $93,803 $129,484 $157,654 Canada 3,918 5,954 7,420 Other - 272 1,277 ------- -------- -------- Total $97,721 $135,710 $166,351 ------- -------- -------- ------- -------- --------
The following table presents long-lived assets by country based on the location of the asset:
1996 1997 1998 -------- -------- -------- United States $156,235 $209,993 $199,067 Canada 7,922 8,955 10,370 -------- -------- -------- Total $164,157 $218,948 $209,437 -------- -------- -------- -------- -------- --------
No single customer accounted for 10% or more of the Company's consolidated revenue in 1996, 1997 or 1998. LodgeNet Entertainment Corporation F - 20 Form 10-K 1998 NOTE 21 -- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) The following selected quarterly financial data are in thousands of dollars, except per share data:
Quarter Quarter Quarter Quarter Ending Ending Ending Ending March 31, June 30, September 30, December 31, --------- -------- ------------- ------------ For 1997: Total revenue $29,656 $ 33,132 $ 36,692 $ 36,230 Gross profit 16,839 18,794 20,961 20,604 Loss before cumulative effect of change in accounting principle (6,679) (5,756) (5,050) (7,924) Net loss (2) (6,679) (5,756) (5,050) (8,134) Per common share (basic and diluted (1): Loss before cumulative effect of change in accounting principle $ (0.60) $ (0.51) $ (0.45) $ (.70) Net loss (0.60) (0.51) (0.45) (.71) For 1998: Total revenue $36,347 $ 40,898 $ 45,776 $ 43,330 Gross profit 20,267 22,711 25,636 23,729 Net loss (3) (8,635) (7,548) (5,457) (18,272) Per common share (basic and diluted) (1): Net loss $ (0.76) $ (0.65) $ (0.47) $ (1.54)
- ---------- (1) Per share amounts are computed independently for each of the quarters presented. Therefore, the sum of such amounts will not equal the total for the year. (2) The results of the quarter ended December 31, 1997 include a $210,000 charge for the effect of adopting EITF Issue 97-13 related to accounting for certain business reengineering costs (see Note 16). (3) The net loss for the quarter ended December 31, 1998 includes the recognition of the $3.3 million restructuring charge related to the ResNet transaction which occurred effective November 30, 1998. Additionally, the $6.5 million of losses recorded from unconsolidated affiliates were recorded in the fourth quarter. This loss is due to (i) the ResNet transaction which resulted in the Company recording its share of GICC's losses incurred in December, and (ii) a change in circumstances during the fourth quarter related to the Company's investment in AMN which resulted in the Company adopting the equity method, rather than the cost method, of accounting for this investment. LodgeNet Entertainment Corporation F - 21 Form 10-K 1998 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE To LodgeNet Entertainment Corporation: We have audited, in accordance with generally accepted auditing standards, the consolidated financial statements included in this annual report on Form 10-K, and have issued our report thereon dated February 12, 1999. Our audit was made for the purpose of forming an opinion on those financial statements taken as a whole. The following schedule is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Minneapolis, Minnesota February 12, 1999 (except for Note 9, as to which the date is February 25, 1999) LodgeNet Entertainment Corporation F - 22 Form 10-K 1998 LODGENET ENTERTAINMENT CORPORATION AND SUBSIDIARIES SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS (Dollar amounts in thousands)
Column A Column B Column C Column D Column E - ---------------------------------- --------- ---------- ---------- -------- Additions Balance Charged to Balance Beginning Costs and Deductions End of Description of Period Expenses (Note 1) Period - ---------------------------------- --------- ---------- ---------- -------- Allowances deducted from related balance sheet accounts: Year Ended December 31, 1996: Allowance for Doubtful Accounts $410 $922 $547 $785 Year Ended December 31, 1997: Allowance for Doubtful Accounts $785 $820 $805 $800 Year Ended December 31, 1998: Allowance for Doubtful Accounts $800 $848 $848 $800
- ---------- (1) All deductions from reserves were for the purposes for which such reserves were created except for the 1998 activity, which includes a $45,000 reduction to the reserve resulting from the ResNet merger described in Note 3. LodgeNet Entertainment Corporation F - 23 Form 10-K 1998 EX-4.4 2 EXHIBIT 4.4 SUPPLEMENTAL INDENTURE THIS SUPPLEMENTAL INDENTURE is entered into as of October 15, 1998 by and between LODGENET ENTERTAINMENT CORPORATION, a Delaware corporation (the "Company") having its principal office at 3900 West Innovation Street, Sioux Falls, South Dakota 57107 and MARINE MIDLAND BANK, a New York banking corporation and trust company, as trustee (the "Trustee"), amending and supplementing the indenture (the "Indenture") dated as of December 19, 1996 pursuant to which the Company issued $150,000,000 10-1/4% Senior Notes due 2006 (the "Notes"). RECITALS: WHEREAS, the parties wish to make certain amendments to the Indenture pursuant to Section 9.02 of the Indenture; and WHEREAS, the Company has duly authorized the execution and delivery of this Supplemental Indenture, has obtained the consent of at least a majority of the holders of the Notes, and done all other things necessary to make this Supplemental Indenture a valid agreement of the Company. NOW, THEREFORE, in consideration of the premises, mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby mutually acknowledged, the parties hereto agree as follows: 1. AMENDMENTS. The Indenture is hereby amended as follows: 1A. DEFINITIONS. The definitions of "ASSET SALE" and "PERMITTED INVESTMENTS" in Section 1.01 of the Indenture are hereby deleted in their entirety and replaced with the following language: "ASSET SALE" means any sale, transfer or other disposition (including by way of merger, consolidation or sale-leaseback transaction) in one transaction or a series of related transactions by the Company or any of its Restricted Subsidiaries to any Person, other than the Company or any of its Restricted Subsidiaries of (i) all or any of the Capital Stock of any Restricted Subsidiary, (ii) all or substantially all of the property and assets of an operating unit or business of the Company or any of its Restricted Subsidiaries or (iii) any other property and assets of the Company or any of its Restricted Subsidiaries (other than the Capital Stock or assets of an Unrestricted Subsidiary) outside the ordinary course of business of the Company or such Restricted Subsidiary and, in each case, that is not governed by Article Five; PROVIDED that "Asset Sale" shall not include (a) sales or other dispositions of inventory, receivables and other current, obsolete or worn out assets, (b) sales or other dispositions of assets for consideration at least equal to the fair market value of the assets sold or disposed of, provided that the consideration received would satisfy clause (B) of Section 4.11, (c) issuances or sales of Common Stock of ResNet pursuant to the ResNet Transaction Documents or (d) the contribution to Newco of (1) the assets of ResNet LLC, (2) the limited liability company membership interests of ResNet LLC or (3) the equity interests of a special purpose entity created for the purpose of conveying such assets, but no other assets. "PERMITTED INVESTMENTS" means (i) an Investment in the Company or a Restricted Subsidiary or a Person which will, upon the making of such Investment, become a Restricted Subsidiary or be merged or consolidated with or into or transfer or convey all or substantially all its assets to, the Company or a Restricted Subsidiary; PROVIDED that such person's primary business is related, ancillary or complementary to the businesses of the Company and its Restricted Subsidiaries on the date of such Investment; (ii) Temporary Cash Investments; (iii) payroll, travel and similar advances to cover matters that are expected at the time of such advances ultimately to be treated as expenses in accordance with GAAP; (iv) stock, obligations or securities received in satisfaction of judgments; and (v) Investments in Newco received in connection with the ResNet Contribution and (vi) Investments in Newco in connection with or after the closing of the ResNet Contribution in aggregate amount not to exceed $5 million. The following definitions of "NEWCO", "RESNET CONTRIBUTION" and "RESNET LLC" are hereby added to Section 1.01 of the Indenture: "Newco" means the joint venture company which will own substantially all of the operations of Shared Technologies Communications LLC ("STC"), Interactive Cable Systems, Inc. ("ICS") and ResNet LLC, to be created pursuant to a nonbinding agreement among STC, ICS and ResNet LLC dated August 18, 1998. "ResNet Contribution" means the contribution to Newco of (i) the assets of ResNet LLC, (ii) the limited liability company membership interests of ResNet LLC or (iii) the equity interests of a special purpose entity created for the purpose of conveying such assets, in exchange for approximately 30% of the equity interest therein and notes payable in an aggregate amount equal to Investments made by the Company or any Subsidiary in ResNet LLC to acquire operating assets between June 1, 1998 and the closing of the ResNet Contribution. -2- "ResNet LLC" means ResNet Communications, L.L.C., a Delaware limited liability company. 1B. SECTION 4.08, LIMITATION ON TRANSACTIONS WITH STOCKHOLDERS AND AFFILIATES. Section 4.08 of the Indenture is hereby deleted in its entirety and replaced with the following language: 4.08. LIMITATION ON TRANSACTIONS WITH STOCKHOLDERS AND AFFILIATES. The Company will not, and will not permit any Restricted Subsidiary to, directly or indirectly, enter into, renew or extend any transaction (including without limitation, the purchase, sale, lease or exchange or property or assets, or the rendering of any service) with any holder (or any Affiliate of such holder) of 10% or more of any class of Capital Stock of the Company or with any Affiliate of the Company or any Restricted Subsidiary, except upon fair and reasonable terms no less favorable to the Company or such Restricted Subsidiary than could be obtained, at the time of such transaction or, if such transaction is pursuant to a written agreement, at the time of the execution of the agreement providing therefor, in a comparable arm's-length transaction with a Person that is not such a holder or an Affiliate. The foregoing limitation does not limit, and shall not apply to (i) transactions (A) approved by a majority of the disinterested members of the Board of Directors or (B) for which the Company or a Restricted Subsidiary delivers to the Trustee a written opinion of a nationally recognized investment banking firm stating that the transaction is fair to the Company or such Restricted Subsidiary from a financial point of view; (ii) any transaction solely between the Company and any of its Wholly Owned Restricted Subsidiaries or solely between Wholly Owned Restricted Subsidiaries; (iii) the payment of reasonable and customary regular fees to directors of the Company who are not employees of the Company; (iv) any payments or other transactions pursuant to any tax-sharing agreement between the Company and any other Person with which the Company files a consolidated tax return or with which the Company is part of a consolidated group for tax purposes; (v) any Restricted Payments not prohibited by Section 4.04; (vi) transactions pursuant to the ResNet Transaction Documents; or (vii) transactions with Newco in the ordinary course of business on terms no less favorable to the Company or such Restricted Subsidiary than could be obtained in a comparable arm's-length transaction. Notwithstanding the foregoing, any transaction covered by the first paragraph of this Section 4.08 and not covered by clauses (ii) through (vii) of this paragraph, the aggregate amount of which exceeds $1 million in value, must be approved or determined to be fair in the manner provided for in clause (i)(A) or (B) above. -3- 2. RATIFICATION OF INDENTURE. As amended by this Supplemental Indenture, the Indenture and the Notes are in all respects ratified and confirmed and the Indenture as so amended by this Supplemental Indenture shall be read, taken and construed as one and the same instrument. 3. THE TRUSTEE. The Trustee shall not be responsible in any manner whatsoever for or in respect of the validity or sufficiency of this Supplemental Indenture or for or in respect of the recitals contained herein, all of which are made solely by the Company. 4. EFFECTIVENESS. This Supplemental Indenture shall be effective as of the date first above written; PROVIDED that (i) Section 1 of this Supplemental Indenture shall be operative so long as the ResNet Contribution is consummated on or prior to November 30, 1998 and the Company furnishes an Officers' Certificate to the Trustee certifying to the same, and (ii) the conditions specified in Section 9.02 of the Indenture shall have been satisfied. 5. MISCELLANEOUS. (a) This Supplemental Indenture may be executed in any number of counterparts and by each of the parties hereto on separate counterparts, each of which, once executed and delivered, shall be deemed to be an original and all of which taken together shall constitute but one and same instrument. (b) This Supplemental Indenture shall be governed and construed in accordance with the laws of the State of New York. [The remainder of the page is intentionally left blank] -4- IN WITNESS WHEREOF, the parties hereto have caused this Supplemental Indenture to be duly executed, and their respective corporate seals to be hereunto affixed and attested, all as of the day and year first above written. LODGENET ENTERTAINMENT CORPORATION By /s/ Eric R. Jacobsen --------------------------------------- Name: Eric R. Jacobsen ---------------------------------- Title: Vice President, General Counsel --------------------------------- MARINE MIDLAND BANK, as Trustee By /s/ James M. Foley -------------------------------------- James M. Foley Assistant Vice President -5- EX-10.27 3 EXHIBIT 10.27 CONSENT AND RESTRUCTURING AGREEMENT THIS CONSENT AND RESTRUCTURING AGREEMENT (the "Agreement"), dated as of November _6_, 1998, is entered into by ResNet Communications, LLC, a Delaware limited liability company (the "Company"), ResNet Communications, Inc., a Delaware corporation ("ResNet"), and PRIMESTAR MDU, Inc., a Delaware corporation and successor in interest to TCI Satellite MDU, Inc. ("PRIMESTAR"). A. WHEREAS, ResNet and PRIMESTAR, as the sole members of the Company, desire, subject to the conditions set forth below, to grant their respective consents (the "Consent") to a proposed transaction pursuant to a stock purchase agreement, dated the Closing Date (as defined below), among the Company, Shared Technologies Communications, Corp., a Delaware limited liability company ("STC"), and Interactive Cable Systems, Inc., a California corporation ("ICS"), whereby the constituent companies will each contribute to a newly formed wholly-owned subsidiary of such company (a "Contribution Sub" and in the case of the Company, the "ResNet Contribution Sub") substantially all of the assets of such company, subject to certain specified liabilities (in the case of the Company, such assets and liabilities being referred to as the "ResNet Business"), and exchange the capital stock of each Contribution Sub for capital stock in a newly formed Delaware corporation ("Newco") for designated percentages of Newco's common equity securities (collectively, the "Transaction;" the date of the consummation of the Transaction being the "Closing Date"). B. WHEREAS, in connection with the closing of the Transaction, the parties desire to terminate and/or restructure certain agreements (collectively, the "Existing Agreements") entered into by the parties as of June 4, 1997, including, without limitation, (i) the limited liability company agreement of the Company (the "LLC Agreement"), (ii) an agreement relating to the purchase by the Company from PRIMESTAR of certain satellite receive equipment (the "Equipment Sale Agreement"), (iii) the provision by PRIMESTAR to the Company of a convertible credit facility repayable solely by the issuance of equity interests in the Company (the "Subordinated Convertible Term Loan Agreement"), (iv) the grant of certain options (the "Option Agreement") and contingent warrants (the "Option Warrants") enabling PRIMESTAR to acquire additional equity interests in the Company, (v) the furnishing by PRIMESTAR to the Company of the PRIMESTAR-SM- DBS feed on a nationwide basis for multi-family dwelling units ("MDU") properties (the "Signal Availability Agreement"), (vi) a standstill agreement (the "Standstill Agreement"), (vii) a subscription agreement (the "Subscription Agreement"), (viii) a redemption agreement (the "Redemption Agreement"), (ix) a related letter agreement, dated June 4, 1997, from Toby DeWeese to Tim Flynn (the "Letter Agreement"), and (x) a management and shared services agreement (the "Management and Shared Services Agreement"). NOW, THEREFORE, in consideration of the foregoing, and for other good consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. CONSENT TO THE TRANSACTION. Subject to the satisfaction of the terms and conditions set forth herein, the parties hereby consent to the Transaction. 2. RESTRUCTURING OF THE EXISTING AGREEMENTS. Simultaneously with the closing of the Transaction, the parties agree that: (a) The LLC Agreement will remain in full force and effect; PROVIDED, HOWEVER, that if determined by ResNet to be necessary or desirable in connection with the distribution of the Newco Shares contemplated under Section 4 hereof, the parties hereby consent to a dissolution of the Company and a liquidating distribution of its assets in accordance with applicable provisions of Delaware law. (b) The following Existing Agreements will be terminated and be of no further force or effect: (i) the Equipment Sale Agreement, (ii) the Subordinated Convertible Term Loan Agreement, (iii) the Option Agreement and the Option Warrants, (iv) the Standstill Agreement, (v) the Subscription Agreement, (vi) the Redemption Agreement, (vii) the Letter Agreement, and (viii) the Management and Shared Services Agreement; 1 (c) The Signal Availability Agreement shall be assigned to, and assumed by Newco, pursuant to a form of assignment (the "Assignment") substantially in the form of EXHIBIT A hereto; PROVIDED, HOWEVER, that the Signal Availability Agreement shall be deemed to apply only to the Company's headend installations at the sites set forth on SCHEDULE I to the Assignment (all of which sites are subject to video services agreements of the Company existing on the Closing Date and contributed to Newco); PROVIDED, FURTHER, that as a condition to such assignment Newco shall be prohibited from offering digital overlays or digital tiers of any other DBS provider to any MDU property covered by the Signal Availability Agreement; and (d) The inter-company promissory note evidencing advances from ResNet to the Company shall be canceled and the outstanding amount due thereunder shall be deemed a capital contribution by ResNet to the Company. 3. NEWCO AGREEMENT. ResNet and PRIMESTAR agree to cooperate in good faith to explore opportunities for PRIMESTAR, Inc. and Newco to enter into a new signal carriage services agreement ("New PRIMESTAR Agreement"). 4. DISTRIBUTION OF NEWCO SHARES. The parties agree: (i) if PRIMESTAR and Newco are unable to reach an agreement with respect to the terms of a New PRIMESTAR Agreement, upon the written request of PRIMESTAR to be made on or before April 1, 1999, ResNet will purchase the member interest of PRIMESTAR in the Company for a purchase price of $5.4 million, payable in part by the exchange of IRD receivers previously purchased by the Company from PRIMESTAR and valued at the contract price paid by the Company for such equipment, with the remainder payable in cash on or prior to April 9, 1999; or (ii) if PRIMESTAR and Newco are able to reach an agreement with respect to the terms of a New PRIMESTAR Agreement, as soon as practicable following the execution and delivery of such agreement, the Company shall be dissolved and liquidated and the shares of Newco capital stock received in the Transaction will be distributed 14.26% to PRIMESTAR (representing 4.99% of Newco's outstanding equity ownership at the closing) (free and clear of all claims, liens, security interests and other encumbrances) and 85.74% to LNET, respectively. 5. REPRESENTATIONS. Each of the parties, severally and not jointly, hereby represents and warrants to each other party that (a) it is an entity duly organized and validly existing in good standing under the laws of the state of its formation; (b) it has all necessary power and authority to execute, deliver and perform its obligations under this Agreement and consummate the transactions contemplated hereby; and (c) the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary action on the part of such entity. 6. EFFECTIVENESS. This Agreement shall become effective on the Closing Date simultaneously with the closing of the Transaction. In the event that the Closing Date does not occur on or prior to November 30, 1998, then at the election of any party and upon notice to the other parties, this Agreement shall terminate. 7. ENTIRE AGREEMENT. This Agreement constitutes the entire understanding of the parties with respect to the subject matter hereof. This Agreement may be amended, modified or supplemented only by an agreement in writing executed by each of the parties. Any term of this Agreement may be waived only with the written consent of the party sought to be bound. 8. SEVERABILITY. If any provision of this Agreement is held by a court of competent jurisdiction to be invalid, illegal or unenforceable, such provision shall be severed from this Agreement, and in either case the remaining provisions of this Agreement shall not in any way be affected or impaired thereby. 9. COUNTERPARTS. This Agreement may be executed in two or more counterparts, and each such executed counterpart will be an original instrument. 10. SUCCESSORS AND ASSIGNS. This Agreement shall bind and inure to the benefit of the parties hereto and their respective successors and assigns. Nothing herein shall be deemed to alter or amend in any respect the assignment provisions set forth in Section 13 of the Signal Availability Agreement. 2 11. NO JOINT VENTURE. Nothing in this Agreement is intended to create a joint venture or partnership between the parties. None of the parties undertakes by this Agreement or otherwise to perform any obligation of another party, whether regulatory or contractual, or to assume any responsibility for the business of any other party. 12. FURTHER ASSURANCES. From time to time after the date hereof and without further consideration, the parties will execute and deliver, or arrange for the execution and delivery of, such other instruments or documents and take or arrange for such other actions as may reasonably be requested to give full effect to this Agreement and the transactions contemplated hereby. 13. GOVERNING LAW. This Agreement will be governed by and construed and enforced in accordance with the internal laws of the State of Delaware, without giving effect to the conflict of laws principles thereof. IN WITNESS WHEREOF, the parties hereto have caused this Agreement as of the date first indicated above. RESNET COMMUNICATIONS, INC. By: /s/ Jeffrey T. Weisner ---------------------------------- Its: Vice President - Finance ---------------------------------- RESNET COMMUNICATIONS, LLC By: ResNet Communications, Inc., as Managing Member By: /s/ Jeffrey T. Weisner ------------------------------ Its: Vice President, Finance ----------------------------- PRIMESTAR MDU, INC. By: /s/ William D. Myers ---------------------------------- Its: Vice President, Finance ---------------------------------- CONSENTED TO AND AGREED: LODGENET ENTERTAINMENT CORPORATION By: /s/ Jeffrey T. Weisner --------------------------------- Its: Vice President, Finanace --------------------------------- 3 EXHIBIT A ASSIGNMENT, ASSUMPTION AND AMENDMENT AGREEMENT 1. For good and valuable consideration, receipt of which is hereby acknowledged, ResNet Communications, LLC, a Delaware limited liability company ("Assignor"), does hereby sell, assign, transfer and set over as of the Closing Date (as defined below) to GLOBAL INTERACTIVE COMMUNICATIONS CORPORATION, a Delaware corporation ("Assignee"), all of Assignor's right, title and interest in and to that certain Signal Availability Agreement (the "Signal Availability Agreement"), dated as of June 4, 1997, between Assignor and PRIMESTAR MDU, Inc. ("PRIMESTAR"), as successor in interest to TCI Satellite MDU, Inc.; and Assignee hereby assumes the obligations of Assignor under, and agrees to be bound by the terms and conditions of, the Signal Availability Agreement as modified by Paragraph 3 below. 2. This assignment is made pursuant to a Consent and Restructuring Agreement, dated as of November _6_, 1998, among Assignor, PRIMESTAR and the parties named therein, and is entered into in connection with a transaction pursuant to which Assignor and certain other parties will each contribute to Assignee substantially all of the assets of each such company, subject to certain specified liabilities, in exchange for capital stock in the parent corporation of Assignee (collectively, the "Transaction;" the date of the consummation of the Transaction being the "Closing Date"). 3. The terms of the Signal Availability Agreement shall hereby be amended such that: (a) The Signal Availability Agreement shall be deemed to apply only to Assignor's headend installations at the sites set forth on SCHEDULE I hereto (all of which sites are subject to video services agreements of the Assignor existing on the Closing Date and contributed to Assignee in connection with the Transaction); (b) As a condition to such assignment Assignee shall be prohibited from offering digital overlays or digital tiers of any direct broadcast satellite ("DBS") provider other than PRIMESTAR, Inc. to any multi-family dwelling unit property covered by the Signal Availability Agreement; and (c) Section 11(d) of the Signal Availability Agreement shall be deemed modified and restated as follows (except that the last unnumbered paragraph thereof beginning with the words "Subject to the provisions of Section 17" shall remain unmodified): "(d) If for any reason other than an event of Force Majeure, Satellite is unable to provide the signal of the Programming Services, this Agreement shall terminate upon 90 days prior written notice from Satellite to ResNet. If this Agreement is terminated pursuant to this Section 11(d), ResNet shall use its best efforts to enter into an agreement to receive the signal of the Programming Services at the Headends from a signal provider (a "Compatible Signal Provider") that provides digital signals in a format compatible with the Equipment. If this Agreement is terminated pursuant to this Section 11(d) prior to December 31, 2003 and ResNet is not able to enter into an agreement with a Compatible Signal Provider, Satellite will pay to ResNet an amount equal to the price paid by ResNet for purchasing equipment that is compatible with the signals provided by the new signal provider (the "Incompatible Signal Provider") for all Headends included under this Agreement as of the date of termination, less the fair market value of the Equipment that is replaced, up to $200 per IRD for a maximum of 4,000 IRDs. Satellite shall have no liability to ResNet with respect to any increase in the transport fees payable by ResNet to the Incompatible Signal Provider over the amount of the Availability Fees payable by ResNet hereunder." (d) Section 3 of the Signal Availability Agreement shall be amended to add the following provision: "Satellite will sell to ResNet the integrated receiver-decoders ("IRDs") (limited to no more than 4,000 IRDs), low-noise block converters and other equipment specified on EXHIBIT A hereto (the "Equipment"). The price payable by ResNet for the Equipment shall equal Satellite's actual cost therefor. Payments will be made by ResNet in cash within 30 days after shipment by Satellite (which shipment shall be at Satellite's expense, but at ResNet's risk of loss) and receipt of Satellite's invoice specifying the purchase price and applicable sales taxes. Late payments shall bear interest at the rate of 1.5% per month (or the highest amount permitted by law, if lower). The Equipment sold by Satellite may be new from the manufacturer or may be previously authorized. Equipment consisting of previously authorized IRDs will be reconditioned in accordance with the 4 standards set forth on EXHIBIT B hereto. For a period of 12 months from the date of delivery, Satellite or its authorized service representatives will repair or replace (at its option) the Equipment free of charge in the event of a defect in materials or workmanship. ResNet shall bear the cost of shipment to the repair location designated by Satellite and Satellite shall bear the cost of shipment of replacement/repaired Equipment to the designated ResNet location. The foregoing warranty does not apply to any appearance items of the Equipment that do not adversely affect the performance of the Equipment. The warranty will not apply if the Equipment is damaged as a result of (i) improper modification, alteration, maintenance, repair, connection or disconnection of the Equipment by anyone other than Satellite's authorized service representatives; (ii) improper use of the Equipment; (iii) conditions outside the control of Satellite; or (iv) accident, abuse or neglect. SATELLITE SHALL NOT BE LIABLE FOR INCIDENTAL OR CONSEQUENTIAL DAMAGES RESULTING FROM THE USE OF THE EQUIPMENT OR ARISING OUT OF ANY BREACH OF THIS WARRANTY. SATELLITE EXCLUDES AND DISCLAIMS ANY AND ALL OTHER EXPRESS OR IMPLIED WARRANTIES, INCLUDING THE WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE." IN WITNESS WHEREOF, the Assignor, Assignee and PRIMESTAR have caused this Agreement to be signed as of the Closing Date. ASSIGNOR: RESNET COMMUNICATIONS, LLC By: ResNet Communications, Inc., as Managing Member By: /s/ Jeffrey T. Weisner --------------------------------- Its: Vice President, Finance --------------------------------- ASSIGNEE: GLOBAL INTERACTIVE COMMUNICATIONS CORPORATION By: /s/ Carl Koenig --------------------------------------------- Its: Vice President, Secretary & General Counsel --------------------------------------------- CONSENTED TO AND AGREED: PRIMESTAR MDU, INC. By: /s/ William D. Myers ----------------------------------- Its: Vice President, Finance ----------------------------------- 5 EX-10.28 4 EXHIBIT 10.28 Exhibit 10.27 [Execution Copy] - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- $150,000,000 SECOND AMENDED AND RESTATED CREDIT AGREEMENT Dated as of February 25, 1999 among LODGENET ENTERTAINMENT CORPORATION, as Borrower, NATIONAL WESTMINSTER BANK PLC, as Administrative Agent, BANKBOSTON, N.A. and MORGAN STANLEY SENIOR FUNDING, INC., as Syndication Agents and THE LENDERS NAMED HEREIN - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Arranged By GLEACHER NATWEST INC., BANCBOSTON ROBERTSON STEPHENS INC. and MORGAN STANLEY DEAN WITTER TABLE OF CONTENTS
PAGE ARTICLE 1. DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE 2. THE CREDITS. . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Section 2.1 Amounts and Terms of Commitments. . . . . . . . . . . . . 23 (a) The Term Credit . . . . . . . . . . . . . . . . . . . . . 23 (b) The Revolving Credit. . . . . . . . . . . . . . . . . . . 23 Section 2.2 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Section 2.3 Procedure for Borrowing . . . . . . . . . . . . . . . . . 23 Section 2.4 Conversion and Continuation Elections . . . . . . . . . . 25 Section 2.5 Change in Aggregate Revolving Commitment. . . . . . . . . 26 Section 2.6 Optional Prepayments. . . . . . . . . . . . . . . . . . . 27 Section 2.7 Mandatory Prepayments of Loans; Mandatory Commitment Reductions . . . . . . . . . . . . . . . . . . 27 (a) Asset Dispositions; Events of Loss. . . . . . . . . . . . 27 (b) Excess Cash Flow. . . . . . . . . . . . . . . . . . . . . 27 (c) General . . . . . . . . . . . . . . . . . . . . . . . . . 27 (d) Reduction of Commitment . . . . . . . . . . . . . . . . . 28 (e) Mandatory Prepayment Notice . . . . . . . . . . . . . . . 28 (f) Letters of Credit . . . . . . . . . . . . . . . . . . . . 28 Section 2.8 Repayment . . . . . . . . . . . . . . . . . . . . . . . . 28 (a) The Term Credit . . . . . . . . . . . . . . . . . . . . . 28 (b) The Revolving Credit. . . . . . . . . . . . . . . . . . . 29 Section 2.9 Interest. . . . . . . . . . . . . . . . . . . . . . . . . 29 Section 2.10 Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . 30 (a) Arranger Fees . . . . . . . . . . . . . . . . . . . . . . 30 (b) Commitment Fees . . . . . . . . . . . . . . . . . . . . . 31 (c) Agency Fee. . . . . . . . . . . . . . . . . . . . . . . . 31 (d) L/C Fees. . . . . . . . . . . . . . . . . . . . . . . . . 31 Section 2.11 Computation of Fees and Interest. . . . . . . . . . . . . 31 Section 2.12 Payments by the Borrower. . . . . . . . . . . . . . . . . 32 Section 2.13 Payments by the Lenders to the Administrative Agent . . . 33 Section 2.14 Sharing of Payments, Etc. . . . . . . . . . . . . . . . . 33 Section 2.15 Security and Guaranties . . . . . . . . . . . . . . . . . 34 Section 2.16 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Section 2.17 Illegality. . . . . . . . . . . . . . . . . . . . . . . . 37 Section 2.18 Increased Costs and Reduction of Return . . . . . . . . . 38 Section 2.19 Funding Losses. . . . . . . . . . . . . . . . . . . . . . 38 Section 2.20 Inability to Determine Rates. . . . . . . . . . . . . . . 39 Section 2.21 Certificates of Lenders . . . . . . . . . . . . . . . . . 39 Section 2.22 Survival. . . . . . . . . . . . . . . . . . . . . . . . . 39 i Section 2.23 Letters of Credit . . . . . . . . . . . . . . . . . . . . 39 ARTICLE 3. REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . 45 Section 3.1 Organization. . . . . . . . . . . . . . . . . . . . . . . 45 Section 3.2 Power, Authority, Consents. . . . . . . . . . . . . . . . 46 Section 3.3 No Violation of Law or Agreements . . . . . . . . . . . . 46 Section 3.4 Due Execution, Validity, Enforceability . . . . . . . . . 47 Section 3.5 Properties, Liens . . . . . . . . . . . . . . . . . . . . 47 Section 3.6 Litigation. . . . . . . . . . . . . . . . . . . . . . . . 47 Section 3.7 No Defaults, Compliance With Laws . . . . . . . . . . . . 47 Section 3.8 Burdensome Documents. . . . . . . . . . . . . . . . . . . 48 Section 3.9 Financial Statements; Projections . . . . . . . . . . . . 48 Section 3.10 Tax Returns . . . . . . . . . . . . . . . . . . . . . . . 48 Section 3.11 Intellectual Property . . . . . . . . . . . . . . . . . . 49 Section 3.12 Regulation U. . . . . . . . . . . . . . . . . . . . . . . 49 Section 3.13 Name Changes, Mergers, Acquisitions . . . . . . . . . . . 49 Section 3.14 Full Disclosure . . . . . . . . . . . . . . . . . . . . . 49 Section 3.15 Licenses and Approvals. . . . . . . . . . . . . . . . . . 49 Section 3.16 Labor Disputes; Collective Bargaining Agreements; Employee Grievances . . . . . . . . . . . . . . . . . . . 50 Section 3.17 Condition of Assets . . . . . . . . . . . . . . . . . . . 50 Section 3.18 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . 50 Section 3.19 Material Agreements . . . . . . . . . . . . . . . . . . . 50 Section 3.20 Collateral Documents. . . . . . . . . . . . . . . . . . . 51 Section 3.21 Solvency. . . . . . . . . . . . . . . . . . . . . . . . . 51 Section 3.22 Year 2000 . . . . . . . . . . . . . . . . . . . . . . . . 51 ARTICLE 4. CONDITIONS TO THE LOANS. . . . . . . . . . . . . . . . . . . . . 52 Section 4.1 Conditions to Initial Loans . . . . . . . . . . . . . . . 52 Section 4.2 Conditions to Subsequent Loans and L/Cs . . . . . . . . . 54 ARTICLE 5. DELIVERY OF FINANCIAL REPORTS AND OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . 55 Section 5.1 Annual Financial Statements . . . . . . . . . . . . . . . 55 Section 5.2 Quarterly Financial Statements. . . . . . . . . . . . . . 55 Section 5.3 Projections . . . . . . . . . . . . . . . . . . . . . . . 56 Section 5.4 Compliance Information. . . . . . . . . . . . . . . . . . 56 Section 5.5 No Default Certificate. . . . . . . . . . . . . . . . . . 56 Section 5.6 Accountants' Reports. . . . . . . . . . . . . . . . . . . 56 Section 5.7 Copies of Documents . . . . . . . . . . . . . . . . . . . 56 Section 5.8 Notices of Defaults . . . . . . . . . . . . . . . . . . . 57 Section 5.9 ERISA Notices and Requests. . . . . . . . . . . . . . . . 57 Section 5.10 Additional Information; Guest-Pay Rooms . . . . . . . . . 58 ii ARTICLE 6. AFFIRMATIVE COVENANTS. . . . . . . . . . . . . . . . . . . . . . 58 Section 6.1 Books and Records . . . . . . . . . . . . . . . . . . . . 58 Section 6.2 Inspections and Audits. . . . . . . . . . . . . . . . . . 59 Section 6.3 Maintenance and Repairs . . . . . . . . . . . . . . . . . 59 Section 6.4 Continuance of Business . . . . . . . . . . . . . . . . . 59 Section 6.5 Copies of Corporate Documents . . . . . . . . . . . . . . 59 Section 6.6 Perform Obligations . . . . . . . . . . . . . . . . . . . 59 Section 6.7 Notice of Litigation. . . . . . . . . . . . . . . . . . . 60 Section 6.8 Insurance . . . . . . . . . . . . . . . . . . . . . . . . 60 Section 6.9 Financial Covenants . . . . . . . . . . . . . . . . . . . 60 Section 6.10 Notice of Certain Events. . . . . . . . . . . . . . . . . 62 Section 6.11 Comply with ERISA . . . . . . . . . . . . . . . . . . . . 63 Section 6.12 Environmental Compliance. . . . . . . . . . . . . . . . . 63 Section 6.13 Further Assurances. . . . . . . . . . . . . . . . . . . . 63 ARTICLE 7. NEGATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . 65 Section 7.1 Indebtedness. . . . . . . . . . . . . . . . . . . . . . . 65 Section 7.2 Liens . . . . . . . . . . . . . . . . . . . . . . . . . . 66 Section 7.3 Guaranties. . . . . . . . . . . . . . . . . . . . . . . . 67 Section 7.4 Mergers, Acquisitions . . . . . . . . . . . . . . . . . . 67 Section 7.5 Redemptions; Distributions. . . . . . . . . . . . . . . . 67 Section 7.6 Stock Issuances . . . . . . . . . . . . . . . . . . . . . 68 Section 7.7 Changes in Business; Asset Dispositions . . . . . . . . . 69 Section 7.8 Prepayments and Repayments of Indebtedness. . . . . . . . 69 Section 7.9 Investments . . . . . . . . . . . . . . . . . . . . . . . 69 Section 7.10 Fiscal Year . . . . . . . . . . . . . . . . . . . . . . . 71 Section 7.11 ERISA Obligations . . . . . . . . . . . . . . . . . . . . 72 Section 7.12 Amendments of Documents . . . . . . . . . . . . . . . . . 73 Section 7.13 Capital Expenditures. . . . . . . . . . . . . . . . . . . 73 Section 7.14 Rental Obligations. . . . . . . . . . . . . . . . . . . . 74 Section 7.15 Management Fees . . . . . . . . . . . . . . . . . . . . . 74 Section 7.16 Transactions with Affiliates. . . . . . . . . . . . . . . 74 Section 7.17 Hazardous Material. . . . . . . . . . . . . . . . . . . . 74 ARTICLE 8. EVENTS OF DEFAULT. . . . . . . . . . . . . . . . . . . . . . . . 75 Section 8.1 Event of Default. . . . . . . . . . . . . . . . . . . . . 75 (a) Payments. . . . . . . . . . . . . . . . . . . . . . . . . 75 (b) Certain Covenants . . . . . . . . . . . . . . . . . . . . 75 (c) Other Covenants . . . . . . . . . . . . . . . . . . . . . 75 (d) Other Defaults. . . . . . . . . . . . . . . . . . . . . . 75 (e) Representations and Warranties. . . . . . . . . . . . . . 76 (f) Bankruptcy. . . . . . . . . . . . . . . . . . . . . . . . 76 (g) Judgments . . . . . . . . . . . . . . . . . . . . . . . . 76 (h) ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . 77 iii (i) Change of Control . . . . . . . . . . . . . . . . . . . . 77 (j) Collateral. . . . . . . . . . . . . . . . . . . . . . . . 77 Section 8.2 Remedies. . . . . . . . . . . . . . . . . . . . . . . . . 77 Section 8.3 Rights Not Exclusive. . . . . . . . . . . . . . . . . . . 78 Section 8.4 Right of Administrative Agent to Use and Operate Collateral; Consent to Appointment of Receiver. . . . . . 78 ARTICLE 9. THE ADMINISTRATIVE AGENT . . . . . . . . . . . . . . . . . . . . 79 Section 9.1 Appointment, Powers and Immunities. . . . . . . . . . . . 79 Section 9.2 Reliance by Administrative Agent. . . . . . . . . . . . . 80 Section 9.3 Events of Default . . . . . . . . . . . . . . . . . . . . 80 Section 9.4 Rights as a Lender. . . . . . . . . . . . . . . . . . . . 80 Section 9.5 Indemnification . . . . . . . . . . . . . . . . . . . . . 81 Section 9.6 Non-Reliance on Administrative Agent and other Lenders. . 81 Section 9.7 Failure to Act. . . . . . . . . . . . . . . . . . . . . . 81 Section 9.8 Resignation or Removal of Administrative Agent. . . . . . 82 Section 9.9 Sharing of Payments . . . . . . . . . . . . . . . . . . . 82 Section 9.10 Collateral Matters. . . . . . . . . . . . . . . . . . . . 83 Section 9.11 Syndication Agents. . . . . . . . . . . . . . . . . . . . 84 ARTICLE 10. MISCELLANEOUS PROVISIONS. . . . . . . . . . . . . . . . . . . . 84 Section 10.1 Fees and Expenses; Indemnity. . . . . . . . . . . . . . . 84 Section 10.2 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . 85 Section 10.3 Payments. . . . . . . . . . . . . . . . . . . . . . . . . 85 Section 10.4 Survival of Agreements and Representations; Construction. . . . . . . . . . . . . . . . . . . . . . . 86 Section 10.5 Lien on and Set-off of Deposits . . . . . . . . . . . . . 86 Section 10.6 Amendments and Waivers; Entire Agreement. . . . . . . . . 86 Section 10.7 Remedies Cumulative; Counterclaims. . . . . . . . . . . . 87 Section 10.8 Additional Actions. . . . . . . . . . . . . . . . . . . . 87 Section 10.9 Notices . . . . . . . . . . . . . . . . . . . . . . . . . 88 Section 10.10 Counterparts. . . . . . . . . . . . . . . . . . . . . . . 89 Section 10.11 Severability. . . . . . . . . . . . . . . . . . . . . . . 89 Section 10.12 Successors and Assigns. . . . . . . . . . . . . . . . . . 89 Section 10.13 GOVERNING LAW; CONSENT TO JURISDICTION; WAIVER OF TRIAL BY JURY . . . . . . . . . . . . . . . . . 91 ARTICLE 11. INCREASES IN COMMITMENTS; CHANGES IN LENDERS . . . . . . . . . . 92 Section 11.1 Resignation of Lenders. . . . . . . . . . . . . . . . . . 92 Section 11.2 Addition of New Lenders . . . . . . . . . . . . . . . . . 92 Section 11.3 No Reliance by New Lenders. . . . . . . . . . . . . . . . 92 Section 11.4 New Notes . . . . . . . . . . . . . . . . . . . . . . . . 93 Section 11.5 Adjustment of Loan Amounts. . . . . . . . . . . . . . . . 93 iv SCHEDULES AND EXHIBITS SCHEDULES I Term and Revolving Commitments II Amortization of Term Loans 3.1 Organization and Capitalization 3.5 Properties 3.11 Intellectual Property 3.19 Material Agreements EXHIBITS A Form of Term Note B Form of Revolving Note C Form of Notice of Borrowing D Form of Notice of Conversion/Continuation E Assignment and Assumption Agreement F Borrower U.S. Legal Opinion
v SECOND AMENDED AND RESTATED CREDIT AGREEMENT This SECOND AMENDED AND RESTATED CREDIT AGREEMENT dated as of February 25, 1999 is among LODGENET ENTERTAINMENT CORPORATION, a Delaware corporation (the "BORROWER"), the Lenders (as defined in Article 1), NATIONAL WESTMINSTER BANK PLC, a United Kingdom public limited company, as administrative agent for the Lenders (in such capacity, the "ADMINISTRATIVE AGENT"), and BANKBOSTON, N.A. and MORGAN STANLEY SENIOR FUNDING, INC., as Syndication Agents. W I T N E S S E T H: WHEREAS, the Borrower, the Administrative Agent and certain of the Lenders are parties to that certain Amended and Restated Credit Agreement dated as of December 19, 1996 (the "EXISTING CREDIT AGREEMENT") pursuant to which certain loans and letter of credit obligations are presently outstanding; WHEREAS, the Borrower has requested the Lenders to amend and restate the Existing Credit Agreement to provide to the Borrower a term loan facility and a revolving credit facility (including a letter of credit subfacility) upon the terms and conditions set forth in this Agreement in order to finance systems upgrades and other capital expenditures and to provide for the ongoing working capital requirements of the Borrower and its Subsidiaries; and WHEREAS, this Agreement confirms and evidences (i) the amendment and restatement hereunder of the indebtedness and other obligations heretofore existing under the Existing Credit Agreement and (ii) the continuation as security for the indebtedness and other obligations under this Agreement and related agreements and instruments, without any release or termination whatsoever, of all liens and security interests previously securing the indebtedness and other obligations under the Existing Credit Agreement and related agreements and instruments. NOW THEREFORE, the parties hereto, intending to be legally bound hereby, amend and restate the Existing Credit Agreement in its entirety on and from the Closing Date and further agree as follows: ARTICLE 1. DEFINITIONS. As used in this Agreement, the following terms shall have the following meanings: AFFILIATE: as to any Person, any other Person that directly or indirectly controls, or is under common control with, or is controlled by, such Person. As used in this definition, "control" (including, with its correlative meanings, "controlled by" and "under common control 1 with") shall mean possession, directly or indirectly, of power to direct or cause the direction of management or policies (whether through ownership of securities or partnership or other ownership interests, by contract or otherwise). AGGREGATE COMMITMENT: at any time, the combined Commitments of the Lenders. AGGREGATE REVOLVING COMMITMENT: at any time, the combined Revolving Commitments of the Lenders, in the initial amount of Seventy-Five Million Dollars ($75,000,000), as such amount may be reduced or increased from time to time pursuant to this Agreement. AGGREGATE TERM COMMITMENT: the combined Term Commitments of the Lenders in the amount of Seventy-Five Million Dollars ($75,000,000). AGREEMENT: this Second Amended and Restated Credit Agreement, as amended or otherwise modified from time to time in accordance with the terms hereof. ANNUAL OPERATING CASH FLOW: as at any date of determination thereof, as to the Borrower and its Restricted Subsidiaries, the Operating Cash Flow for the immediately preceding four consecutive full fiscal quarters for which the Administrative Agent has received financial statements in compliance with Section 5.1 or Section 5.2 hereof (or, if as at any date of determination the Administrative Agent shall not yet have received financial statements delivered in compliance with Section 5.1 or Section 5.2 hereof, then the Operating Cash Flow for such immediately preceding four consecutive full fiscal quarters (or such shorter period) shall be determined by the Administrative Agent in its sole judgment based, in the Administrative Agent's discretion, on such financial information as it shall have requested and received from the Borrower). ANNUALIZED OPERATING CASH FLOW: as at any date of determination thereof, as to the Borrower and its Restricted Subsidiaries, the product of (a) Operating Cash Flow for the immediately preceding two consecutive full fiscal quarters for which the Administrative Agent has received financial statements in compliance with Section 5.1 or Section 5.2 hereof (or, if as at any date of determination the Administrative Agent shall not yet have received financial statements delivered in compliance with Section 5.1 or Section 5.2 hereof, then the Operating Cash Flow for such immediately preceding two consecutive full fiscal quarters shall be determined by the Administrative Agent in its sole judgment based, in the Administrative Agent's discretion, on such financial information as it shall have requested and received from the Borrower), multiplied by (b) two (2). APPLICABLE BASE RATE MARGIN: with respect to Base Rate Loans, one and three-quarters percent (1.75%), subject to adjustment in accordance with subsection 2.9(b) hereof. APPLICABLE EURODOLLAR RATE MARGIN: with respect to Eurodollar Loans, two and three-quarters percent (2.75%), subject to adjustment in accordance with subsection 2.9(b) hereof. 2 APPLICABLE LENDING OFFICE: with respect to each Lender, with respect to each type of Loan, the Lending Office as designated for such type of Loan below its name on the signature pages hereof or such other office of such Lender or of an affiliate of such Lender as such Lender may from time to time specify to the Administrative Agent and the Borrower as the office at which its Loans of such type are to be made and maintained. APPLICATION DOCUMENTS: as defined in subsection 2.23(b) hereof. ASSET DISPOSITION: any conveyance, sale, lease, assignment, transfer or other disposition of property, assets or business of the Borrower or any Subsidiary of the Borrower in a single transaction or a series of related transactions (other than in the ordinary course of business). ASSIGNMENT AND ASSUMPTION AGREEMENT: an agreement in the form of Exhibit E hereto. BASE MAXIMUM CAPITAL EXPENDITURES AMOUNT: as defined in Section 7.13 hereof. BASE RATE: as of any date of determination, the higher of (i) the interest rate established from time to time by NatWest Plc as its "prime rate" at its Payment Office and (ii) the Federal Funds Rate plus one-half percent (0.50%). Notwithstanding the foregoing, the Borrower acknowledges that NatWest Plc may regularly make domestic commercial loans at rates of interest less than the rate of interest referred to in the preceding sentence. Each change in any interest rate provided for herein based upon the "prime rate" resulting from a change in the "prime rate" shall take effect at the time of such change in the "prime rate." BASE RATE LOANS: Loans that earn interest at a rate based upon the Base Rate. BENEFICIARY DOCUMENTS: as defined in subsection 2.23(d) hereof. BORROWING: a borrowing hereunder consisting of Loans of a particular type made to the Borrower on the same day by Lenders having a Commitment to make such Loans pursuant to Article II. BUSINESS DAY: any day other than Saturday, Sunday or any other day on which commercial banks in New York City are authorized or required by law to close and, if the applicable Business Day relates to a Eurodollar Loan, such a day on which dealings are carried on in the London interbank market. CAPITAL EXPENDITURES: for any period, the aggregate amount of all payments made during such period by any Person directly or indirectly for the purpose of acquiring, constructing or maintaining fixed assets, real property or equipment that, in accordance with generally accepted accounting principles, would be added as a debit to the fixed asset account of such Person, including, without limitation, all amounts paid or payable during such period with 3 respect to Capitalized Lease Obligations and interest that are required to be capitalized in accordance with generally accepted accounting principles. CAPITALIZED LEASE: any lease the obligations to pay rent or other amounts under which constitute Capitalized Lease Obligations. CAPITALIZED LEASE OBLIGATIONS: as to any Person, the obligations of such Person to pay rent or other amounts under a lease of (or other agreement conveying the right to use) real and/or personal property which obligations are required to be classified and accounted for as a capital lease on a balance sheet of such Person under generally accepted accounting principles and, for purposes of this Agreement, the amount of such obligations shall be the capitalized amount thereof, determined in accordance with generally accepted accounting principles. CASH: as to any Person, such Person's cash and cash equivalents, as defined in accordance with generally accepted accounting principles consistently applied. CERCLA: the Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C. Section 9601, et seq. CLOSING DATE: the date on which all conditions precedent set forth in Section 4.1 hereof are satisfied or waived. CODE: the Internal Revenue Code of 1986, as it may be amended from time to time. COLLATERAL: the property covered by the Security Agreement, the Patent and Trademark Security Agreement, the Pledge Agreements, the Mortgage and the other Collateral Documents, and any other property, real or personal, tangible or intangible, now existing or hereafter acquired that may at any time be or become subject to a security interest or Lien in favor of the Administrative Agent on behalf of itself, the Lenders and the Issuing Banks, to secure the Obligations. COLLATERAL DOCUMENTS: the Security Agreement, the Patent and Trademark Security Agreement, the Pledge Agreements, the Irrevocable Proxies, the Mortgage and each of the security agreements, mortgages and other instruments and documents executed and delivered pursuant to any of the foregoing or pursuant to Section 6.13 hereof. COMMITMENT: for each Lender, the sum of its Revolving Commitment and its Term Commitment. COMMITMENT FEE: as defined in subsection 2.10(b) hereof. COMMITMENT PERCENTAGE: as to any Lender, (i) with respect to Revolving Loans and L/C Obligations, such Lender's Revolving Commitment divided by the Aggregate Revolving Commitment, and (ii) with respect to a Term Loan, such Lender's Term Commitment divided by the Aggregate Term Commitment. 4 COMPLIANCE CERTIFICATE: a certificate executed by the president, chief financial officer or chief operating officer of the Borrower to the effect that: (i) as of the effective date of the certificate, no Default or Event of Default under this Agreement exists or would exist after giving effect to the action intended to be taken by the Borrower as described in such certificate, including, without limitation, that the covenants set forth in the Senior Note Documents (including Section 4.03 of the Senior 1996 Note Indenture) would not be breached after giving effect to such action, together with a calculation in reasonable detail, and in form satisfactory to the Administrative Agent, of such compliance; (ii) the representations and warranties contained in Article 3 hereof are true and with the same effect as though such representations and warranties were made on the date of such certificate, except to the extent such representations and warranties expressly relate to an earlier date; and (iii) since September 30, 1998, there has not occurred any event or circumstance (including litigation developments) that has resulted or could reasonably be expected to result in a Material Adverse Effect. CONTROLLED GROUP: all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with the Borrower, are treated as a single employer under Section 414(b), 414(c) or 414(m) of the Code and Section 4001(a)(2) of ERISA. DEBT INSTRUMENT: as defined in subsection 8.4(a) hereof. DEFAULTING LENDER: any Lender with respect to which a Lender Default is in effect. DEFAULT: an event which with notice or lapse of time, or both, would constitute an Event of Default. DEFINED CONTRIBUTION PLAN: a plan which is not covered by Title IV of ERISA or subject to the minimum funding standards of Section 412 of the Code and which provides for an individual account for each participant and for benefits based solely on the amount contributed to the participant's account, and any income, expenses, gains and losses, and any forfeitures of accounts of other participants which may be allocated to such participant's account. DISPOSAL: the discharge, deposit, injection, dumping, spilling, leaking or placing of any hazardous materials into or on any land or water so that such hazardous materials or constituent thereof may enter the environment or be emitted into the air or discharged into any waters, including ground waters. DOLLARS and $: lawful money of the United States of America. DOCUMENTARY L/C: any L/C which is issued for the benefit of a supplier of system components and/or inventory for whose account such L/C is issued in order to support payment of the purchase price of such inventory. ELIGIBLE BANK: as defined in subsection 7.9(a)(ii) hereof. 5 EMPLOYEE BENEFIT PLAN: any employee benefit plan within the meaning of Section 3(3) of ERISA which (a) is maintained for employees of Borrower or any of its ERISA Affiliates or (b) has at any time within the preceding six (6) years been maintained for employees of any Loan Party or any current or former ERISA Affiliate. ENVIRONMENTAL LAWS AND REGULATIONS: all federal, state and local environmental, health and safety laws, regulations, ordinances, orders, judgments and decrees applicable to the Borrower or any other Loan Party, or any of their respective assets or properties. ENVIRONMENTAL LIABILITY: any liability under any applicable Environmental Laws and Regulations for any disposal, release or threatened release of a Hazardous Substance pollutant or contaminant as those terms are defined under CERCLA, and any liability which would require a removal, remedial or response action, as those terms are defined under CERCLA, by any person or any environmental regulatory body having jurisdiction over the Borrower or any other Loan Party and/or any liability arising under any Environmental Laws and Regulations for the Borrower's or any other Loan Party's failure to comply with such laws and regulations, including without limitation, the failure to comply with or obtain any applicable environmental permit. ENVIRONMENTAL PROCEEDING: any judgment, action, proceeding or investigation pending before any court or governmental authority, with respect to the Borrower or any other Loan Party and arising under or relating to any Environmental Laws and Regulations. ERISA: the Employee Retirement Income Security Act of 1974, as it may be amended from time to time, and the regulations promulgated thereunder. ERISA AFFILIATE: with respect to any Loan Party, any corporation, person or trade or business which is a member of a group which is under common control with any Loan Party, who together with any Loan Party, is treated as a single employer within the meaning of Sections 414(b) - (o) of the Code and, if applicable, Sections 4001(a)(14) and (b) of ERISA. EURODOLLAR LOANS: Loans the interest on which is determined on the basis of the Eurodollar Rate. EURODOLLAR RATE: for any Eurodollar Loan for any Interest Period therefor, the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) determined by the Administrative Agent to be equal to the sum of: (a) the rate per annum (rounded upwards, if necessary, to the nearest 1/16 of 1%) quoted by the Reference Bank at approximately 10:00 a.m. New York time (or as soon thereafter as practicable) two (2) Business Days prior to the first day of such Interest Period for the offering by the Reference Bank to leading banks in the Eurodollar interbank market of Dollar deposits having a term comparable to such Interest Period and in an amount comparable to the principal amount of the Eurodollar Loan to be made by the Lenders to which such Interest Period relates; divided by (b) 1 minus the Reserve Requirement for such Eurodollar Loan for such Interest Period. The Administrative Agent shall use its best efforts to advise the Borrower of the Eurodollar Rate as soon as practicable after each change in the 6 Eurodollar Rate; PROVIDED, HOWEVER, that the failure of the Administrative Agent to so advise the Borrower on any one or more occasions shall not affect the rights of the Lenders or the Administrative Agent or the obligations of the Borrower hereunder. EVENT OF DEFAULT: as defined in Section 8.1 hereof. EVENT OF LOSS: with respect to any property, (a) any loss, destruction or damage of such property or (b) any condemnation, seizure or taking, by exercise of the power of eminent domain or otherwise, of such property, or confiscation of such property or the requisition of the use of such property. EXCESS CASH FLOW: for any period, an amount equal to, for the Borrower and its Restricted Subsidiaries: (i) the amount of the Operating Cash Flow for such period PLUS Cash actually received by the Borrower from or in respect of Investments or Subsidiaries which are not Restricted Subsidiaries; (ii) MINUS, without duplication, the sum of: (a) all Capital Expenditures incurred during such period, (b) all payments of principal on Permitted Debt (other than payments of principal on the Loans pursuant to subsection 2.7(b) hereof) and interest on Indebtedness for money borrowed incurred in accordance with Section 7.1 hereof that were or are due and payable during such period, (c) any provision for income taxes, (d) Cash used for Investments permitted pursuant to and in accordance with subsection 7.9(e) hereof, and (e) $500,000. EXISTING CREDIT AGREEMENT: as defined in the first recital to this Agreement. FACILITY TERMINATION DATE: the earlier of (i) February 25, 2005 and (ii) the date on which the Aggregate Revolving Commitment is terminated in full or reduced to zero and the Term Loans and all other Obligations have been paid in full. FEDERAL FUNDS RATE: for any day, the weighted average of the rates on overnight federal funds transactions with member banks of the Federal Reserve System arranged by federal funds brokers as published by the Federal Reserve Bank of New York for such day, or if such day is not a Business Day, for the next preceding Business Day (or, if such rate is not so published for any such day, the average rate charged to the Administrative Agent on such day on such transactions as reasonably determined by the Administrative Agent). FEE(S): as defined in subsection 2.10(e) hereof. FINANCIAL STATEMENTS: with respect to the Borrower, (i) its unaudited consolidated Balance Sheet as at September 30, 1998, together with the related unaudited consolidated Statements of Operations and Statements of Cash Flows for the fiscal period then ended, and (ii) its audited consolidated Balance Sheet as at December 31, 1997, together with the related audited consolidated Statements of Operations and Statements of Cash Flows for the fiscal year then ended. 7 GOVERNMENTAL AUTHORITY: any nation or government, any state or other political subdivision thereof, any central bank (or similar monetary or regulatory authority) thereof, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, and any corporation or other entity owned or controlled, through stock or capital ownership or otherwise, by any of the foregoing. GUARANTOR(S): ResNet Inc., LodgeNet Canada, ResNet LLC and any other Subsidiary of the Borrower designated by the Borrower to execute a Subsidiary Guaranty pursuant to subsection 6.13(e) hereof. GUARANTY(IES): (i) the Amended and Restated Guaranty of even date herewith of ResNet Inc. in favor of the Administrative Agent for the benefit of itself, the Lenders and the Issuing Banks, (ii) the Amended and Restated Guaranty of even date herewith of LodgeNet Canada in favor of the Administrative Agent for the benefit of itself, the Lenders and the Issuing Banks, and (iii) the Amended and Restated Guaranty of even date herewith of ResNet LLC in favor of the Administrative Agent for the benefit of itself, the Lenders and the Issuing Banks, as each such Guaranty may be, from time to time, further amended, modified or supplemented. GUEST-PAY ROOMS: at any time of determination, the aggregate number of guest rooms of all lodging, hospital, cruise line and related properties, (i) which have a firm contract with the Borrower or any Subsidiary for the provision of in-room television entertainment and/or information services which are provided to the guests of such property for a charge and (ii) against which the Borrower or such Subsidiary has not, in accordance with its ordinary business practice, chosen to exercise any remedies for non-payment under such contract. HAZARDOUS MATERIALS: any toxic chemical, Hazardous Substances, contaminants or pollutants, medical wastes, infectious wastes, or hazardous wastes. HAZARDOUS SUBSTANCE: as set forth in Section 101(14) of CERCLA or state or local law. HAZARDOUS WASTE: as set forth in the Resource Conservation and Recovery Act, 42 U.S.C. Section 9603(5), and the Environmental Protection Agency's implementing regulations, or state or local law. INDEBTEDNESS: with respect to any Person, without duplication, all: (i) liabilities or obligations, direct and contingent, with respect to money borrowed, including, without limitation (a) contingent liabilities of any kind for which the Borrower or any Subsidiary incurs or becomes responsible for in connection with any Investment made pursuant to subsection 7.9(e) hereof, (b) that portion of Capitalized Lease Obligations of such Person that, in accordance with generally accepted accounting principles, should be classified as a liability on the balance sheet of such Person, (c) the deferred purchase price of assets or services which in accordance with generally accepted accounting principles would be shown on the liability side of the balance sheet of such Person, and (d) all obligations of such Person to pay a specified purchase price for goods or services whether or not delivered or accepted, I.E., take-or-pay and similar obligations; 8 (ii) liabilities or obligations of others for which such Person is directly or indirectly liable, by way of guaranty (whether by direct guaranty, suretyship, discount, endorsement, take-or-pay agreement, agreement to purchase or advance or keep in funds or other agreement having the effect of a guaranty) or otherwise; (iii) liabilities or obligations secured by Liens on any assets of such Person, whether or not such liabilities or obligations shall have been assumed by it; (iv) liabilities or obligations of such Person, direct or contingent, with respect to letters of credit issued for the account of such Person and bankers acceptances created for such Person and (v) net obligations of such Person under any interest rate swap agreement, interest rate cap agreement, interest rate collar agreement, interest rate futures contract, interest rate option contract or any other agreement or arrangement designed to protect such Person against fluctuations in interest rates or exchange rates. INTEREST COVERAGE: as at any date, for the immediately preceding fiscal period, the ratio determined by dividing (a) Annual Operating Cash Flow PLUS Rentals by (b) Interest Expense on all Indebtedness of the Borrower and its Restricted Subsidiaries on a consolidated basis (excluding for this purpose the TCI Convertible Debt) PLUS Rentals PLUS Preferred Stock Dividends. INTEREST EXPENSE: as to any Person as at any date, with respect to any Indebtedness of such Person, the sum of all (a) interest and all amortization of debt discount and expense (including, without limitation, interest that is imputed in accordance with generally accepted accounting principles on Capitalized Lease Obligations that are included in Indebtedness) and (b) commitment fees, commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing and net costs under Interest Rate Contracts, in each case that were due and payable relating to such Indebtedness during the immediately preceding four consecutive full fiscal quarters for which the Administrative Agent has received financial statements in compliance with Sections 5.1 and 5.2 hereof (or, if as at any date of determination the Administrative Agent shall not yet have received financial statements delivered in compliance with Section 5.1 or Section 5.2 hereof, then Interest Expense for such immediately preceding four consecutive full fiscal quarters (or such shorter period) shall be determined by the Administrative Agent in its sole judgment based, in the Administrative Agent's discretion, on such financial information as it shall have requested and received from the Borrower). INTEREST PERIOD: with respect to any Eurodollar Loan, each period commencing on the date such Loan is made or converted from a Loan or Loans of another type, or the last day of the next preceding Interest Period with respect to such Loan, and ending on the same day in the first, second, third or sixth calendar month thereafter (or such longer period which each of the Lenders shall have notified the Administrative Agent is available at any time) as the Borrower may select as provided in Section 2.3 hereof, except that each such Interest Period that commences on the last Business Day of a calendar month (or on any day for which there is no numerically corresponding day in the appropriate subsequent calendar month) shall end on the last Business Day of the appropriate subsequent calendar month; Notwithstanding the foregoing: (i) each Interest Period that would otherwise end on a day that is not a Business Day shall end on the next succeeding Business Day (or, if such next succeeding 9 Business Day falls in the next succeeding calendar month, on the next preceding Business Day); (ii) no Interest Period for any type of Loan shall end later than the Facility Termination Date; and (iii) notwithstanding clause (ii) above, no Interest Period shall have a duration of less than one (1) month. INTEREST RATE CONTRACTS: interest rate swap agreements, interest rate cap agreements, interest rate collar agreements, interest rate insurance or any other agreements or arrangements designed to provide protection against fluctuation in interest rates or exchange rates, in each case, in form and substance reasonably satisfactory to the Administrative Agent and, in each case, with a Lender or such other counterparties satisfactory to the Administrative Agent. INVESTMENT: by any Person, (a) the amount paid or committed to be paid, or the value of property or services contributed or committed to be contributed, by such Person for or in connection with the acquisition by such Person of any stock, bonds, notes, debentures, partnership or other ownership interests or other securities of any other Person; and (b) the amount of any advance, loan or extension of credit by such Person, to any other Person, or guaranty or other similar obligation of such Person with respect to any Indebtedness of such other Person, and (without duplication) any amount committed to be advanced, loaned, or extended by such Person to any other Person, or any amount the payment of which is committed to be assured by a guaranty or similar obligation by such Person for the benefit of, such other Person. IRS: Internal Revenue Service. IRREVOCABLE PROXIES: (i) the Amended and Restated Irrevocable Proxy of even date herewith of the Borrower relating to ResNet Inc. shares, (ii) the Amended and Restated Irrevocable Proxy of even date herewith of the Borrower relating to LodgeNet Canada shares, (iii) the Amended and Restated Irrevocable Proxy of even date herewith of ResNet Inc. relating to its ResNet LLC ownership interest, and (iv) the Amended and Restated Irrevocable Proxy of even date herewith of ResNet LLC relating to the Newco Common Stock, as each such Irrevocable Proxy may be, from time to time, further amended, modified or supplemented. ISSUING BANK(S): NatWest Plc and BankBoston, N.A. and any other Lender or any successor appointed with the consent of the Required Lenders and the Borrower. LATEST BALANCE SHEET: as defined in subsection 3.9(a) hereof. L/C(S): (i) any standby letter of credit or documentary letter of credit issued by the Issuing Banks pursuant to Section 2.23 hereof and (ii) each existing letter of credit issued pursuant to the Existing Credit Agreement outstanding on the date hereof, in each case, as amended, supplemented or modified from time to time. 10 L/C DRAWING AVAILABILITY: as of any date of determination, the sum of the aggregate maximum amount then available to be drawn under all L/Cs but excluding the aggregate amount of any Unreimbursed Drawings then outstanding and excluding that portion of L/Cs for which portion demands for drawings have been made but not yet paid by the Issuing Bank. L/C FEES: as defined in subsection 2.10(d) hereof. L/C ISSUANCE REQUEST: as defined in subsection 2.23(b) hereof. L/C OBLIGATIONS: as of any date of determination, all the existing liabilities (including all L/C Fees) of the Borrower to the Issuing Banks and the Lenders and the Administrative Agent in respect of all L/Cs, whether such liability is contingent or fixed and shall be computed to include the sum of the aggregate maximum amount then available to be drawn under all L/Cs and the aggregate amount of any Unreimbursed Drawings then outstanding. LEASES: leases and subleases (other than Capitalized Leases), licenses for the use of real property, easements, rights-of-entry, grants, and other attachment rights and similar instruments under which the Borrower or its Subsidiaries has the right to use real or personal property or rights of way; PROVIDED, HOWEVER, that "Leases" shall not be deemed to include video service leases and similar agreements utilized by the Borrower or its Subsidiaries in the ordinary course of business for the purpose of obtaining the right to deliver cable television programming and/or other interactive, multimedia entertainment and information services to specific customer properties. LENDER DEFAULT: (i) the refusal (which has not been retracted) of a Lender to make available its portion of any Borrowing or to fund its portion of any unreimbursed payment under Section 2.23 hereof or (ii) a Lender having notified the Administrative Agent and/or the Borrower that it does not intend to comply with its obligations under Section 2.1 or Section 2.23 hereof, in the case of either (i) or (ii) as a result of the appointment of a receiver or conservator with respect to such Lender at the direction or request of any regulatory agency or authority. LICENSES: as defined in Section 3.15 hereof. LIEN: any mortgage, deed of trust, pledge, security interest, encumbrance, lien or charge of any kind (including any agreement to give any of the foregoing), any conditional sale or other title retention agreement, any lease in the nature of any of the foregoing, and the filing of or agreement to give any financing statement under the Uniform Commercial Code of any jurisdiction (excluding precautionary filings by lessors). LOAN(S): an extension of credit by a Lender to the Borrower pursuant to Article 2, and may be a Base Rate Loan or a Eurodollar Loan. Loans of different types made or converted from Loans of other types on the same day (or of the same type but having different Interest Periods) shall be deemed to be separate Loans for all purposes of this Agreement. 11 LOAN DOCUMENTS: this Agreement, the Notes, any Subsidiary Guaranty, the Collateral Documents, the L/C(s), Interest Rate Contracts to which any Lender is a party and all other documents executed and delivered in connection herewith or therewith, including all amendments, modifications and supplements of or to all such documents. LOAN INTEREST(S): as defined in Section 2.14 hereof. LOAN PARTY: the Borrower, each of the Guarantors and any other Person (other than the Lenders, the Issuing Banks and the Administrative Agent) which now or hereafter executes and delivers to any Lender or the Administrative Agent any Loan Document. LODGENET CANADA: LodgeNet Entertainment (Canada) Corporation, a Canadian corporation and a Wholly-Owned Subsidiary of the Borrower. MANAGEMENT FEES: for any period, all fees, emoluments or similar compensation paid or incurred by any Person (other than any such fees, emoluments or similar compensation paid to or incurred and payable to the Borrower or any of its Subsidiaries) in respect of services rendered in connection with the management or supervision of the management of such Person, or any construction, operation or maintenance associated with the business of the Borrower or its Subsidiaries, other than salaries, bonuses and other compensation paid to any full-time executive employee in respect of such full-time employment. MANDATORY L/C BORROWING: as defined in subsection 2.23(c) hereof. MATERIAL ADVERSE EFFECT: (a) a materially adverse effect on the business, properties, assets, operations, condition (financial or otherwise) or prospects of the Borrower and its Subsidiaries taken as a whole, (b) material impairment of the ability of the Borrower or any Loan Party to perform any of its obligations under any Loan Document to which it is a party, or (c) material impairment of the rights or benefits available to the Lenders, the Issuing Banks or the Administrative Agent under any Loan Document. MAXIMUM L/C AMOUNT: the sum of Twelve Million Dollars ($12,000,000) as the same shall and/or may be reduced pursuant to Sections 2.5 and 2.7 hereof. MORTGAGE: that certain mortgage of even date herewith relating to the Borrower's headquarters property located at 3900 West Innovation Street, Sioux Falls, South Dakota 57107, by the Borrower for the benefit of the Administrative Agent, on behalf of itself, the Lenders and the Issuing Banks, as the same may be, from time to time, amended, modified or supplemented. MULTIEMPLOYER PLAN: a "multiemployer plan" as defined in Section 4001(a)(3) or ERISA to which any Loan Party or any ERISA Affiliate is making, or is accruing an obligation to make, contributions or has made, or been obligated to make, contributions within the preceding six (6) years. 12 NATWEST PLC: National Westminster Bank Plc, New York branch. NET L/C OBLIGATIONS: the L/C Obligations exclusive of Unreimbursed Drawings which have been repaid with the proceeds of and simultaneously with the incurrence of Loans. NET PROCEEDS: proceeds in Cash, as and when received by the Person making an Asset Disposition, net of (a) the direct costs relating to such Asset Disposition excluding amounts payable to the Borrower or any Affiliate of the Borrower, (b) sale, use or other transaction taxes paid or payable as a result thereof, and (c) amounts required to be applied to repay principal, interest and prepayment premiums and penalties on Indebtedness incurred to acquire the asset which is the subject of such Asset Disposition and secured by a purchase money lien on such asset. "Net Proceeds" shall also include proceeds paid on account of any Event of Loss net of (i) all of the costs and expenses reasonably incurred in connection with the collection of such proceeds, awards or other payments and (ii) any amounts retained by or paid to parties having superior rights to such proceeds, awards or other payments. NEWCO INVESTMENTS: the following investments in Global Interactive Technologies Corporation, a Delaware corporation ("Newco"): (i) 1,750 shares of common stock, par value $.01 per share, of Newco representing approximately 35% of Newco's outstanding capital stock (the "Newco Common Stock"), (ii) secured promissory notes of Newco and Global Interactive Communications Corporation, a subsidiary of Newco ("GICC"), in the aggregate principal amount of $1,500,000 (the "Newco Term Notes") issued to ResNet Inc., (iii) secured promissory note of GICC in the principal amount of up to $3,000,000 (the "Newco Junior Term Note") issued to ResNet Inc., (iv) promissory note of GICC in the principal amount of up to $3,000,000 (the "Newco Capital Advance Note") issued to ResNet Inc., and (v) capital lease obligations of GICC, as lessee, to ResNet Inc., as lessor, in the aggregate amount of approximately $5,000,000 pursuant to a capital lease agreement between ResNet Inc. and GICC (the "Newco Capital Lease"). NON-DEFAULTING LENDER: each Lender other than a Defaulting Lender. NOTE: a Revolving Note or a Term Note; NOTES collectively means the Revolving Notes and the Term Notes. NOTICE OF BORROWING: a notice given by the Borrower to the Administrative Agent pursuant to Section 2.3 in substantially the form of EXHIBIT C. NOTICE OF CONVERSION/CONTINUATION: a notice given by the Borrower to the Administrative Agent pursuant to Section 2.4 in substantially the form of EXHIBIT D. OBLIGATIONS: collectively, all of the Loans, Indebtedness, liabilities and obligations of the Borrower to the Lenders, the Issuing Banks and the Administrative Agent arising out of this Agreement and the Loan Documents, whether now existing or hereafter arising, whether or not currently contemplated, including, without limitation, the L/C Obligations 13 and, to the extent provided by any Lender or its Affiliate, obligations under any Interest Rate Contract or any currency hedging agreement. OPERATING CASH FLOW: for any period, the consolidated net income of any Person during such period (a) PLUS, but only to the extent such items shall have been deducted in determining such net income, the sum of (i) all interest, fees and costs paid or accrued during such period on Indebtedness, including, without limitation, interest that is imputed in accordance with generally accepted accounting principles on Capitalized Lease Obligations that are included in Indebtedness, (ii) depreciation and amortization of assets, (iii) any income tax provision and (iv) extraordinary non-operating losses (including any non-recurring charges incurred in connection with the transactions associated with the initial Newco Investments) and (b) MINUS the sum of (i) extraordinary gains, (ii) income derived from other than the consolidated operations of such Person and (iii) to the extent not already deducted in determining such net income, all corporate overhead expenses of such Person; all of the above items exclusive of minority interests (except to the extent of Cash in respect thereof actually received by the Borrower in such period); as to all of the foregoing, as determined in accordance with generally accepted accounting principles consistently applied; PROVIDED, THAT, notwithstanding any of the foregoing, except to the extent of Cash actually received on an unconditional basis, any direct or indirect Subsidiary the distribution of whose earnings and proceeds the Borrower does not maintain the ability to direct in the ordinary course of business shall not be considered for purposes of calculating Operating Cash Flow; and, PROVIDED FURTHER, that, notwithstanding any of the foregoing, regardless of the receipt of any proceeds or any other distributions therefrom, there shall not be considered in calculating Operating Cash Flow any Subsidiary which is not a Guarantor hereunder. OTHER TAXES: as defined in subsection 2.16(b) hereof. PATENT AND TRADEMARK SECURITY AGREEMENT: the Amended and Restated Patent and Trademark Security Agreement of even date herewith among the Borrower, ResNet Inc. and the Administrative Agent, on behalf of itself, the Lenders and the Issuing Banks, as the same may be, from time to time, further amended, modified or supplemented. PAYMENT OFFICE: the principal U.S. office of NatWest Plc presently located at 65 East 55th Street, New York, New York 10022. PBGC: Pension Benefit Guaranty Corporation. PENSION PLAN: at any time an employee pension benefit plan that is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code and is maintained either: (i) by the Borrower or any ERISA Affiliate for employees of the Borrower, or by the Borrower for any ERISA Affiliate, or (ii) pursuant to a collective bargaining agreement or any other arrangement under which more than one employer makes contributions and to which the Borrower or any ERISA Affiliate is then making or accruing an obligation to make contributions or has within the preceding five (5) plan years made contributions. 14 PERMITTED DEBT: Indebtedness (i) which is not secured by any Lien, (ii) which contains terms, covenants and conditions satisfactory to the Administrative Agent and the Required Lenders, and (iii) as to its incurrence, no Default or Event of Default has occurred and is continuing either immediately before or after giving effect thereto. PERMITTED INTERCOMPANY DEBT: Indebtedness of ResNet Inc. for money borrowed from the Borrower (i) which is evidenced by a promissory note of ResNet Inc. to the Borrower, (ii) which represents senior, unsubordinated Indebtedness of ResNet Inc., and (iii) the repayment of which is not restricted in any manner by any covenant, agreement or other restriction binding upon or affecting ResNet Inc. PERMITTED LIENS: as to any Person: (i) pledges or deposits by such Person under workers' compensation laws, unemployment insurance laws, social security laws, or similar legislation, or good faith deposits in connection with bids, tenders, contracts (other than for the payment of Indebtedness of such Person), or leases to which such Person is a party, or deposits to secure public or statutory obligations of such Person or deposits of Cash or United States Government Bonds to secure surety, appeal, performance or other similar bonds to which such Person is a party, or deposits as security for contested taxes or import duties or for the payment of rent; (ii) Liens imposed by law, such as carriers', landlords', warehousemen's, materialmen's and mechanics' liens, or Liens arising out of judgments or awards against such Person with respect to which such Person at the time shall currently be prosecuting an appeal or proceedings for review; (iii) Liens for taxes not yet subject to penalties for non-payment and Liens for taxes the payment of which is being contested as permitted by Section 6.6 hereof; (iv) minor survey exceptions, minor encumbrances, easements or reservations of, or rights of, others for rights of way, highways and railroad crossings, sewers, electric lines, telegraph and telephone lines and other similar purposes, or zoning or other restrictions as to the use of real properties; (v) Liens incidental to the conduct of the business of such Person or to the ownership of such Person's property that were not incurred in connection with Indebtedness of such Person, all of which Liens referred to in the preceding clause (v) do not in the aggregate materially detract from the value of the properties to which they relate or materially impair their use in the operation of the business taken as a whole of such Person, and as to all the foregoing only to the extent arising and continuing in the ordinary course of business; and (vi) Liens created pursuant to the Loan Documents. PERSON: an individual, a corporation, a limited liability company, a partnership, a joint venture, a trust or unincorporated organization, a joint stock company or other similar organization, a government or any political subdivision thereof, a court, or any other legal entity, whether acting in an individual, fiduciary or other capacity. PLAN: at any time an employee pension benefit plan that is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code and is either: (i) maintained by the Borrower or any member of the Controlled Group for employees of the Borrower, or by the Borrower for any other member of such Controlled Group, or (ii) maintained pursuant to a collective bargaining agreement or any other arrangement under which more than one employer makes contributions and to which the Borrower or any member of the Controlled 15 Group is then making or accruing an obligation to make contributions or has within the preceding five plan years made contributions. PLEDGE AGREEMENT(S): (i) the Amended and Restated Pledge Agreement of even date herewith between the Borrower and the Administrative Agent, on behalf of itself, the Lenders and the Issuing Banks, pledging all capital stock of the Borrower's Subsidiaries owned by the Borrower and all intercompany notes owing to or held by the Borrower, (ii) the Amended and Restated Pledge Agreement of even date herewith between ResNet Inc. and the Administrative Agent, on behalf of itself, the Lenders and the Issuing Banks, pledging all the capital stock of ResNet Inc.'s Subsidiaries and Affiliates and all notes of such Persons owing to or held by ResNet Inc., and (iii) the Amended and Restated Pledge Agreement of even date herewith between ResNet LLC and the Administrative Agent, on behalf of itself, the Lenders and the Issuing Banks, pledging the Newco Common Stock, as each such Pledge Agreement may be, from time to time, further amended, modified or supplemented. POST-DEFAULT RATE: (i) in respect of any Loans a rate per annum equal to: (x) if such Loans are Base Rate Loans, two percent (2%) above the Base Rate as in effect from time to time plus the Applicable Base Rate Margin (but in no event less than the interest rate in effect on the due date), or (y) if such Loans are Eurodollar Loans, two percent (2%) above the rate of interest in effect thereon at the time of the Event of Default that resulted in the Post-Default Rate being instituted until the end of the then current Interest Period therefor and, thereafter, two percent (2%) above the Base Rate as in effect from time to time plus the Applicable Base Rate Margin (but in no event less than the interest rate in effect on the due date); and (ii) in respect of other amounts payable by the Borrower hereunder (including interest to the extent permitted by law) not paid when due (whether at stated maturity, by acceleration or otherwise), a rate per annum during the period commencing on the due date until such other amounts are paid in full equal to two percent (2%) above the Base Rate as in effect from time to time plus the Applicable Base Rate Margin (but in no event less than the interest rate in effect on the due date). PREFERRED STOCK DIVIDENDS: as defined in subsection 7.5(b) hereof for payments made during the immediately preceding four consecutive full fiscal quarters for which the Administrative Agent has received financial statements in compliance with Sections 5.1 and 5.2 hereof (or, if as at any date of determination the Administrative Agent shall not yet have received financial statements delivered in compliance with Section 5.1 or Section 5.2 hereof, then Preferred Stock Dividends for such immediately preceding four consecutive full fiscal quarters (or such shorter period) shall be determined by the Administrative Agent in its sole judgment based, in the Administrative Agent's discretion, on such financial information as it shall have requested and received from the Borrower). PROJECTIONS: with respect to the Borrower, its forecasted consolidated Balance Sheet and related forecasted consolidated Statements of Operations and Statements of Cash Flows for the period from the date hereof through December 31, 2005, as updated on an annual basis pursuant hereto, all prepared on a basis consistent with the Financial Statements, together with appropriate supporting details and a statement of underlying assumptions. 16 PURCHASE MONEY SECURITY INTEREST: as defined in subsection 7.2(b) hereof. QUARTERLY DATES: the last day of each of March, June, September and December, the first of which shall be the first such day after the date of this Agreement, PROVIDED THAT, if any such date is not a Business Day, the relevant Quarterly Date shall be the next succeeding Business Day (or, if the next succeeding Business Day falls in the next succeeding calendar month, then on the next preceding Business Day). REFERENCE BANK: (i) for purposes of determining the Eurodollar Rate, the non-United States office or offices or international banking facility or facilities of NatWest Plc as NatWest Plc may from time to time select and (ii) for all other purposes hereunder, NatWest Plc's Payment Office. REGULATION D: Regulation D of the Board of Governors of the Federal Reserve System, as the same may be amended or supplemented from time to time. REGULATORY CHANGE: as to any Lender, any change after the date of this Agreement in United States federal, state or foreign laws or regulations (including Regulation D and the laws or regulations that designate any assessment rate relating to certificates of deposit or otherwise) or the adoption or making after such date of any interpretations, directives or requests applying to a class of banks, including such Lender, of or under any United States federal, state or foreign laws or regulations (whether or not having the force of law) by any court or Governmental Authority charged with the interpretation or administration thereof. RELEASE: as set forth in Section 101(22) of CERCLA or state or local law. RENTALS: for the Borrower and its Restricted Subsidiaries on a consolidated basis, as of the date of any determination thereof, all fixed payments (including as such all payments which the lessee is obligated to make to the lessors on termination of the lease or surrender of the property) payable by a Person, as lessee or sublessee under a lease of real or personal property, during the immediately preceding four consecutive full fiscal quarters for which the Administrative Agent has received financial statements in compliance with Sections 5.1 and 5.2 hereof (or, if as at any date of determination the Administrative Agent shall not yet have received financial statements delivered in compliance with Section 5.1 or Section 5.2 hereof, then Rentals for such immediately preceding four consecutive full fiscal quarters (or such shorter period) shall be determined by the Administrative Agent in its sole judgment based, in the Administrative Agent's discretion, on such financial information as it shall have requested and received from the Borrower), but shall be exclusive of any amounts required to be paid by a Person (whether or not designated as rents or additional rents) on account of maintenance, repairs, insurance, taxes and similar charges. 17 REQUIRED LENDERS: (i) at any time while no Loans are outstanding hereunder, Non-Defaulting Lenders having more than 50% of the Aggregate Commitment, and (ii) at any time while Loans are outstanding hereunder, Non-Defaulting Lenders holding more than 50% of the then aggregate unpaid principal amount of such Loans and the unused Aggregate Revolving Commitment. REQUIREMENT OF LAW: as to any Person, any law (statutory or common), treaty, rule or regulation or determination of an arbitrator or of a Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject. RESERVE REQUIREMENT: for any Eurodollar Loans for any quarterly period (or, as the case may be, shorter period) as to which interest is payable hereunder, the maximum rate at which reserves (including any marginal, supplemental or emergency reserves) are required to be maintained during such period under Regulation D by member banks of the Federal Reserve System in New York City with deposits exceeding One Billion Dollars against "Eurocurrency liabilities" (as such term is used in Regulation D). Without limiting the effect of the foregoing, the Reserve Requirement shall reflect any other reserves required to be maintained by such member banks by reason of any Regulatory Change against: (i) any category of liabilities that includes deposits by references to which the Eurodollar Rate for Eurodollar Loans is to be determined, or (ii) any category of extensions of credit or other assets that include Eurodollar Loans. RESNET INC.: ResNet Communications, Inc., a Delaware corporation and a Subsidiary of the Borrower. RESNET LLC: ResNet Communications, LLC, a Delaware limited liability company and a Subsidiary of the Borrower. RESTRICTED PAYMENTS: (i) any dividend or other distribution, direct or indirect, on account of any shares of any class of stock of the Borrower now or hereafter outstanding, except a dividend or distribution payable solely in shares of stock of the Borrower which are not shares of preferred stock; (ii) any redemption, retirement, purchase or other acquisition, direct or indirect, of any shares of any class of stock of the Borrower in respect of such shares now or hereafter outstanding, or of any warrants, rights or options to acquire any such shares, except to the extent that the consideration therefor consists of shares of stock of the Borrower; (iii) any other distributions whatsoever, or any loans or advances, to any holder of shares of any class of stock of the Borrower now or hereafter outstanding, or of any warrants, rights or options to acquire any such shares; and (iv) any fees or expenses paid to any shareholder or Affiliate (other than directors, officers and full-time employees) of the Borrower for management services provided to the Borrower or any Subsidiary. RESTRICTED SUBSIDIARY: each Subsidiary of the Borrower which is or becomes a Guarantor hereunder. 18 REVOLVING COMMITMENT: with respect to each Lender, has the meaning specified in subsection 2.1(b) hereof. REVOLVING LOAN: as defined in subsection 2.1(b) hereof. REVOLVING NOTE: a promissory note of the Borrower payable to the order of a Lender, in substantially the form of Exhibit B, evidencing the aggregate Indebtedness of the Borrower to such Lender resulting from Revolving Loan(s) made by such Lender. REVOLVING TERMINATION DATE: the earlier to occur of: (a) February 25, 2005; and (b) the date on which the Aggregate Revolving Commitment shall terminate or be reduced to zero in accordance with the provisions of this Agreement. SEC: the Securities and Exchange Commission or any Governmental Authority succeeding to any of its principal functions. SECURITY AGREEMENT: the Amended and Restated Security Agreement of even date herewith among the Borrower, ResNet Inc., LodgeNet Canada and the Administrative Agent, on behalf of itself, the Lenders and the Issuing Banks, as the same may be, from time to time, further amended, modified or supplemented. SENIOR 1995 NOTES: those certain 11.5% Senior Notes due July 15, 2005 of the Borrower in an aggregate outstanding principal amount of $30,000,000, as amended or otherwise modified as permitted hereby. SENIOR 1995 NOTE AGREEMENT: that certain Securities Purchase Agreement dated as of August 9, 1995 by and among the Borrower and the holders of the Senior 1995 Notes, as amended or otherwise modified as permitted hereby. SENIOR 1996 NOTES: those certain 10 1/4% Senior Notes due December 15, 2006 of the Borrower in an aggregate outstanding principal amount of $150,000,000, as amended or otherwise modified as permitted hereby. SENIOR 1996 NOTE INDENTURE: that certain Indenture dated as of December 19, 1996 between the Borrower and Marine Midland Bank, as Trustee, relating to the Senior 1996 Notes, as amended or otherwise modified as permitted hereby. SENIOR NOTE DOCUMENTS: collectively, the Senior 1995 Notes, the Senior 1995 Note Agreement, the Senior 1996 Notes, the Senior 1996 Note Indenture and each other agreement, instrument or other document executed in connection therewith. 19 SOLVENT: as to any Person at any time, that (i) the fair value of the property of such Person is greater than the amount of such Person's liabilities (including disputed, contingent and unliquidated liabilities) as such value is established and liabilities evaluated for purposes of Section 101(31) of the Federal Bankruptcy Reform Act of 1978 and, in the alternative, for purposes of the New York Uniform Fraudulent Transfer Act; (ii) the present fair saleable value of the property of such Person is not less than the amount that will be required to pay the probable liability of such Person on its debts as they become absolute and matured; (iii) such Person is able to realize upon its property and pay its debts and other liabilities (including disputed, contingent and unliquidated liabilities) as they mature in the normal course of business; (iv) such Person does not intend to, and does not believe that it will, incur debts or liabilities beyond such Person's ability to pay as such debts and liabilities mature; and (v) such Person is not engaged in business or a transaction, and is not about to engage in business or a transaction, for which such Person's property would constitute unreasonably small capital. STANDBY L/C: any L/C which is not a Documentary L/C. SUBSIDIARY: with respect to any Person, any corporation, partnership, limited liability company or joint venture whether now existing or hereafter organized or acquired: (i) in the case of a corporation, of which a majority of the securities having ordinary voting power for the election of directors (other than securities having such power only by reason of the happening of a contingency) are at the time owned by such Person and/or one or more Subsidiaries of such Person, or (ii) in the case of a partnership, limited liability company or joint venture in which such Person is a general partner, managing member or joint venturer or of which a majority of the partnership, membership or other ownership interests are at the time owned by such Person and/or one or more of its Subsidiaries. Unless the context otherwise requires, references in this Agreement to "Subsidiary" or the "Subsidiaries" shall be deemed to be references to a Subsidiary or Subsidiaries of the Borrower. Notwithstanding anything herein to the contrary, ResNet Inc. and ResNet LLC shall each be deemed to be a Subsidiary of the Borrower so long as (i) in the case of ResNet Inc., the Borrower owns 50% of ResNet's outstanding capital stock and retains the right to elect a majority of ResNet's board of directors, and (ii) in the case of ResNet LLC, the Borrower directly or indirectly owns over 50% of all members' interests and is the managing member. SUBSIDIARY GUARANTY(IES): each of the Guaranties and any additional guaranty substantially in the same form as the Guaranties subsequently executed by any Person that hereafter becomes a Guarantor in favor of the Administrative Agent, for the benefit of itself, the Lenders and the Issuing Banks, as the same may be, from time to time, amended, modified or supplemented. SUBSTANTIAL PORTION: assets of the Borrower and its Restricted Subsidiaries which (a) represent more than fifteen percent (15%) of the consolidated assets of the Borrower and its Restricted Subsidiaries, as would be shown in the consolidated financial statements of the Borrower and its Restricted Subsidiaries as at the end of the fiscal quarter immediately preceding the date on which such determination is made or (b) are responsible for more than fifteen percent (15%) of the Operating Cash Flow of the Borrower and its Restricted Subsidiaries for the 20 consecutive full twelve (12) month period ending as of the end of the fiscal quarter immediately preceding the date on which such determination is made. TAXES: as defined in subsection 2.16(a) hereof. TCI CONVERTIBLE DEBT: that certain Indebtedness of ResNet LLC in an aggregate principal amount of up to $34,603,947 incurred pursuant to that certain Subordinated Convertible Term Loan Agreement dated as of October 21, 1996 between ResNet Inc. and TCI Digital Satellite Entertainment, Inc. TERM COMMITMENT: with respect to each Lender, as defined in subsection 2.1(a) hereof. TERM LOAN: as defined in subsection 2.1(a) hereof. TERM LOAN PRINCIPAL PAYMENT DATE: as defined in subsection 2.8(a) hereof. TERM MATURITY DATE: February 25, 2005. TERM NOTE: each promissory note of the Borrower payable to the order of a Lender, in substantially the form of Exhibit A, evidencing the respective Indebtedness of the Borrower to the Lender resulting from the Term Loan made by such Lender. TERMINATION EVENT: any one of the following: (a) a "Reportable Event" described in Section 4043 of ERISA and the regulations issued thereunder; (b) the withdrawal of any Loan Party or any ERISA Affiliate from a Pension Plan during a plan year in which it was a "substantial employer" as defined in Section 4001(a)(2) of ERISA or was deemed such under Section 4068(f) of ERISA; or (c) the termination of a Pension Plan, the filing of a notice of intent to terminate a Pension Plan or the treatment of a Pension Plan amendment as a termination under Section 4041 of ERISA; (d) the institution of proceedings to terminate a Pension Plan by the PBGC; (e) any other event or condition which would constitute grounds under Section 4042(a) of ERISA for the termination of, or the appointment of a trustee to administer, any Pension Plan; (f) the partial or complete withdrawal of any Loan Party or any ERISA Affiliate from a Multiemployer Plan; (g) the imposition of a Lien pursuant to Section 412 of the Code or Section 302 of ERISA; (h) any event or condition which results in the reorganization or insolvency of a Multiemployer Plan under Section 4241 or Section 4245 of ERISA, respectively; or 21 (i) any event or condition which results in the termination of a Multiemployer Plan under Section 4041A of ERISA or the institution by the PBGC of proceedings to terminate a Multiemployer Plan under Section 4042 of ERISA. TOTAL DEBT: the aggregate outstanding principal balance of all Indebtedness of the Borrower and its Restricted Subsidiaries on a consolidated basis, including without limitation, all Permitted Debt (but excluding for this purpose the TCI Convertible Debt). Total Debt shall be determined by the Administrative Agent, in its reasonable judgment, based upon its review of a certificate of the Borrower delivered to the Administrative Agent which shall set forth, in reasonable detail, such calculation of Total Debt, along with such financial information as the Administrative Agent shall have requested and received from the Borrower or, in the absence of such certificate, such other pertinent financial information as the Administrative Agent in its sole discretion shall deem appropriate. TOTAL LEVERAGE: as at any date, the ratio determined by dividing (a) Total Debt PLUS the amount of any outstanding preferred stock of the Borrower providing for the payment of cash dividends, by (b) Annualized Operating Cash Flow. UCC: as defined in the Security Agreement. UNREIMBURSED DRAWINGS: as defined in subsection 2.23(c) hereof. UNUSED REVOLVING COMMITMENT: as at any date, for each Lender, the difference, if any, between (i) the amount of such Lender's Revolving Commitment as in effect on such date, MINUS (ii) the sum of the then aggregate outstanding principal amount of all Revolving Loans made by such Lender and such Lender's Commitment Percentage of Net L/C Obligations at such time. WHOLLY-OWNED SUBSIDIARY: as to any Person: (i) any corporation 100% of whose capital stock (other than directors' qualifying shares) is at the time owned by such Person and/or one or more Wholly-Owned Subsidiaries of such Person and (ii) any partnership, association, joint venture or other entity in which such Person and/or one or more Wholly-Owned Subsidiaries of such Person has a 100% equity interest at such time, and in each case where there exists no restriction on the right or ability of such Person to receive dividend payments or other cash flow from such corporation or other entity. "YEAR 2000 ISSUES": anticipated costs, problems and uncertainties associated with the inability of certain computer applications to effectively handle data including dates on and after January 1, 2000, as such inability affects the business, operations and financial condition of the Borrower and its Subsidiaries and of the Borrower's and its Subsidiaries' material customers, suppliers and vendors. "YEAR 2000 PROGRAM": as defined in SECTION 3.22. 22 Any accounting terms used in this Agreement that are not specifically defined herein shall have the meanings customarily given to them in accordance with generally accepted accounting principles as in effect on the date of this Agreement, except that references in Article 5 to such principles shall be deemed to refer to such principles as in effect on the date of the financial statements delivered pursuant thereto. ARTICLE 2. THE CREDITS Section 2.1 AMOUNTS AND TERMS OF COMMITMENTS. (a) THE TERM CREDIT. Each Lender severally agrees, on the terms and conditions hereinafter set forth, to make a Loan to the Borrower (each such Loan, a "TERM LOAN") on the Closing Date in the amount set forth opposite such Lender's name on Schedule I under the heading "Term Commitment" (such amount, as the same may be reduced pursuant to the provisions of this Agreement, such Lender's "TERM COMMITMENT"). Amounts borrowed as a Term Loan which are repaid or prepaid by the Borrower may not be reborrowed. (b) THE REVOLVING CREDIT. Each Lender severally agrees, on the terms and conditions hereinafter set forth, to make Loans to the Borrower (each such Loan, a "REVOLVING LOAN") from time to time on any Business Day during the period from the Closing Date to the Revolving Termination Date, in an aggregate amount not to exceed at any time outstanding (when added to such Lender's Commitment Percentage of the then outstanding Net L/C Obligations) the amount set forth opposite such Lender's name on Schedule I under the heading "Revolving Commitment" (such amount, as the same may be reduced or increased pursuant to the provisions of this Agreement, such Lender's "REVOLVING COMMITMENT"); PROVIDED, HOWEVER, that, after giving effect to any Borrowing of Revolving Loans, the aggregate principal amount of all outstanding Revolving Loans and Net L/C Obligations shall not exceed the Aggregate Revolving Commitment. Within the limits of each Lender's Revolving Commitment, and subject to the other terms and conditions hereof, the Borrower may borrow under this subsection 2.1(b), prepay pursuant to Section 2.6 and reborrow pursuant to this subsection 2.1(b). Section 2.2 NOTES. (a) Each Term Loan made by each Lender shall be evidenced by a Term Note payable to the order of such Lender in an amount equal to its Term Commitment. (b) The Revolving Loans made by each Lender shall be evidenced by a Revolving Note payable to the order of such Lender in an amount equal to its Revolving Commitment. (c) Each Lender shall endorse on schedules annexed to its Notes, or in its internal records, the date, amount and maturity of each Loan made by it and the amount of each payment of principal made by the Borrower with respect thereto. Each Lender is irrevocably authorized by the Borrower to so endorse its Notes, and each Lender's records shall be conclusive absent manifest error; PROVIDED, HOWEVER, that the failure of a Lender to make, or an error in 23 making, a notation thereon or in its internal records with respect to any Loan shall not limit or otherwise affect the obligations of the Borrower hereunder or under any such Note to such Lender. Section 2.3 PROCEDURE FOR BORROWING. (a) Each Borrowing of Term Loans and Revolving Loans shall be made upon the Borrower's irrevocable written notice delivered to the Administrative Agent in the form of a Notice of Borrowing, which notice must be received by the Administrative Agent prior to 11:00 a.m. (New York time) (i) three Business Days prior to the requested Borrowing date, in the case of Eurodollar Loans, and (ii) one Business Day prior to the requested Borrowing date, in the case of Base Rate Loans, specifying: (A) the amount of the Borrowing, which shall be in an aggregate minimum principal amount of (x) Five Hundred Thousand Dollars ($500,000) or any multiple of Five Hundred Thousand Dollars ($500,000) in excess thereof for Base Rate Loans and (y) One Million Dollars ($1,000,000) or any multiple of One Million Dollars ($1,000,000) in excess thereof for Eurodollar Loans: (B) the requested Borrowing date, which shall be a Business Day; (C) whether the Borrowing is to be comprised of Eurodollar Loans or Base Rate Loans; and (D) subject to subsection 2.3(d) hereof, the duration of the Interest Period applicable to any Eurodollar Loans included in such notice. If the Notice of Borrowing shall fail to specify the duration of the Interest Period for any Borrowing comprised of Eurodollar Loans, such Interest Period shall be one month; PROVIDED, HOWEVER, that with respect to the Borrowing to be made on the Closing Date, the Notice of Borrowing shall be delivered to the Administrative Agent not later than 2:00 p.m. (New York time) one Business Day before the Closing Date and such Borrowing will consist of Base Rate Loans only; and FURTHER PROVIDED, if the primary syndication of this Agreement is not completed by the Closing Date, and if so requested by the Administrative Agent, all Borrowings comprised of Eurodollar Loans during the first 60 days following the Closing Date shall have the same Interest Period, which shall be one month. (b) Upon receipt of the Notice of Borrowing, the Administrative Agent will promptly notify each Lender thereof and of the amount of such Lender's Commitment Percentage (as applicable) of the Borrowing. 24 (c) Each Lender will make the amount of its Commitment Percentage (as applicable) of the Borrowing available to the Administrative Agent for the account of the Borrower at the Administrative Agent's Payment Office by 11:00 a.m. (New York time) on the Borrowing date requested by the Borrower in funds immediately available to the Administrative Agent. The proceeds of all such Loans will then be made available to the Borrower by the Administrative Agent by wire transfer in accordance with written instructions provided to the Administrative Agent by the Borrower of like funds as received by the Administrative Agent. (d) Unless the Required Lenders shall otherwise agree, during the existence of a Default or an Event of Default, the Borrower may not elect to have a Loan be made as, or converted into or continued as, a Eurodollar Loan. (e) After giving effect to any Borrowing, there shall not be more than five (5) different Interest Periods in effect with respect to outstanding Revolving Loans and Term Loans. Section 2.4 CONVERSION AND CONTINUATION ELECTIONS. (a) The Borrower may upon irrevocable written notice to the Administrative Agent in accordance with subsection 2.4(b): (i) elect to convert on any Business Day, any Base Rate Loans (or any part thereof in an amount not less than $1,000,000 or that is in an integral multiple of $1,000,000 in excess thereof) into Eurodollar Loans; or (ii) elect to continue and convert on the last day of the applicable Interest Period any Eurodollar Loans having Interest Periods maturing on such day (or any part thereof in an amount not less than $500,000, or that is in an integral multiple of $500,000 in excess thereof) into Base Rate Loans; or (iii) elect to continue and renew on the last day of the applicable Interest Period any Eurodollar Loans having Interest Periods maturing on such day (or any part thereof in an amount not less than $1,000,000, or that is in an integral multiple of $1,000,000 in excess thereof); PROVIDED, that if the aggregate amount of Eurodollar Loans in respect of any Borrowing shall have been reduced, by payment, prepayment, or conversion of part thereof to be less than $1,000,000, such Eurodollar Loans shall automatically convert into Base Rate Loans, and on and after such date the right of the Borrower to continue such Loans as, and convert such Loans into, Eurodollar Loans shall terminate. (b) The Borrower shall deliver a Notice of Conversion/Continuation to be received by the Administrative Agent not later than 11:00 a.m. (New York time) at least (i) three Business Days in advance of the conversion date or continuation date, if the Loans are to be converted into or continued as Eurodollar Loans, and (ii) on the conversion date, if the Loans are to be converted into Base Rate Loans, specifying: 25 (A) the proposed conversion date or continuation date; (B) the aggregate amount of Loans to be converted or continued; (C) the nature of the proposed conversion or continuation; and (D) the duration of the requested Interest Period, if applicable. (c) If, upon the expiration of any Interest Period applicable to Eurodollar Loans, the Borrower has failed to select timely a new Interest Period to be applicable to such Eurodollar Loans or if any Default or Event of Default shall then exist, the Borrower shall be deemed to have elected to convert such Eurodollar Loans into Base Rate Loans effective as of the expiration date of such current Interest Period. (d) Upon receipt of a Notice of Conversion/Continuation, the Administrative Agent will promptly notify each Lender thereof, or, if no timely notice is provided by the Borrower, the Administrative Agent will promptly notify each Lender of the details of any automatic conversion. All conversions and continuations shall be made PRO RATA according to the respective outstanding principal amounts of the Loans (with respect to which the notice was given) that are held by each Lender. (e) Unless the Required Lenders shall otherwise agree, during the existence of a Default or Event of Default, the Borrower may not elect to have a Loan converted into or continued as a Eurodollar Loan. (f) Notwithstanding any other provision contained in this Agreement, after giving effect to any conversion or continuation of any Loans, there shall not be more than five (5) different Interest Periods in effect with respect to outstanding Revolving Loans and Term Loans. Section 2.5 CHANGE IN AGGREGATE REVOLVING COMMITMENT. (a) The Borrower shall be permitted to make an application at any time on or after December 31, 2000 to increase the Aggregate Revolving Commitment (but not the Commitment of any Lender without such Lender's agreement) in a principal amount of not less than $10,000,000 and not more than $25,000,000 (and in an integral multiple of $5,000,000 within such range), which increase in the Aggregate Revolving Commitment may be effected, if at all, by an increase in the Revolving Commitment(s) of NatWest Plc or the then-existing Lenders, and/or by the addition of new Lenders; PROVIDED that (i) the Borrower shall give written notice of such application to the Administrative Agent not less than 45 days (or such shorter period as may be acceptable to the Administrative Agent) prior to the effective date of such increase and (ii) the Borrower shall have delivered to the Administrative Agent a Compliance Certificate dated as of the date of such proposed increase, and the matters certified therein, including without limitation, the absence of any Default or Event of Default or Material Adverse Effect, both before and after giving effect to such increase, shall be true as of such date. 26 (b) The Borrower may, upon not less than three Business Days' prior notice to the Administrative Agent, terminate the Aggregate Revolving Commitment or permanently reduce the Aggregate Revolving Commitment by an aggregate minimum amount of $5,000,000 or any multiple of $1,000,000 in excess thereof; PROVIDED that no such reduction or termination shall be permitted if, after giving effect thereto and to any prepayments of the Revolving Loans made on the effective date thereof, the then outstanding principal amount of the Revolving Loans and Net L/C Obligations would exceed the Aggregate Revolving Commitment; and, PROVIDED, FURTHER, that, once reduced in accordance with this subsection 2.5(b), the Aggregate Revolving Commitment may not be increased (except pursuant to subsection 2.5(a)). Any reduction of the Aggregate Revolving Commitment shall be applied to each Lender's Revolving Commitment in accordance with such Lender's applicable Commitment Percentage. All accrued Commitment Fees to but not including the effective date of any termination of Commitments shall be paid on the effective date of such termination. Section 2.6 OPTIONAL PREPAYMENTS. Subject to Section 2.19 hereof, the Borrower may, at any time or from time to time, upon notice given not later than 11:00 a.m. (New York time) at least three Business Days in advance (in the case of Eurodollar Loans) and at least one Business Day in advance (in the case of Base Rate Loans) to the Administrative Agent, ratably prepay Loans in whole or in part, in amounts of (i) $500,000 or any multiple of $500,000 in excess thereof for Eurodollar Loans, or (ii) $500,000 or any multiple of $500,000 in excess thereof for Base Rate Loans. Such notice of prepayment shall specify the date and amount of such prepayment and whether such prepayment is of Term Loans or Revolving Loans, or any combination thereof. The Administrative Agent will promptly notify each Lender thereof and of such Lender's applicable Commitment Percentage of such prepayment. If such notice is given by the Borrower, the Borrower shall make such prepayment, and the payment amount specified in such notice shall be due and payable on the date specified therein, together with accrued interest to each such date on the amount prepaid and any amounts required pursuant to Section 2.19 hereof. Partial prepayments of Term Loans shall be applied ratably over the remaining installments of each such Loan. Section 2.7 MANDATORY PREPAYMENTS OF LOANS; MANDATORY COMMITMENT REDUCTIONS. (a) ASSET DISPOSITIONS; EVENTS OF LOSS. If the Borrower or any of its Subsidiaries shall at any time or from time to time make or agree to make an Asset Disposition constituting less than a Substantial Portion or shall suffer an Event of Loss constituting less than or greater than a Substantial Portion, then (i) the Borrower shall promptly notify the Administrative Agent of such proposed Asset Disposition or Event of Loss (including the amount of the estimated Net Proceeds to be received by the Borrower in respect thereof) and (ii) promptly upon receipt by the Borrower or its Subsidiary of the Net Proceeds of such Asset Disposition or on account of such Event of Loss (and in any event not later than the third Business Day following such receipt), the Borrower shall prepay Loans in accordance with subsection 2.7(c) hereof in each case in an aggregate amount equal to the amount of such Net Proceeds; PROVIDED, HOWEVER, that the Borrower shall not be required to prepay Loans upon receipt of such Net Proceeds of any Asset Disposition or Event of Loss constituting less than a 27 Substantial Portion to the extent that such Net Proceeds are reinvested by the Borrower in substantially similar assets within 180 days from the receipt thereof. (b) EXCESS CASH FLOW. As soon as the required financial information is available to determine the amount, if any, of Excess Cash Flow generated by the Borrower and its Subsidiaries during the then-preceding fiscal year, but not later than the 120th day following the last day of such fiscal year commencing with the fiscal year ending on December 31, 1998, the Borrower shall prepay Loans in accordance with subsection 2.7(c) hereof in an amount equal to fifty percent (50%) of such Excess Cash Flow, if any, for the then-preceding fiscal year of the Borrower. (c) GENERAL. Any prepayments pursuant to this Section 2.7 shall be applied (i) first, to the prepayment of the outstanding amount of Term Loans, ratably over the remaining installments of each such Loan until all Term Loans have been repaid in full; then to the outstanding amount of any Revolving Loans; and then to prepay or cash collateralize the outstanding amount of any L/C Obligations; and (ii) subject to the foregoing priorities, first to any Base Rate Loans then outstanding and then to Eurodollar Loans with the shortest Interest Periods remaining; PROVIDED, HOWEVER, that if the amount of Base Rate Loans then outstanding is not sufficient to satisfy the entire prepayment requirement, the Borrower may, at its option, place any amounts which it would otherwise be required to use to prepay Eurodollar Loans on a day other than the last day of the Interest Period therefor in an interest-bearing account pledged to the Administrative Agent for the benefit of the Lenders until the end of such Interest Period, at which time such pledged amounts will be applied to prepay such Eurodollar Loans. The Borrower shall pay, together with each prepayment under this Section 2.7, accrued interest on the amount prepaid and any amounts required pursuant to Section 2.19. (d) REDUCTION OF COMMITMENT. Upon the making of any mandatory prepayment under this Section 2.7, the applicable Commitments of each Lender shall automatically be reduced by an amount equal to such Lender's ratable share of the aggregate of principal repaid, effective as of the earlier of the date that such prepayment is made or the date by which such prepayment is due and payable hereunder. All accrued Commitment Fees to, but not including the effective date of any termination of Commitments, shall be paid on the effective date of such termination. (e) MANDATORY PREPAYMENT NOTICE. The Borrower shall deliver to the Administrative Agent (i) at the time of each prepayment required under subsections 2.7(a) and (b) above, a certificate signed by the chief financial officer of the Borrower setting forth in reasonable detail the calculation of the amount of such prepayment, and (ii) to the extent reasonably practicable, at least three Business Days prior to the time of each such prepayment, a notice of such prepayment which shall specify the prepayment date and the principal amount of the Loans (or portion thereof) to be prepaid pursuant to subsection 2.7(c) hereof. (f) LETTERS OF CREDIT. If on any date the effective amount of L/C Obligations exceeds the Maximum L/C Amount, the Borrower shall cash collateralize on such date the outstanding L/Cs in an amount equal to the excess of the maximum amount then available to be 28 drawn under the L/Cs over the Maximum L/C Amount. Subject to Section 2.19, if on any date after giving effect to any cash collateralization made on such date pursuant to the preceding sentence, the effective amount of all Revolving Loans then outstanding plus the effective amount of Net L/C Obligations exceeds the Aggregate Revolving Commitment, the Borrower shall immediately, and without notice or demand, prepay the outstanding principal amount of Revolving Loans by an amount equal to the applicable excess. Section 2.8 REPAYMENT. (a) THE TERM CREDIT. The Borrower shall repay the Term Loans in installments on each quarterly date (or on the next Business Day if such date is not a Business Day) indicated on Schedule II hereto (each a "TERM LOAN PRINCIPAL PAYMENT DATE") in the amount indicated opposite each such Term Loan Principal Payment Date (net of any optional or mandatory prepayments previously applied in accordance with Section 2.6 or subsection 2.7(c)). (b) THE REVOLVING CREDIT. The Borrower shall repay to the Lenders in full on the Revolving Termination Date the aggregate principal amount of the Revolving Loans outstanding on such date. Section 2.9 INTEREST. (a) The Borrower shall pay to the Administrative Agent for the account of each Lender interest on the unpaid principal amount of each Loan made by such Lender for the period commencing on the date of such Loan until such Loan shall be paid in full, at the following rates per annum: (i) During such periods that such Loan is a Base Rate Loan, the Base Rate plus the Applicable Base Rate Margin; and (ii) During such periods that such Loan is a Eurodollar Loan, for each Interest Period relating thereto, the Eurodollar Rate for such Loan for such Interest Period plus the Applicable Eurodollar Rate Margin. (b) The initial Applicable Base Rate Margin shall be 1.75% and the initial Applicable Eurodollar Rate Margin shall be 2.75%. So long as no Default or Event of Default shall have occurred and be continuing, on each occasion that, as of the last day of any fiscal quarter ending on or after September 30, 1999, the Borrower's Total Leverage on such date shall fall within one of the categories set forth in the table below, the Applicable Base Rate Margin and the Applicable Eurodollar Rate Margin in respect of Base Rate Loans and Eurodollar Loans, respectively, shall be automatically changed, if necessary, to reflect the percentages indicated for such category in the table below, with any such change to be effective on and after the date of delivery to the Administrative Agent of the certificate described in Section 5.5 hereof relating to such fiscal quarter: 29 Applicable Applicable Base Rate Eurodollar Total Leverage Margin Rate Margin -------------- ------ ----------- 5.0 to 1 or higher 1.75% 2.75% Lower than 5.0 to 1 1.50% 2.50% Lower than 4.5 to 1 1.25% 2.25% Lower than 4.0 to 1 1.00% 2.00% In the event that the condition that gives rise to any change in a Total Leverage category pursuant to the first sentence of this subsection 2.9(b) is no longer satisfied as of the end of any subsequent fiscal quarter, on and after the date of delivery to the Administrative Agent of the certificate described in Section 5.5 hereof relating to such subsequent fiscal quarter, the Applicable Base Rate Margin and the Applicable Eurodollar Rate Margin shall be automatically changed to reflect the Total Leverage category indicated by such certificate. Notwithstanding the foregoing, at any time during which the Borrower has failed to deliver the certificate described in Section 5.5 hereof with respect to a fiscal quarter in accordance with the provisions thereof, or at any time that a Default or Event of Default shall have occurred and be continuing, the Applicable Base Rate Margin and the Applicable Eurodollar Rate Margin shall be determined by reference to the definition of such terms, without any adjustment pursuant to this subsection 2.9(b), until such time as the Borrower shall deliver such certificate in accordance with the provisions of Section 5.5 hereof or such Default or Event of Default shall be cured or waived. (c) Notwithstanding the foregoing, whenever an Event of Default has occurred and is continuing, the Borrower shall pay interest on any Loan, and on any other amount payable by the Borrower hereunder (to the extent permitted by law) for the period commencing on the occurrence of such Event of Default until such Event of Default has been cured or waived as acknowledged in writing by the Administrative Agent at the applicable Post-Default Rate. (d) Except as provided in the next sentence, accrued interest on each Loan shall be payable: (i) in the case of a Base Rate Loan, quarterly on the Quarterly Dates, (ii) in the case of a Eurodollar Loan, on the last day of each Interest Period for such Loan (and, if such Interest Period exceeds three months' duration, quarterly, commencing on the first quarterly anniversary of the first day of such Interest Period), and (iii) in the case of any Loan, upon the payment or prepayment thereof or the conversion thereof into a Loan of another type (but only on the principal so paid, prepaid or converted). Interest that is payable at the Post-Default Rate shall be payable from time to time on demand of the Administrative Agent or any Lender. Promptly after the establishment of any interest rate provided for herein or any change therein, the Administrative Agent will notify the Lenders and the Borrower thereof, PROVIDED THAT the failure of the Administrative Agent to so notify the Borrower or the Lenders shall not affect the obligations of the Borrower hereunder or under any of the Notes in any respect. (e) Anything in this Agreement or any of the Notes to the contrary notwithstanding, the obligation of the Borrower to make payments of interest shall be subject to the limitation that payments of interest shall not be required to be made to any Lender to the 30 extent that such Lender's receipt thereof would not be permissible under the law or laws applicable to such Lender limiting rates of interest that may be charged or collected by such Lender. Any such payments of interest that are not made as a result of the limitation referred to in the preceding sentence shall be made by the Borrower to such Lender on the earliest interest payment date or dates on which the receipt thereof would be permissible under the laws applicable to such Lender limiting rates of interest that may be charged or collected by such Lender. Such deferred interest shall not bear interest. Section 2.10 FEES. (a) ARRANGER FEES.The Borrower shall pay to Gleacher NatWest Inc., BankBoston, N.A. and Morgan Stanley Dean Witter, for the respective accounts of each, fees in such amounts and at such times as are agreed upon between or among such parties. (b) COMMITMENT FEES.The Borrower shall pay to the Administrative Agent for the account of each Lender a commitment fee (the "COMMITMENT FEE") equal to 0.5% per annum on the average daily amount of such Lender's Unused Revolving Commitment, for the period from the date hereof to and including the earlier of the date such Lender's Revolving Commitment is terminated or the Revolving Termination Date. The accrued Commitment Fee shall be payable quarterly on the Quarterly Dates and on the earlier of the date the Revolving Commitments are terminated or the Revolving Termination Date, and, in the event the Borrower reduces the Aggregate Revolving Commitment as provided in Section 2.5 hereof, on the effective date of such reduction. (c) AGENCY FEE.The Borrower shall pay to the Administrative Agent, for the Administrative Agent's own account, an annual agency fee in the amount and at the times agreed upon by the Borrower and the Administrative Agent in that certain letter agreement between such parties dated January 12, 1999. (d) L/C FEES.(i) The Borrower shall pay to the Administrative Agent for the benefit of the Lenders, PRO RATA according to their respective Commitment Percentages, non-refundable letter of credit fees as follows: on the maximum amount of each L/C available from time to time to be drawn under such outstanding L/Cs, a fee, for the period from and including the date of issuance of such L/C to and including the termination thereof, computed at a rate per annum equal to the Applicable Eurodollar Rate Margin from time to time used to determine the interest rate on Eurodollar Loans pursuant to subsection 2.9(b) hereof, payable in arrears on the Quarterly Dates and on the date of termination thereof. (ii) In addition to the foregoing fees described in the preceding clause (i), the Borrower shall pay on demand to the Issuing Bank, exclusively for the account of the Issuing Bank, a fee for the period from and including the date of issuance of such Issuing Bank's L/C to and including the termination thereof, computed at the rate of one-quarter of one percent (.25%) per annum on the face amount of such L/C, payable in arrears on the Quarterly Dates and on the date of termination thereof, and in addition, such standard fees, charges and expenses as are customarily charged or incurred by the Issuing Bank from time to time in 31 connection with the issuance, amendment, transfer, administration, cancellation or payment under any or all L/Cs. The fees referred to in subsections 2.10(d)(i) and (ii) are hereinafter sometimes referred to individually as an "L/C FEE" and collectively as the "L/C FEES". (e) The Commitment Fee, the arranger and agency fees, and the L/C Fees are hereinafter sometimes referred to individually as a "FEE" and collectively as the "FEES". Section 2.11 COMPUTATION OF FEES AND INTEREST. (a) All computations of interest payable in respect of Base Rate Loans shall be made on the basis of a year of 365 or 366 days, as the case may be, and actual days elapsed. All other computations of Fees and interest under this Agreement shall be made on the basis of a 360-day year and actual days elapsed. Interest and fees shall accrue during each period during which interest or such fees are computed from the first day thereof to the last day thereof. (b) The Administrative Agent will, with reasonable promptness, notify the Borrower and the Lenders of each determination of the Base Rate or of the Eurodollar Rate; PROVIDED that any failure to do so shall not relieve the Borrower of any liability hereunder or provide the basis for any claim against the Administrative Agent. Any change in the interest rate on a Loan resulting from a change in the Applicable Base Rate Margin or Applicable Eurodollar Rate Margin shall become effective as of the opening of business on the day on which such change in such Applicable Margin becomes effective. The Administrative Agent will with reasonable promptness notify the Borrower and the Lenders of the effective date and the amount of each such change, PROVIDED that any failure to do so shall not relieve the Borrower of any liability hereunder or provide the basis for any claim against the Administrative Agent. (c) Each determination of an interest rate by the Administrative Agent shall be conclusive and binding on the Borrower and the Lenders in the absence of manifest error. (d) If the Reference Bank's Commitment shall terminate (otherwise than on termination of all the Commitments), or for any reason whatsoever the Reference Bank shall cease to be a Lender hereunder, that Lender shall thereupon cease to be the Reference Bank, and the Base Rate and the Eurodollar Rate shall be determined on the basis of the rates as notified by a successor Reference Bank appointed by the Administrative Agent. Section 2.12 PAYMENTS BY THE BORROWER. (a) All payments (including prepayments) to be made by the Borrower on account of principal, interest, Fees and other amounts required hereunder shall be made without set-off, recoupment or counterclaim; shall, except as otherwise expressly provided herein, be made to the Administrative Agent for the ratable account of the Lenders at the Administrative Agent's Payment Office, and shall be made in dollars and in immediately available funds, no later than 2:00 p.m. (New York time) on the date specified herein. The Administrative Agent will promptly distribute to each Lender its Commitment Percentage (or other applicable share as expressly provided herein) of such principal, interest, Fees or other amounts, in like funds as received. Any payment which is received by the Administrative Agent later than 2:00 p.m. (New 32 York time) shall be deemed to have been received on the immediately succeeding Business Day and any applicable interest or Fee shall continue to accrue. (b) Whenever any payment hereunder shall be stated to be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of interest or Fees, as the case may be; subject to the provisions set forth in the definition of "Interest Period" herein. (c) Unless the Administrative Agent shall have received notice from the Borrower prior to the date on which any payment is due to the Lenders hereunder that the Borrower will not make such payment in full as and when required hereunder, the Administrative Agent may assume that the Borrower has made such payment in full to the Administrative Agent on such date in immediately available funds and the Administrative Agent may (but shall not be so required), in reliance upon such assumption, cause to be distributed to each Lender on such due date an amount equal to the amount then due such Lender. If and to the extent the Borrower shall not have made such payment in full to the Administrative Agent, each Lender shall repay to the Administrative Agent on demand such amount distributed to such Lender, together with interest thereon for each day from the date such amount is distributed to such Lender until the date such Lender repays such amount to the Administrative Agent, at the Federal Funds Rate as in effect for each such day. Section 2.13 PAYMENTS BY THE LENDERS TO THE ADMINISTRATIVE AGENT. (a) Unless the Administrative Agent shall have received notice from a Lender on the Closing Date or, with respect to each Borrowing after the Closing Date, at least one Business Day prior to the date of any proposed Borrowing, that such Lender will not make available to the Administrative Agent as and when required hereunder for the account of the Borrower the amount of that Lender's Commitment Percentage of the Borrowing, the Administrative Agent may assume that each Lender has made such amount available to the Administrative Agent in immediately available funds on the Borrowing date and the Administrative Agent may (but shall not be so required), in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If and to the extent any Lender shall not have made its full amount available to the Administrative Agent in immediately available funds and the Administrative Agent in such circumstances has made available to the Borrower such amount, that Lender shall on the next Business Day following the date of such Borrowing make such amount available to the Administrative Agent, together with interest at the Federal Funds Rate for and determined as of each day during such period. A notice of the Administrative Agent submitted to any Lender with respect to amounts owing under this subsection 2.13(a) shall be conclusive, absent manifest error. If such amount is so made available, such payment to the Administrative Agent shall constitute such Lender's Loan on the date of Borrowing for all purposes of this Agreement. If such amount is not made available to the Administrative Agent on the next Business Day following the date of such Borrowing, the Administrative Agent shall notify the Borrower of such failure to fund and, upon demand by the Administrative Agent, the Borrower shall pay such amount to the Administrative Agent for the Administrative Agent's account, together with interest thereon for each day elapsed since the date 33 of such Borrowing, at a rate per annum equal to the intrest rate applicable at the time to the Loans comprising such Borrowing. (b) The failure of any Lender to make any Loan on any date of Borrowing shall not relieve any other Lender of any obligation hereunder to make a Loan on the date of such Borrowing, but no Lender shall be responsible for the failure of any other Lender to make the Loan to be made by such other Lender on the date of any Borrowing. Section 2.14 SHARING OF PAYMENTS, ETC. If, other than as expressly provided elsewhere herein, any Lender shall obtain on account of the Loans made by it any payment (whether voluntary, involuntary, through the exercise of any right of set-off, or otherwise) in excess of its Commitment Percentage of payments on account of the Loans obtained by all the Lenders, such Lender shall forthwith (a) notify the Administrative Agent of such fact, and (b) purchase from the other Lenders such participations, assignments or other interests in the Loans made by them ("LOAN INTEREST(S)") as shall be necessary to cause such purchasing Lender to share the excess payment ratably with each of them; PROVIDED, HOWEVER, that if all or any portion of such excess payment is thereafter recovered from the purchasing Lender, such purchase shall to that extent be rescinded and each other Lender shall repay to the purchasing Lender the purchase price paid therefor, together with an amount equal to such paying Lender's Commitment Percentage (according to the proportion of (i) the amount of such paying Lender's required repayment to (ii) the total amount so recovered from the purchasing Lender) of any interest or other amount paid or payable by the purchasing Lender in respect of the total amount so recovered. The Borrower agrees that any Lender so purchasing a Loan Interest from another Lender pursuant to this Section 2.14 may, to the fullest extent permitted by law, exercise all its rights of payment (including the right of set-off, but subject to Section 10.5) with respect to such Loan Interest as fully as if such Lender were the direct creditor of the Borrower in the amount of such Loan Interest. The Administrative Agent will keep records (which shall be conclusive and binding in the absence of manifest error) of Loan Interests purchased pursuant to this Section 2.14 and will in each case notify the Lenders following any such purchases or repayments. Section 2.15 SECURITY AND GUARANTIES. (a) All Obligations of the Borrower under this Agreement, each of the Notes and all other Loan Documents shall be secured in accordance with the Collateral Documents. (b) All Obligations of the Borrower under this Agreement, each of the Notes and all other Loan Documents shall be unconditionally guaranteed by the Guarantors pursuant to the Subsidiary Guaranties. Section 2.16 TAXES. (a) Subject to subsection 2.16(g), any and all payments by the Borrower to each Lender or the Administrative Agent under this Agreement shall be made free and clear of, and without deduction or withholding for, any and all present or future taxes, levies, deductions or withholdings, and all liabilities with respect thereto, excluding, in the case of each Lender and 34 the Administrative Agent, such taxes (including income taxes or franchise taxes) as are imposed on or measured by each Lender's or the Administrative Agent's net income by the jurisdiction under the laws of which such Lender or the Administrative Agent, as the case may be, is organized or maintains a Lending Office or any political subdivision thereof (all such non-excluded taxes, levies, imposts, deductions, charges, withholdings and liabilities being hereinafter referred to as "TAXES"). (b) In addition, the Borrower shall pay any present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies which arise from any payment made hereunder or from the execution, delivery or registration of, or otherwise with respect to, this Agreement or any other Loan Documents (hereinafter referred to as "OTHER TAXES"). (c) Subject to subsection 2.16(g), the Borrower shall indemnify and hold harmless each Lender and the Administrative Agent for the full amount of Taxes or Other Taxes (including any Taxes or Other Taxes imposed by any jurisdiction on amounts payable under this Section 2.16) paid by the Lender or the Administrative Agent and any liability (including penalties, interest, additions to tax and expenses) arising therefrom or with respect thereto. Payment under this indemnification shall be made within 30 days from the date the Lender or the Administrative Agent makes written demand therefor. (d) If the Borrower shall be required by law to deduct or withhold any Taxes or Other Taxes from or in respect of any sum payable hereunder to any Lender or the Administrative Agent, then, subject to subsection 2.16(g): (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 2.16) such Lender or the Administrative Agent, as the case may be, receives an amount equal to the sum it would have received had no such deductions been made; (ii) the Borrower shall make such deductions, and (iii) the Borrower shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law. (e) Within 30 days after the date of any payment by the Borrower of Taxes or Other Taxes, the Borrower shall furnish to the Administrative Agent the original or a certified copy of a receipt evidencing payment thereof, or other evidence of payment satisfactory to the Administrative Agent. (f) Each Lender which is a foreign person (I.E., a person other than a United States person for United States Federal income tax purposes) agrees that: 35 (i) it shall, no later than the Closing Date (or, in the case of a Lender which becomes a party hereto pursuant to Section 10.12 after the Closing Date, the date upon which the Lender becomes a party hereto) deliver to the Borrower through the Administrative Agent two accurate and complete signed originals (one of which shall be retained by the Administrative Agent) of Internal Revenue Service Form 4224 or any successor thereto ("FORM 4224"), or two accurate and complete signed originals of Internal Revenue Service Form 1001 or any successor thereto ("FORM 1001"), as appropriate, in each case indicating that the Lender is on the date of delivery thereof entitled to receive payments of principal, interest and fees under this Agreement free from withholding of United States Federal income tax; (ii) if at any time the Lender makes any changes necessitating a new Form 4224 or Form 1001, it shall with reasonable promptness deliver to the Borrower through the Administrative Agent in replacement for, or in addition to, the forms previously delivered by it hereunder, two accurate and complete signed originals (one of which shall be retained by the Administrative Agent) of Form 4224; or two accurate and complete signed originals (one of which shall be retained by the Administrative Agent) of Form 1001, as appropriate, in each case indicating that the Lender is on the date of delivery thereof entitled to receive payments of principal, interest and fees under this Agreement free from withholding of United States Federal income tax; (iii) it shall, before or promptly after the occurrence of any event (including the passing of time but excluding any event mentioned in (ii) above) requiring a change in or renewal of the most recent Form 4224 or Form 1001 previously delivered by such Lender and deliver to the Borrower through the Administrative Agent two accurate and complete original signed copies (one of which shall be retained by the Administrative Agent) of Form 4224 or Form 1001 in replacement for the forms previously delivered by the Lender; and (iv) it shall, promptly upon the Borrower's or the Administrative Agent's reasonable request to that effect, deliver to the Borrower or the Administrative Agent (as the case may be) such other forms or similar documentation as may be required from time to time by any applicable law, treaty, rule or regulation in order to establish such Lender's tax status for withholding purposes. (g) The Borrower will not be required to pay any additional amounts in respect of United States Federal income tax pursuant to subsection 2.16(d) to any Lender for the account of any Applicable Lending Office of such Lender: (i) if the obligation to pay such additional amounts would not have arisen but for a failure by such Lender to comply with its obligations under subsection 2.16(f) in respect of such Applicable Lending Office; (ii) if such Lender shall have delivered to the Borrower a Form 4224 in respect of such Applicable Lending Office pursuant to subsection 2.16(f), and such 36 Lender shall not at any time be entitled to exemption from deduction or withholding of United States Federal income tax in respect of payments by the Borrower hereunder for the account of such Applicable Lending Office for any reason other than a change in United States law or regulations or in the official interpretation of such law or regulations by any governmental authority charged with the interpretation or administration thereof (whether or not having the force of law) after the date of delivery of such Form 4224; or (iii) if the Lender shall have delivered to the Borrower a Form 1001 in respect of such Applicable Lending Office pursuant to subsection 2.16(f), and such Lender shall not at any time be entitled to exemption from deduction or withholding of United States Federal income tax in respect of payments by the Borrower hereunder for the account of such Applicable Lending Office for any reason other than a change in United States law or regulations or any applicable tax treaty or regulations or in the official interpretation of any such law, treaty or regulations by any governmental authority charged with the interpretation or administration thereof (whether or not having the force of law) after the date of delivery of such Form 1001. (h) If, at any time, the Borrower requests any Lender to deliver any forms or other documentation pursuant to subsection 2.16(f)(iv), then the Borrower shall, on demand of such Lender through the Administrative Agent, reimburse such Lender for any costs and expenses (including attorney costs) reasonably incurred by such Lender in the preparation or delivery of such forms or other documentation. (i) If the Borrower is required to pay additional amounts to any Lender or the Administrative Agent pursuant to subsection 2.16(d), then such Lender shall use its reasonable best efforts (consistent with legal and regulatory restrictions) to change the jurisdiction of its Applicable Lending Office so as to eliminate any such additional payment by the Borrower which may thereafter accrue if such change in the judgment of such Lender is not otherwise disadvantageous to such Lender. Section 2.17 ILLEGALITY. (a) If any Lender shall determine that the introduction of any Requirement of Law, or any change in any Requirement of Law or in the interpretation or administration thereof, has made it unlawful, or that any central bank or other Governmental Authority has asserted that it is unlawful, for any Lender or its Applicable Lending Office to make Eurodollar Loans, then, on notice thereof by the Lender to the Borrower through the Administrative Agent, the obligation of that Lender to make Eurodollar Loans shall be suspended until the Lender shall have notified the Administrative Agent and the Borrower that the circumstances giving rise to such determination no longer exists. (b) If a Lender shall determine that it is unlawful to maintain any Eurodollar Loan, all Eurodollar Loans of that Lender then outstanding shall be converted into Base Rate Loans either on the last day of the Interest Period thereof if the Lender may lawfully continue to maintain such Eurodollar Loans to such day, or immediately, if the Lender may not lawfully 37 continue to maintain such Eurodollar Loans, and the Borrower shall prepay accrued interest thereon to the date of conversion, together with any amounts required to be paid in connection therewith pursuant to Section 2.19. (c) If the obligation of any Lender to make or maintain Eurodollar Loans has been terminated, the Borrower may elect, by giving notice to the Lender through the Administrative Agent that all Loans which would otherwise be made by the Lender as Eurodollar Loans shall be instead Base Rate Loans. (d) Before giving any notice to the Administrative Agent pursuant to this Section 2.17, the affected Lender shall designate a different Applicable Lending Office with respect to its Eurodollar Loans if such designation will avoid the need for giving such notice or making such demand and will not, in the judgment of the Lender, be illegal or otherwise disadvantageous to the Lender. Section 2.18 INCREASED COSTS AND REDUCTION OF RETURN. (a) If, on or after the date of this Agreement, any Lender shall in good faith determine that, due to either (i) the introduction of or any change in or in the interpretation of any law or regulation or (ii) the compliance with any guideline or request from any central bank or other Governmental Authority (whether or not having the force of law), there shall be any increase in the cost to such Lender of agreeing to make or making, funding or maintaining any Eurodollar Loans, then the Borrower shall be liable for, and shall from time to time, upon demand therefor by such Lender (with a copy of such demand to the Administrative Agent), pay to the Administrative Agent for the account of such Lender, additional amounts as are sufficient to compensate such Lender for such increased costs. (b) If, on or after the date of this Agreement, any Lender shall have in good faith determined that (i) the introduction of any capital adequacy regulation, (ii) any change in any capital adequacy regulation, or (iii) any change in the interpretation or administration of any capital adequacy regulation by any central bank or other Governmental Authority charged with the interpretation or administration thereof, affects or would affect the amount of capital required or expected to be maintained by the Lender or any corporation controlling the Lender and (taking into consideration such Lender's or such corporation's policies with respect to capital adequacy and such Lender's anticipated return on capital) determines that the amount of such capital is increased as a consequence of its Commitment, loans, credits or obligations under this Agreement, then, upon demand of such Lender (with a copy to the Administrative Agent), the Borrower shall upon demand pay to the Lender, from time to time as specified by the Lender, additional amounts sufficient to compensate the Lender for such increase. Section 2.19 FUNDING LOSSES. The Borrower agrees to reimburse each Lender and to hold each Lender harmless from any loss or expense which the Lender may sustain or incur as a consequence of: 38 (a) the failure of the Borrower to make any payment or mandatory prepayment of principal of any Eurodollar Loan (including payments made after any acceleration thereof); (b) the failure of the Borrower to borrow, continue or convert a Loan after the Borrower has given (or is deemed to have given) a Notice of Borrowing or a Notice of Conversion/Continuation; (c) the failure of the Borrower to make any prepayment after the Borrower has given a notice in accordance with Section 2.6 hereof; (d) the prepayment (including pursuant to Section 2.7 hereof) of a Eurodollar Loan on a day which is not the last day of the Interest Period with respect thereto; or (e) the conversion pursuant to Section 2.4 or 2.17 hereof of any Eurodollar Loan to a Base Rate Loan on a day that is not the last day of the respective Interest Period; including any such loss or expense arising from the liquidation or reemployment of funds obtained by it to maintain its Eurodollar Loans hereunder or from fees payable to terminate the deposits from which such funds were obtained. Section 2.20 INABILITY TO DETERMINE RATES. If the Administrative Agent shall have determined that for any reason adequate and reasonable means do not exist for ascertaining the Eurodollar reference rate for any requested Interest Period with respect to a proposed Eurodollar Loan or that the Eurodollar reference rate applicable pursuant to subsection 2.9(a)(ii) for any requested Interest Period with respect to a proposed Eurodollar Loan does not adequately and fairly reflect the cost to the Lenders of funding such Loan, the Administrative Agent will forthwith give notice of such determination to the Borrower and each Lender. Thereafter, the obligation of the Lenders to make or maintain Eurodollar Loans, as the case may be, hereunder shall be suspended until the Administrative Agent revokes such notice in writing. Upon receipt of such notice, the Borrower may revoke any Notice of Borrowing or Notice of Conversion/Continuation then submitted by it. If the Borrower does not revoke such notice, the Lenders shall make, convert or continue the Loans, as proposed by the Borrower, in the amount specified in the applicable notice submitted by the Borrower, but such Loans shall be made, converted or continued as Base Rate Loans instead of Eurodollar Loans. Section 2.21 CERTIFICATES OF LENDERS. Any Lender claiming reimbursement or compensation pursuant to this Article II shall deliver to the Borrower (with a copy to the Administrative Agent) a certificate setting forth in reasonable detail the amount payable to the Lender hereunder and such certificate shall be conclusive and binding on the Borrower in the absence of manifest error. Section 2.22 SURVIVAL. The agreements and obligations of the Borrower in Sections 2.16 through 2.22 hereof shall survive the payment of all other Obligations. Section 2.23 LETTERS OF CREDIT. 39 (a) AMOUNT AND EXPIRATION. (i) Subject to the terms and conditions of this Agreement, the Borrower may request that NatWest Plc in its individual capacity (in the case of Standby L/Cs) or BankBoston, N.A. in its individual capacity (in the case of Standby L/Cs and Documentary L/Cs) issue one or more L/Cs (in such capacity, each of NatWest Plc and BankBoston, N.A. is herein referred to as the "ISSUING BANK" and collectively as the "ISSUING BANKS") for the account of the Borrower, PROVIDED, HOWEVER, that no L/C shall be issued if, after giving effect to the issuance of such L/C (i) the aggregate amount of all Net L/C Obligations and the aggregate amount of all Revolving Loans then outstanding would exceed the Aggregate Revolving Commitment at such time, or (ii) the aggregate amount of all L/C Obligations then outstanding would exceed the Maximum L/C Amount. Subject to the foregoing, the Borrower may request the issuance of L/Cs under this Section 2.23, repay any drawings thereunder and request the issuance of additional L/Cs under this Section 2.23. For all purposes of this Agreement, reference to the "issue" or "issuance" of any L/C or any L/C being "issued" shall include the amendment, supplement or modification of any L/C, including, without limitation, any increase in the amount thereof, or any extension or renewal thereof. (ii) No L/C shall have an expiration date later than the earlier of (A) three hundred sixty-five (365) days after the date of issuance thereof, or (B) the date which is thirty (30) days prior to the Revolving Termination Date. No L/C may by its terms be automatically renewable, unless consented to in writing by the Administrative Agent and the Issuing Bank in the exercise of their sole discretion, subject to the foregoing restriction regarding expiration dates, and no L/C may be denominated or drawable other than in Dollars. (b) NOTICE AND ISSUANCE. (i) The Borrower shall give notice to the Issuing Bank and to the Administrative Agent of a request for issuance of any L/C not less than three (3) Business Days prior to the proposed issuance date (which prescribed time period may be waived at the option of the Issuing Bank and the Administrative Agent in the exercise of their sole discretion). Each such notice (an "L/C ISSUANCE REQUEST") shall specify: (A) the requested date of such issuance (which shall be a Business Day); (B) the maximum amount of such L/C; (C) the expiration date of such L/C; (D) the purpose of such L/C; (E) the name and address of the beneficiary of such L/C; and (F) the required documents under any such L/C and, if requested by the Issuing Bank, the form of such L/C (which shall be acceptable to both of the Issuing Bank and the Administrative Agent in their respective sole discretion). The making of each L/C Issuance Request shall be deemed to be a representation and warranty by the Borrower that such L/C may be issued in accordance with and will not violate the terms of subsection 2.23(a) hereof. Each L/C Issuance Request shall be accompanied by the Issuing Bank's customary Standby or Documentary L/C application and other standard documents as may be required by the Issuing Bank (the "APPLICATION DOCUMENTS") each duly completed and executed and delivered by the Borrower. 40 (ii) Upon acceptance of the form of the proposed L/C by the Issuing Bank and the Administrative Agent and upon fulfillment of the conditions set forth above in this subsection 2.23(b) and applicable conditions in Article 4 hereof, the Issuing Bank shall issue such Standby L/C or Documentary L/C. Each Documentary L/C shall be issued upon such other terms and conditions as may be approved by both the Issuing Bank and the Administrative Agent (in their sole discretion) which are not inconsistent with this Agreement. (iii) Notwithstanding the foregoing, the Issuing Bank shall be under no obligation to issue any L/C if at the time of such issuance: (A) any order, judgment or decree of any governmental authority or arbitrator shall purport by its terms to enjoin or restrain the Issuing Bank from issuing such L/C or any requirement of law applicable to the Issuing Bank or any request or directive (whether or not having the force of law) from any Governmental Authority with jurisdiction over the Issuing Bank shall prohibit, or request that the Issuing Bank refrain from, the issuance of letters of credit generally or such L/C in particular or shall impose upon the Issuing Bank with respect to such L/C any requirement (for which the Issuing Bank is not otherwise compensated) not in effect on the date hereof, or any unreimbursed loss, cost or expense which was not applicable, in effect or known to the Issuing Bank as of the date hereof and which the Issuing Bank in good faith deems material to it; or (B) the Issuing Bank shall have received notice from any Lender prior to the issuance of such L/C that one or more of the applicable conditions specified in this Section 2.23 or 4.2 are not then satisfied, or that the issuance of such L/C would violate subsection 2.23(a) above. (iv) The Issuing Bank shall promptly give written notice to each of the other Lenders of the information specified in subsections 2.23(b)(i)(A) through (E) above. (c) REIMBURSEMENT OBLIGATIONS. (i) The Borrower shall be obligated to reimburse the Administrative Agent, for the account of the Issuing Bank, in immediately available funds at its Payment Office, on the day of each payment under an L/C by the Issuing Bank for drafts drawn and all amounts paid or disbursed under each such L/C (all such amounts so drawn, paid or disbursed until reimbursed are hereinafter referred to as "UNREIMBURSED DRAWINGS"); PROVIDED that if any such Unreimbursed Drawings are not so reimbursed on the date of any drafts drawn, the Borrower's reimbursement obligation in respect of such Unreimbursed Drawings shall be funded on such date with the borrowing of Loans (each such borrowing a "MANDATORY L/C BORROWING") in the full amount of the Unreimbursed Drawings from all Lenders PRO RATA based on each Lender's Commitment Percentage. The Issuing Bank shall promptly notify the Administrative Agent of the amount of any Unreimbursed Drawings and the Administrative Agent shall promptly notify the Lenders of the amount of each such Mandatory L/C Borrowing not later than 12:00 noon (New York City time) on the date on which such Mandatory L/C Borrowing is to be made. Each such Lender hereby irrevocably agrees to make Revolving Loans 41 pursuant to each Mandatory L/C Borrowing in the amount, and not later than 5:00 p.m. (New York City time) on the date, and in the manner specified in the preceding sentence, for immediate payment to the Issuing Bank, notwithstanding (i) that the amount of the Mandatory L/C Borrowing may not comply with the minimum amount for borrowings otherwise required hereunder, (ii) whether any conditions specified in Article 4 are then satisfied, (iii) whether a Default or an Event of Default then exists, (iv) the date of such Mandatory L/C Borrowing and (v) any reduction in the Aggregate Revolving Commitment after any such L/C was issued. In the event that the Administrative Agent delivers the above-described notice to any Lender later than 12:00 noon (New York City time) on the date of the required Mandatory L/C Borrowing, then such Lender shall not be obligated to effect such Mandatory L/C Borrowing until the next succeeding Business Day (but not later than 5:00 p.m. (New York City time)). (ii) Notwithstanding the foregoing, in the event that at any time when a draft is drawn under an L/C, there are not sufficient funds in any account of the Borrower with the Issuing Bank (or with the Administrative Agent for the account of the Issuing Bank) or sufficient availability to permit creation of Revolving Loans sufficient to fund payment of the drafts, any funds advanced by the Issuing Bank (or by the Administrative Agent on behalf of the Issuing Bank) and the other Lenders in payment thereof shall be due and payable immediately and shall bear interest until paid in full at the Post-Default Rate, such interest to be payable on demand. In the event of any conflict, discrepancy or any omission of terms provided herein between the terms established by the Issuing Bank in its Application Documents or otherwise and this Loan Agreement, the terms provided herein shall prevail. The obligations of the Lenders in respect of any funds so advanced or to be advanced by the Issuing Bank (or by the Administrative Agent on behalf of the Issuing Bank) under this subsection (c) shall be as more particularly described in subsections 2.23(e)(ii) and (iii) hereof. (d) GENERAL UNCONDITIONAL OBLIGATIONS. The obligations of the Borrower under this Agreement and the Application Documents and any other agreement, instrument or document relating to reimbursement or payment of L/C Obligations shall be absolute, unconditional and irrevocable, and shall be performed strictly in accordance with the terms of this Agreement and the Application Documents, under all circumstances whatsoever, including, without limitation, the following circumstances, whether relating to any one or more L/Cs: (i) any agreement between the Borrower and any beneficiary or any agreement or instrument relating thereto (the "BENEFICIARY DOCUMENTS") proving to be forged, fraudulent, invalid, unenforceable or insufficient in any respect; (ii) any amendment or waiver of or any consent to departure from all or any of the Beneficiary Documents; (iii) the existence of any claim, set off, defense or other rights which the Borrower may have at any time against any beneficiary or any transferee of any L/C (or any persons or entities for whom any beneficiary or any such transferee may be acting), the 42 Issuing Bank, any other Lender, the Administrative Agent or any other person or entity, whether in connection with the Agreement, the Beneficiary Documents or any unrelated transaction; (iv) any demand presented under any L/C (or any endorsement thereon) proving to be forged, fraudulent, invalid, unenforceable or insufficient in any respect or any statement therein being inaccurate in any respect whatsoever; (v) payment by the Issuing Bank under any L/C against presentation of a demand which does not comply with the terms of such L/C, including, without limitation, the circumstances referred to in clause (iv) above or the failure of any document to bear reference or to bear adequate reference to such L/C; (vi) the use to which any L/C may be put or any acts or omission of any beneficiary in connection therewith; or (vii) any other circumstances or happening whatsoever, whether or not similar to any of the foregoing. (e) PARTICIPATIONS BY LENDERS. (i) On the date of issuance of each L/C the Issuing Bank shall be deemed irrevocably and unconditionally to have sold and transferred to each Lender without recourse or warranty, and each Lender shall be deemed to have irrevocably and unconditionally purchased and received from the Issuing Bank, an undivided interest and participation, to the extent of such Lender's PRO RATA share of the Aggregate Revolving Commitment in effect on the date of such issuance, in such L/C, each substitute letter of credit, each drawing made thereunder, the related Application Documents and all L/C Obligations relating to such L/C and all Loan Documents securing, guaranteeing, supporting, or otherwise benefitting the payment of such L/C Obligation. The Issuing Bank shall furnish to any Lender, upon request, copies of any L/C and any Application Documents as may be requested by such Lender. (ii) In the event that any reimbursement obligation under subsection 2.23(c) hereof is not paid to the Issuing Bank with respect to any L/C in full immediately or by a Mandatory L/C Borrowing from all the Lenders PRO RATA pursuant to paragraph 2.23(c)(i), the Issuing Bank shall promptly notify the Administrative Agent to that effect, and the Administrative Agent shall promptly notify the Lenders of the amount of such reimbursement obligation and each such Lender shall immediately pay to the Administrative Agent, for immediate payment to the Issuing Bank, in lawful money of the United States and in immediately available funds, an amount equal to such Lender's ratable portion of the amount of such unpaid reimbursement obligation. (iii) The obligation of each Lender to make Loans in respect of each Mandatory L/C Borrowing and to make payments under the preceding clause (ii) shall be absolute and unconditional and irrevocable and not subject to any qualification or exception whatsoever and shall be made in accordance with the terms and conditions of this Agreement under all circumstances and shall not be subject to any conditions set forth in Article 4 hereof or 43 otherwise affected by any circumstance including, without limitation, (A) the occurrence or continuance of a Default or Event of Default; (B) any adverse change in the business condition (financial or otherwise), operations, performance, properties or prospects of any Loan Party; (C) any breach of this Agreement or any Application Documents or other Loan Documents by the Borrower, any other Loan Party or any Lender; (D) any set-off, counterclaim, recoupment, defense or other right which such Lender or the Borrower may have at any time against the Issuing Bank, any other Lender, any Loan Party, or any beneficiary named in any L/C in connection herewith or otherwise; (E) the validity, sufficiency or genuineness of documents, or of any endorsement thereon, even if such documents should prove to be in any or all respects invalid, insufficient, fraudulent or forged; (F) any lack of validity or enforcement of this Agreement or any of the Loan Documents; (G) the surrender or impairment of any security for the performance or observance of any of the terms of any of the Loan Documents; or (H) any other circumstance, happening or event whatsoever, whether or not similar to any of the foregoing. The Borrower agrees that any Lender purchasing a participation in any L/C from the Issuing Bank hereunder may, to the fullest extent permitted by law, exercise all of its rights of payment with respect to such participation as fully as if such Lender were the direct creditor of such Borrower in the amount of such participation. (iv) Promptly after the Issuing Bank (or the Administrative Agent acting on behalf of the Issuing Bank) receives a payment on account of a reimbursement obligation with respect to any L/C as to which any other Lender has funded its participation pursuant to subsection 2.23(e)(ii) above, the Issuing Bank (or the Administrative Agent acting on behalf of the Issuing Bank) shall promptly pay to the Administrative Agent, and the Administrative Agent shall promptly pay to each Lender which funded its participation therein, in lawful money of the United States and in the kind of funds so received, an amount equal to such Lender's ratable share thereof. (v) If any payment received on account of any reimbursement obligation with respect to an L/C and distributed to a Lender as a participant under subsection 2.23(e)(iv) is thereafter recovered from the Issuing Bank in connection with any bankruptcy or insolvency proceeding relating to the Borrower or otherwise, each Lender which received such distribution shall, upon demand by the Administrative Agent, repay to the Issuing Bank such Lender's ratable share of the amount so recovered together with an amount equal to such Lender's ratable share (according to the proportion of (i) the amount of such Lender's required repayment to (ii) the total amount so recovered) of any interest or other amount paid or payable by the Issuing Bank in respect of the total amount so recovered. (f) NON-LIABILITY. The Borrower assumes all risks of the acts or omissions of any beneficiary or transferee of any L/C with respect to its use of such L/C. Neither the Administrative Agent, the Issuing Bank nor any other Lender, nor any of their respective officers or directors, shall be liable or responsible for: (A) the use that may be made of any L/C or any acts or omissions of any beneficiary or transferee in connection therewith; (B) the validity, sufficiency or genuineness of documents, or of any endorsement thereon, even if such documents 44 should prove to be in any or all respects invalid, insufficient, fraudulent or forged; (C) payment by the Issuing Bank against presentation of documents that do not comply with the terms of an L/C, including failure of any documents to bear any reference or adequate reference to an L/C, EXCEPT that the Borrower shall have a claim against the Issuing Bank, and such Issuing Bank shall be liable to the Borrower, to the extent of any direct, but not consequential, damages suffered by the Borrower that the Borrower proves were caused solely by (1) the Issuing Bank's willful misconduct or gross negligence in determining whether documents presented under any L/C comply with the terms of the L/C or (2) the Issuing Bank's willful failure to make lawful payment under an L/C after the presentation to it of a draft and documents and/or certificates strictly complying with the terms and conditions of the L/C; (D) for errors, omissions, interruptions or delays in transmission or delivery of any messages, by mail, cable, telegraph, telex or otherwise, whether or not they are in cipher; (E) for errors in interpretation of technical terms; (F) for any loss or delay in the transmission or otherwise of any document required in order to make a drawing under any such L/C or of the proceeds thereof; and (G) for any consequence arising from causes beyond the control of such Issuing Bank, including, without limitation, any government acts. None of the above shall affect, impair, or prevent the vesting of any of such Issuing Bank's rights or powers hereunder. In furtherance and not in limitation of the foregoing, the Issuing Bank may accept documents that appear on their face to be in order, without responsibility for further investigation, regardless of any notice or information to the contrary. The Uniform Customs and Practice for Documentary Credits as most recently published by the International Chamber of Commerce shall be deemed a part of this Section 2.23 as if incorporated herein in all respects and shall apply to the L/Cs. (g) INDEMNIFICATION. In addition to amounts payable as elsewhere provided in this Agreement, without duplication, the Borrower agrees to indemnify and save harmless the Administrative Agent and each Lender including the Issuing Bank, from and against any and all claims, demands, liabilities, damages, losses, costs, charges and expenses (including reasonable attorneys' fees and allocated costs of internal counsel) which such Administrative Agent or Lender may incur or be subject to as a consequence, direct or indirect, of the issuance of any L/C or any action or proceeding relating to a court order, injunction, or other process or decree restraining or seeking to restrain the Issuing Bank or the Administrative Agent from paying any amount under any applicable L/C or the failure of the Issuing Bank to honor a drawing under an L/C as a result of any act or omission, whether rightful or wrongful of any present or future DE JURE or DE FACTO government or Governmental Authority, except that no such Person shall be entitled to indemnification for matters caused solely by such Person's gross negligence or willful misconduct. Without modifying the foregoing, and anything contained herein to the contrary notwithstanding, the Borrower shall cause each L/C issued for its account to be canceled and returned to the Issuing Bank on or before the Revolving Termination Date. ARTICLE 3. REPRESENTATIONS AND WARRANTIES. The Borrower hereby represents and warrants to the Lenders and the Administrative Agent that: 45 Section 3.1 ORGANIZATION. (a) Each of the Borrower and each Subsidiary and each other Loan Party is duly organized and validly existing under the laws of its jurisdiction of organization and has the power to own its assets and to transact the business in which it is presently engaged and in which it proposes to be engaged. Schedule 3.1 hereto accurately and completely lists, as to each of the Borrower and each Subsidiary and each other Loan Party: (i) the jurisdiction of incorporation or organization of each such entity, and the type of legal entity that each of them is, (ii) as to each of them that is a corporation, the classes and number of authorized and outstanding shares of capital stock of each such corporation, (iii) as to each of them that is a legal entity other than a corporation (but not a natural person), the type and amount of equity interests authorized and outstanding of each such entity, and the owners of such equity interests, and (iv) the business in which each of such entities is engaged. All of the foregoing shares or other equity interests that are issued and outstanding have been duly and validly issued and are fully paid and non-assessable. The Borrower owns, beneficially and of record, all of the outstanding shares of each class of stock of the Subsidiaries as shown on Schedule 3.1. Except as set forth on Schedule 3.1, there are no outstanding warrants, options, contracts or commitments of any kind entitling any Person to purchase or otherwise acquire any shares of capital stock or other equity interests of the Borrower (other than warrants and options now or hereafter granted to employees and/or directors of the Borrower in the ordinary course of its business) or any Subsidiary or any other Loan Party nor are there outstanding any securities that are convertible into or exchangeable for any shares of capital stock or other equity interests of the Borrower or any Subsidiary or any other Loan Party. Except as set forth on Schedule 3.1, neither the Borrower nor any Subsidiary nor any other Loan Party has any Subsidiary. (b) Each of the Borrower and each Subsidiary and each other Loan Party is in good standing in its jurisdiction of organization and in each jurisdiction in which it is qualified to do business, except where the failure to be in good standing could not have a material adverse effect on the business, operations, financial condition or properties of the Borrower or any Subsidiary or any other Loan Party; and none of such Persons is aware of any jurisdiction in which it is qualified to do business but not in good standing. There are no jurisdictions in which the character of the properties owned or leased by the Borrower or any Subsidiary or any other Loan Party or in which the transaction of business of the Borrower or any Subsidiary or any other Loan Party requires the Borrower or any Subsidiary or any other Loan Party to qualify to do business, other than those jurisdictions in which such Person is qualified to do business. Section 3.2 POWER, AUTHORITY, CONSENTS. The Borrower and each other Loan Party has the power to execute, deliver and perform the Loan Documents to be executed by it. The Borrower has the power to borrow hereunder and has taken all necessary corporate action to authorize the borrowing hereunder on the terms and conditions of this Agreement. The Borrower and each other Loan Party has taken all necessary action, corporate or otherwise, to authorize the execution, delivery and performance of the Loan Documents to be executed by it. No consent or approval of any Person (including, without limitation, any stockholder of any corporate Loan Party or any partner in any partnership Loan Party), no consent or approval of any landlord or mortgagee, no waiver of any Lien or right of distraint or other similar right and no consent, 46 license, certificate of need, approval, authorization or declaration of any Governmental Authority, bureau or agency, is or will be required in connection with the execution, delivery or performance by the Borrower or any other Loan Party, or the validity, enforcement or priority, of the Loan Documents. Section 3.3 NO VIOLATION OF LAW OR AGREEMENTS. The execution and delivery by the Borrower and each other Loan Party of each Loan Document to which it is a party and performance by it hereunder and thereunder, will not violate any provision of law and will not, conflict with or result in a breach of any order, writ, injunction, ordinance, resolution, decree, or other similar document or instrument of any court or Governmental Authority, domestic or foreign, or any certificate of incorporation or by-laws of the Borrower or any other corporate Loan Party or partnership agreement or other organizational document or instrument of any Loan Party that is not a corporation, or create (with or without the giving of notice or lapse of time, or both) a default under or breach of any agreement, bond, note or indenture to which the Borrower or any other Loan Party is a party, or by which any of them is bound or any of their respective properties or assets is affected, or result in the imposition of any Lien of any nature whatsoever upon any of the properties or assets owned by or used in connection with the business of the Borrower or any other Loan Party (other than the Liens contemplated by the Collateral Documents). Any borrowing under this Agreement will not result in any violation of any debt incurrence test or other applicable covenant under the Senior Note Documents. Section 3.4 DUE EXECUTION, VALIDITY, ENFORCEABILITY. This Agreement and each other Loan Document to which any Loan Party is a party has been duly executed and delivered by the Loan Party that is a party thereto and each constitutes the valid and legally binding obligation of the Borrower or such other Loan Party that is a party thereto, enforceable in accordance with its terms, except as such enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, or other similar laws, now or hereafter in effect, relating to or affecting the enforcement of creditors' rights generally and except that the remedy of specific performance and other equitable remedies are subject to judicial discretion. Section 3.5 PROPERTIES, LIENS. The real estate listed on Schedule 3.5 (together with the addresses thereof) constitutes all of the real property owned, leased, subleased or used by any Loan Party. Each Loan Party owns good and marketable fee simple title to all of its owned real estate, and valid and marketable leasehold interests in all of its leased real estate, all as described on Schedule 3.5. Schedule 3.5 further describes any real estate with respect to which any Loan Party is a lessor, sublessor or assignor. Each Loan Party also has good and marketable title to, or valid leasehold interests in, all of its personal properties and assets. None of the properties and assets of any Loan Party are subject to any Liens other than Permitted Liens and other security interests permitted under the Loan Documents. Schedule 3.5 also describes any purchase options, rights of first refusal or other similar contractual rights pertaining to any real estate owned or leased by the Borrower or any Loan Party. Section 3.6 LITIGATION. There are no outstanding judgments, actions or proceedings, including, without limitation, any Environmental Proceeding, pending before any court or Governmental Authority with respect to or, to the best of the Borrower's knowledge, 47 threatened against or affecting the Borrower or any Subsidiary or any other Loan Party, involving, in the case of any court proceeding, a claim in excess of $2,500,000, nor, to the best of the Borrower's knowledge, is there any reasonable basis for the institution of any such action or proceeding that is probable of assertion, nor are there any such actions or proceedings in which the Borrower or any Subsidiary or any other Loan Party is a plaintiff or complainant. Section 3.7 NO DEFAULTS, COMPLIANCE WITH LAWS. Neither the Borrower nor any Subsidiary nor any other Loan Party is in default under any agreement, resolution, decree, bond, note, indenture, order or judgment to which it is a party or by which it is bound, or any other agreement or other instrument by which any of the properties or assets owned by it or used in the conduct of its business is affected, which default could have a material adverse effect on the business, operations, financial condition or properties of the Borrower or any Subsidiary or any other Loan Party or on the ability of the Borrower or any other Loan Party to perform its obligations under the Loan Documents to which it is a party. The Borrower and each Subsidiary has complied and is in compliance in all respects with all applicable laws, ordinances and regulations, resolutions, ordinances, decrees and other similar documents and instruments of all courts and governmental authorities, bureaus and agencies, domestic and foreign, including, without limitation, all applicable provisions of the Americans with Disabilities Act (42 U.S.C. Section 12101-12213) and the regulations issued thereunder, and all applicable Environmental Laws and Regulations, non-compliance with which could have a material adverse effect on the business, operations, financial condition or properties of the Borrower or any Subsidiary or on the ability of the Borrower or any Subsidiary to perform its obligations under the Loan Documents to which it is a party. Section 3.8 BURDENSOME DOCUMENTS. Neither the Borrower nor any of the other Loan Parties is a party to or bound by, nor are any of the properties or assets owned by the Borrower or any other Loan Party used in the conduct of their respective businesses affected by, any agreement, ordinance, resolution, decree, bond, note, indenture, order or judgment, including, without limitation, any of the foregoing relating to any Environmental Liability, that materially and adversely affects their respective businesses, assets or conditions, financial or otherwise. Section 3.9 FINANCIAL STATEMENTS; PROJECTIONS. (a) Each of the Financial Statements is correct and complete and presents fairly the consolidated financial position of the Borrower and its Subsidiaries, and each other entity to which it relates, as at its date, and has been prepared in accordance with generally accepted accounting principles. Neither the Borrower nor any of the Subsidiaries, nor any other entity to which any of the Financial Statements relates, has any material obligation, liability or commitment, direct or contingent (including, without limitation, any Environmental Liability), that is not reflected in the Financial Statements. There has occurred no Material Adverse Effect since the date of the latest balance sheet included in the Financial Statements (the "LATEST BALANCE SHEET"). The Borrower's fiscal year is the twelve-month period ending on December 31 in each year. 48 (b) The Projections have been prepared on the basis of information and accompanying assumptions that the Borrower believes to be reasonable and reflect as of the date thereof the Borrower's good faith projections, after reasonable analysis, of the matters set forth therein, based on such assumptions, it being understood that such assumptions may be incorrect and unanticipated events and circumstances may affect the Projections; accordingly, the Borrower's actual financial performance and operating results may vary and such variations may be material. Section 3.10 TAX RETURNS. Each of the Borrower and its Subsidiaries has filed all federal, state and local tax returns required to be filed by it and has not failed to pay any taxes, or interest and penalties relating thereto, on or before the due dates thereof. Except to the extent that reserves therefor are reflected in the Financial Statements: (i) there are no material federal, state or local tax liabilities of the Borrower or any Subsidiary due or to become due for any tax year ended on or prior to the date of the Latest Balance Sheet relating to such entity, whether incurred in respect of or measured by the income of such entity, that are not properly reflected in the Latest Balance Sheet relating to such entity, and (ii) there are no material claims pending or, to the knowledge of the Borrower, proposed or threatened against any of the Borrower or any Subsidiary for past federal, state or local taxes, except those, if any, as to which proper reserves are reflected in the Financial Statements. Section 3.11 INTELLECTUAL PROPERTY. Each of the Borrower and its Subsidiaries possesses all patents, trademarks, service marks, trade names, and copyrights, and rights with respect to the foregoing, necessary to conduct its business as now conducted and as proposed to be conducted, without any conflict with the patents, trademarks, service marks, trade names, and copyrights and rights with respect to the foregoing, of any other Person, and each of such patents, trademarks, service marks, trade names, copyrights and rights with respect thereto, together with any pending applications therefor, are listed on Schedule 3.11 hereto. Section 3.12 REGULATION U. No part of the proceeds received by the Borrower or any Subsidiary from the Loans will be used directly or indirectly for: (a) any purpose other than to finance systems upgrades and other capital expenditures and to provide for the ongoing working capital requirements of the Borrower and its Subsidiaries, or (b) the purpose of purchasing or carrying, or for payment in full or in part of Indebtedness that was incurred for the purposes of purchasing or carrying, any "margin stock", as such term is defined in Section 221.3 of Regulation U of the Board of Governors of the Federal Reserve System, 12 C.F.R., Chapter II, Part 221. Section 3.13 NAME CHANGES, MERGERS, ACQUISITIONS. Neither the Borrower nor any of the Subsidiaries nor any other Loan Party has within the six-year period immediately preceding the date of this Agreement changed its name, been the surviving entity of a merger or consolidation, or acquired all or substantially all of the assets of any Person. Section 3.14 FULL DISCLOSURE. None of the Financial Statements, the Borrower's Annual Report on Form 10-K dated March 25, 1998 relating to the fiscal year ended December 31, 1997 filed by the Borrower with the SEC and previously delivered to the Lenders (the "1998 49 10-K Report"), Borrower's Quarterly Report on Form 10-Q dated November 11, 1998 relating to the period ending September 30, 1998 filed by the Borrower with the SEC and previously delivered to the Lenders (the "Third Quarter 10-Q Report"), the Projections, nor any certificate, opinion, or any other statement made or furnished in writing to the Administrative Agent or any Lender by or on behalf of the Borrower or any of the Subsidiaries or any other Loan Party in connection with this Agreement or the transactions contemplated herein, contains any untrue statement of a material fact, or omits to state a material fact necessary in order to make the statements contained therein or herein not misleading, as of the date such statement was made. There is no fact known to the Borrower that has, or would in the now foreseeable future have, a material adverse effect on the business, prospects or condition, financial or otherwise, of the Borrower or any of its Subsidiaries or any other Loan Party, which fact has not been set forth herein, in the Financial Statements, the 1998 10-K Report, the Third Quarter 10-Q Report, the Projections, or any certificate, opinion or other written statement so made or furnished to the Administrative Agent or the Lenders. Section 3.15 LICENSES AND APPROVALS. The Borrower and each of its Subsidiaries has all requisite power and authority and necessary licenses, permits and governmental authorizations, including, without limitation, licenses, permits and authorizations arising under or relating to Environmental Laws and Regulations, to own and operate its properties and to carry on its business as now conducted (collectively, the "LICENSES"). No event has occurred that: (i) results in, or after notice or lapse of time or both would result in, revocation or termination of any License, or (ii) materially and adversely affects or in the future may (so far as the Borrower can now reasonably foresee) materially adversely affect any of the rights of the Borrower or any of its Subsidiaries under any License. The Borrower has no reason to believe (other than in connection with there being no legal assurance thereof) that any License will not be renewed in the ordinary course. Section 3.16 LABOR DISPUTES; COLLECTIVE BARGAINING AGREEMENTS; EMPLOYEE GRIEVANCES. (a) There are no collective bargaining agreements or other labor contracts covering the Borrower or any Subsidiary; (b) no such collective bargaining agreement or other labor contract will expire during the term of this Agreement; (c) no union or other labor organization is seeking to organize, or to be recognized as bargaining representative for, a bargaining unit of employees of the Borrower or any Subsidiary; (d) there is no pending or threatened strike, work stoppage, material unfair labor practice claim or charge, arbitration or other material labor dispute against or affecting the Borrower or any Subsidiary or their representative employees; (e) there has not been, during the five (5) year period prior to the date hereof, a strike, work stoppage, material unfair labor practice claim or charge, arbitration or other material labor dispute against or affecting the Borrower or any Subsidiary or any of their representative employees, and (f) there are no actions, suits, charges, demands, claims, counterclaims or proceedings pending or, to the best of the Borrower's knowledge, threatened against the Borrower or any of its Subsidiaries, by or on behalf of, or with, its employees, other than employee grievances arising in the ordinary course of business that are not, in the aggregate, material. Section 3.17 CONDITION OF ASSETS. The Collateral and all of the assets and properties of the Borrower and its Subsidiaries that are reasonably necessary for the operation of 50 its business, are in good working condition, ordinary wear and tear excepted, and are able to serve the function for which they are currently being used. Section 3.18 ERISA. (a) No Employee Benefit Plan is maintained or has ever been maintained by any Loan Party or any ERISA Affiliate, nor has any Loan Party or any ERISA Affiliate ever contributed to, a Multiemployer Plan. (b) There are no agreements which will provide payments to any officer, employee, shareholder or highly compensated individual which will be "parachute payments" under 280G of the Code that are nondeductible to any Loan Party and which will be subject to tax under Section 4999 of the Code for which any Loan Party will have a material withholding liability. Section 3.19 MATERIAL AGREEMENTS. All of the agreements, contracts and leases of the Borrower and its Subsidiaries with lodging industry and other customers relating to the provision of the Borrower's video and video-related services (guest-pay, free-to-guest and other) are freely assignable by the Borrower or its Subsidiaries, except as listed on Schedule 3.19 hereto. Borrower has previously provided true and correct copies of a representative sample of such contracts to the Administrative Agent, including copies of any such contracts which are not freely assignable by the Borrower or its Subsidiaries. Also set forth on Schedule 3.19 hereto is an accurate and complete list of the following agreements, documents or instruments to which the Borrower or any of its Subsidiaries is subject: (a) all material master agreements with studios and other program providers, (b) any lease of equipment having a remaining term of one year or longer and requiring aggregate rental and other payments in excess of $50,000 per annum; and (c) all material licenses and permits held by the Borrower or its Subsidiaries. Section 3.20 COLLATERAL DOCUMENTS. (a) The Pledge Agreement is effective to create in favor of the Administrative Agent, for the benefit of itself, the Lenders and the Issuing Banks, a legal, valid and enforceable security interest in the Pledged Collateral (as defined in the Pledge Agreement) and, when the Pledged Collateral is delivered to the Administrative Agent, the Pledge Agreement shall constitute a fully perfected first priority Lien on, and security interest in, all right, title and interest of the pledgor thereunder in such Pledged Collateral, in each case prior and superior in right to any other Person. (b) The Security Agreement is effective to create in favor of the Administrative Agent, for the benefit of itself, the Lenders and the Issuing Banks, a legal, valid and enforceable security interest in the Collateral (as defined in the Security Agreement) and, when financing statements in appropriate form are filed in the offices specified therein, the Security Agreement shall constitute a fully perfected Lien on, and security interest in, all right, title and interest of the grantors thereunder in such Collateral, in each case prior and superior in right to any other Person, other than with respect to Permitted Liens and other security interests permitted by the Loan Documents. (c) When the Patent and Trademark Security Agreement is filed in the United States Patent and Trademark Office, said Security Agreement shall constitute a fully 51 perfected Lien on, and security interest in, all right, title and interest of the Loan Parties in the Intellectual Property Collateral (as defined in said Security Agreement) in which a security interest may be perfected by filing, recording or registering a security agreement, financing statement or analogous document in the United States Patent and Trademark Office, in each case prior and superior in right to any other Person (it being understood that subsequent recordings in the United States Patent and Trademark Office may be necessary to perfect a lien on registered patents, trademarks and applications therefor acquired by the Loan Parties after the date hereof). Section 3.21 SOLVENCY. The Borrower (individually, and on a consolidated basis) and each of its Subsidiaries is Solvent on the date hereof and will be Solvent after giving effect to the transactions contemplated by the Loan Documents. Section 3.22 YEAR 2000. The Borrower has made a full and complete assessment of the Year 2000 Issues and has a realistic and achievable program for remediating the Year 2000 Issues on a timely basis (the "Year 2000 Program"). Based on such assessment and on the Year 2000 Program, the Borrower does not reasonably anticipate that Year 2000 Issues will have a Material Adverse Effect. ARTICLE 4. CONDITIONS TO THE LOANS. Section 4.1 CONDITIONS TO INITIAL LOANS. The obligation of each Lender to make the initial Loan to be made by it hereunder shall be subject to the fulfillment (to the satisfaction of the Administrative Agent and the Lenders) of the following conditions precedent on or prior to the Closing Date: (a) LOAN DOCUMENTS. This Agreement shall have been executed by the Borrower, the Administrative Agent, the Issuing Banks and each of the Lenders; the Term Notes and the Revolving Notes shall have been executed by the Borrower; the Guaranties shall have been executed by ResNet Inc., LodgeNet Canada and ResNet LLC; and each other Loan Document shall have been executed by the parties thereto. (b) COLLATERAL. The Borrower and its Subsidiaries shall have executed and delivered the Collateral Documents, in appropriate form for recording where necessary, together with: (i) acknowledgment copies of all UCC-1 financing statements (or any assignments thereof) filed, registered or recorded to perfect the security interests of the Administrative Agent for the benefit of the Lenders, or other evidence satisfactory to the Administrative Agent that there has been filed, registered or recorded all financing statements and other filings, registrations and recordings necessary and advisable to perfect the Liens of the Administrative Agent for the benefit of the Lenders in accordance with applicable law; (ii) written advice relating to such Lien and judgment searches as the Administrative Agent shall have requested of the Borrower and its Subsidiaries, and such termination statements or other documents as may be necessary to confirm that the Collateral is 52 subject to no other Liens in favor of any Persons (other than Permitted Liens and any other security interests permitted under the Loan Documents); (iii) all certificates and instruments representing the Pledged Collateral and undated stock transfer powers executed in blank; (iv) evidence that all other actions necessary or, in the opinion of the Administrative Agent and its counsel, desirable to perfect and protect the first priority security interest created by the Collateral Documents (subject to Permitted Liens and any other security interests permitted under the Loan Documents), and to enhance the Administrative Agent's ability to preserve and protect its interest in and access to the Collateral, have been taken; (v) standard lenders payable endorsements with respect to the insurance policies or other instruments or documents evidencing insurance coverage on the properties of the Borrower and its Subsidiaries in accordance with Section 6.8 hereof; and (vi) funds sufficient to pay any filing or recording tax or fees in connection with any and all UCC-1 financing statements and any other filings or actions taken in regard to the Collateral. (c) CORPORATE ORGANIZATION, AUTHORIZATION, GOOD STANDING. The Administrative Agent shall have received copies of the following: (i) Any consents, approvals and waivers referred to in Section 3.2 hereof; (ii) The certificate of incorporation of the Borrower and of ResNet Inc., each certified by the Secretary of State of Delaware; the certificate of incorporation of LodgeNet Canada, certified by its corporate secretary; (iii) The by-laws of the Borrower, ResNet Inc. and LodgeNet Canada certified by their respective corporate secretaries; (iv) All corporate action taken by the Borrower, ResNet Inc. and LodgeNet Canada to authorize the execution, delivery and performance of each of the Loan Documents to which it is a party and the transactions contemplated thereby, certified by their respective corporate secretaries; (v) Good standing certificates, as of dates not more than ten (10) days prior to the Closing Date, with respect to the Borrower, from the States of Delaware, South Dakota, California, Texas, Florida, New York, Illinois, Hawaii, Ohio, Washington, Georgia, Nevada, Arizona, Louisiana, Colorado, Virginia, Michigan, Pennsylvania, North Carolina, Minnesota, Wisconsin, South Carolina and New Jersey; and 53 (vi) Incumbency certificates (with specimen signatures) with respect to officers of the Borrower, ResNet Inc. and LodgeNet Canada. (d) OFFICER'S CERTIFICATE. (i) The Borrower shall have complied and shall then be in compliance with all of the terms, covenants and conditions of this Agreement and the Senior Note Documents (including Section 4.03 of the Senior 1996 Note Indenture); (ii) There shall exist no Default or Event of Default hereunder; (iii) The representations and warranties contained in Article 3 hereof shall be true and correct on the Closing Date; (iv) Since September 30, 1998, there has not occurred any event or circumstance that has resulted or could reasonably be expected to result in a Material Adverse Effect; and (v) The Borrower (individually, and on a consolidated basis) and each of its Subsidiaries shall be Solvent on the Closing Date and will continue to be Solvent after giving effect to the transactions contemplated hereby; and the Administrative Agent shall have received a certificate of the Borrower's chief financial officer dated the Closing Date certifying, INTER ALIA, that the conditions set forth in this subsection 4.1(d) are satisfied on such date. (e) LEGAL OPINIONS. Daniel P. Johnson, Esq., Director of Corporate and Legal Affairs of the Borrower, and Pillsbury Madison & Sutro LLP, counsel to the Borrower and ResNet Inc., shall have delivered their opinions to the Administrative Agent substantially in the composite form of Exhibit F hereto. (f) FINANCIALS AND SENIOR NOTE DOCUMENTS. The Administrative Agent shall have received true and complete copies of the following, each certified as such in a certificate executed by the president, chief financial officer or chief operating officer of the Borrower: (i) Notice delivered by the Borrower to the Trustee pursuant to the definition of "New Credit Facility" under the Senior 1996 Note Indenture; (ii) The Financial Statements and the Projections; and (iii) The Senior Note Documents, each as amended and in effect on the date hereof. (g) EXCHANGE OF NOTES. The loans represented by the notes outstanding under the Existing Loan Agreement shall be repaid, and such notes shall be surrendered and replaced by the Term Notes and the Revolving Notes hereunder. 54 (h) PAYMENT OF FEES.The Borrower shall have paid on the Closing Date the arranger and agency fees payable pursuant to Section 2.10 hereof and the fees of counsel to the Administrative Agent and other expenses payable pursuant to Section 10.1 hereof. (i) OTHER DOCUMENTS. The Administrative Agent shall have received such other certificates, opinions, approvals, documents or other evidence of compliance with the conditions set forth in this Section 4.1 as the Administrative Agent and its counsel may request. Section 4.2 CONDITIONS TO SUBSEQUENT LOANS AND L/CS. The obligation of each Lender to make any Revolving Loan subsequent to the Closing Date and the obligation of the Issuing Bank to issue any L/C shall be subject to the fulfillment (to the satisfaction of the Administrative Agent) of the following conditions precedent: (a) In respect of each Revolving Loan, the Administrative Agent shall have received a Notice of Borrowing in accordance with Section 2.3 hereof. (b) In respect of each requested L/C, the Issuing Bank and the Administrative Agent shall have received an L/C Issuance Request in accordance with subsection 2.23(b)(i) hereof, together with all other documents required to be delivered in connection with an L/C Issuance Request and all Application Documents, and the Issuing Bank shall have been paid any and all fees then due in accordance with the terms of Sections 2.10 and 2.23 hereof. (c) The Administrative Agent shall have received a Compliance Certificate dated the date of such Revolving Loan or L/C (as the case may be) and effective as of such date, and the matters certified therein, including, without limitation, the absence of any Default or Event of Default, shall be true as of such date. (d) Neither the Administrative Agent nor any Lender nor the Issuing Bank shall have received from the Borrower any notice that any Collateral Document will no longer secure on a first priority basis (subject to Permitted Liens and other security interests permitted under the Loan Documents) future advances or future Loans to be made or extended under this Agreement. (e) All legal matters incident to such Revolving Loan or L/C (as the case may be) shall be satisfactory to counsel for the Administrative Agent. ARTICLE 5. DELIVERY OF FINANCIAL REPORTS AND OTHER INFORMATION. While any Commitments are outstanding, and, in the event any Loan or any L/C Obligation remains outstanding, so long as the Borrower is indebted to the Lenders or the Administrative Agent and until payment in full of the Notes and full and complete performance of all of its other obligations arising hereunder, the Borrower shall deliver to each Lender: 55 Section 5.1 ANNUAL FINANCIAL STATEMENTS. Annually, as soon as available, but in any event within ninety (90) days after the last day of each of its fiscal years, a consolidated and consolidating balance sheet of the Borrower and its Subsidiaries as at such last day of the fiscal year, and consolidated and consolidating statements of income and retained earnings and statements of cash flow, for such fiscal year, each prepared in accordance with generally accepted accounting principles consistently applied, in reasonable detail, and, as to the consolidated statements, certified without qualification by Arthur Andersen & Co. or another firm of independent certified public accountants satisfactory to the Administrative Agent, or certified, as to the consolidating statements, by the chief financial officer of the Borrower, as fairly presenting the financial position and the results of operations of the Borrower and its Subsidiaries as at and for the year ending on its date and as having been prepared in accordance with generally accepted accounting principles. Section 5.2 QUARTERLY FINANCIAL STATEMENTS. As soon as available, but in any event within forty-five (45) days after the end of the Borrower's first three fiscal quarterly periods (and for purposes of calculating the financial ratios in Section 6.9 hereof, for the immediately preceding two or four consecutive full fiscal quarters (including fiscal quarters ending prior to the date of this Agreement) necessary to such calculations), a consolidated and consolidating balance sheet of the Borrower and its Subsidiaries as of the last day of such quarter and consolidated and consolidating statements of income and retained earnings and statements of cash flow, for such quarter, and on a comparative basis figures for the corresponding period of the immediately preceding fiscal year, all in reasonable detail, each such statement to be certified in a certificate of the president, chief financial officer or chief operating officer of the Borrower as accurately presenting the financial position and the results of operations of the Borrower and its Subsidiaries as at its date and for such quarter and as having been prepared in accordance with generally accepted accounting principles consistently applied (subject to non-material, year-end audit adjustments in accordance with generally accepted accounting principles). Section 5.3 PROJECTIONS. Annually, as soon as available, but in any event within ninety (90) days after the last day of each of its fiscal years, a forecasted consolidated balance sheet and related forecasted consolidated statement of operations and statement of cash flows of the Borrower for the period from the first day of the Borrower's then current fiscal year through December 31, 2005, all prepared on a basis consistent with the Financial Statements, together with appropriate supporting details and a statement of underlying assumptions. Section 5.4 COMPLIANCE INFORMATION. Promptly after a written request therefor, such other financial data or information evidencing compliance with the requirements of this Agreement, the Notes, the Collateral Documents and the other Loan Documents, as any Lender may reasonably request from time to time. Section 5.5 NO DEFAULT CERTIFICATE. At the same time as it delivers the financial statements required under the provisions of Sections 5.1 and 5.2 hereof, a certificate of the president, chief financial officer or chief operating officer of the Borrower to the effect that no Event of Default hereunder and that no default under any other agreement to which the Borrower or any of its Subsidiaries is a party or by which it is bound, or by which, to the best knowledge of 56 the Borrower or any Subsidiary, any of its properties or assets, taken as a whole, may be materially affected, and no event which, with the giving of notice or the lapse of time, or both, would constitute such an Event of Default or default, exists, or, if such cannot be so certified, specifying in reasonable detail the exceptions, if any, to such statement. Such certificate shall be accompanied by a detailed calculation indicating compliance with the covenants contained in Sections 6.9, 7.13 and 7.14 hereof. Section 5.6 ACCOUNTANTS' REPORTS. Promptly upon receipt thereof, copies of all reports submitted to the Borrower or any of its Subsidiaries by its independent accountants in connection with any annual or interim audit or review of the books of the Borrower or its Subsidiaries made by such accountants, including, without limitation, any report addressing whether a Default or an Event of Default had occurred hereunder. Section 5.7 COPIES OF DOCUMENTS. Promptly upon their becoming available, copies of any: (i) financial statements, projections, non-routine reports, notices (other than routine correspondence), requests for waivers and proxy statements, in each case delivered by the Borrower or any of its Subsidiaries to any holder of Indebtedness of the Borrower other than the Lenders; (ii) correspondence or notices received by the Borrower from any federal, state or local governmental authority that regulates the operations of the Borrower or any of its Subsidiaries, relating to an actual or threatened change or development that would be materially adverse to the Borrower or any Subsidiary; (iii) registration statements and any amendments and supplements thereto, and any regular and periodic reports, if any, filed by the Borrower or any of its Subsidiaries with any securities exchange or with the SEC (or any Governmental Authority succeeding to any or all of the functions of the SEC); (iv) letters of comment or correspondence sent to the Borrower or any of its Subsidiaries by any such securities exchange or the SEC in relation to the Borrower or any of its Subsidiaries and its affairs, except to the extent sent in the ordinary course of business with respect to routine filings; and (v) any appraisals received by the Borrower or any of its Subsidiaries with respect to material properties or assets of the Borrower or its Subsidiaries. Section 5.8 NOTICES OF DEFAULTS. Promptly, notice of the occurrence of any Default or Event of Default, or any event that would constitute or cause a material adverse change in the condition, financial or otherwise, or the operations of the Borrower or any of its Subsidiaries. Section 5.9 ERISA NOTICES AND REQUESTS. Notice of each of the following within ten (10) days after such event or occurrence: (a) any Loan Party or ERISA Affiliate knowing or having reason to know that a Termination Event has occurred or that a Defined Contribution Plan has been terminated or partially terminated, together with a written statement by the appropriate chief financial officer setting forth the details of such event; 57 (b) the filing of a request for a funding waiver by any Loan Party or ERISA Affiliate with respect to any Pension Plan, and a copy of such request and all communications received by any Loan Party or ERISA Affiliate with respect to such request; (c) receipt by any Loan Party or ERISA Affiliate of a notice of the PBGC's intent to terminate a Pension Plan, and a copy of such notice; (d) the failure of any Loan Party or ERISA Affiliate to make a required installment or payment under Section 302 of ERISA or Section 412 of the Code by the applicable due date thereof, together with a written notice of such failure; (e) any Loan Party or ERISA Affiliate knowing or having reason to know that a prohibited transaction (as defined in Section 406 of ERISA or Section 4975 of the Code) has occurred with respect to any Employee Benefit Plan, and a written statement by the appropriate chief financial officer setting forth the details of such transaction and the action taken with respect thereto; (f) any increase in the benefits of any existing Employee Benefit Plan or the establishment of any new Employee Benefit Plan or the commencement of contributions to any Employee Benefit Plan to which any Loan Party or ERISA Affiliate had not theretofore been contributing, together with a written notice of such occurrence; (g) receipt by any Loan Party or ERISA Affiliate of any favorable or unfavorable determination letter from the IRS regarding the qualification of a Pension Plan under Section 401(a) of the Code, together with a copy of such letter; (h) the filing of an annual report (Form 5500 series), including Schedule B thereto, filed by any Loan Party or ERISA Affiliate with respect to an Employee Benefit Plan, together with a copy of such report; (i) receipt by any Loan Party or ERISA Affiliate of an actuarial report for any Pension Plan, together with a copy of such report; (j) receipt by any Loan Party or ERISA Affiliate of all correspondence with the PBGC, the Secretary of Labor of the United States of America or any representative of the IRS with respect to any Employee Benefit Plans, relating to an actual or threatened change or development which would be materially adverse to the Borrower or any ERISA Affiliate; and (k) receipt by any Loan Party or ERISA Affiliate of any correspondence from a Multiemployer Plan with respect to withdrawal liability. Section 5.10 ADDITIONAL INFORMATION; GUEST-PAY ROOMS. Such other information regarding the business, affairs and condition of the Borrower and its Subsidiaries as the Administrative Agent or the Required Lenders may from time to time reasonably request, including, without limitation, as soon as available, but in any event not later than forty-five (45) 58 days after the end of the first three fiscal quarters of the Borrower and not later than ninety (90) days after the end of the last fiscal quarter of the Borrower, a report, certified by the president, chief financial officer or chief operating officer of the Borrower as having been prepared personally by him or under his personal supervision and to be substantially true and complete, of the number of Guest-Pay Rooms served by the Borrower and its Subsidiaries (on a state-by-state basis) as of the last day of such fiscal quarter, together with such other information with respect to billings, operating costs, Operating Cash Flow or other matters as the Administrative Agent or the Required Lenders may reasonably request from time to time. ARTICLE 6. AFFIRMATIVE COVENANTS. While any Commitments are outstanding, and, in the event any Loan or any L/C Obligation remains outstanding, so long as the Borrower is indebted to the Lenders or the Administrative Agent, and until payment in full of the Notes and full and complete performance of all of its other obligations arising hereunder, the Borrower shall and shall cause each Subsidiary to: Section 6.1 BOOKS AND RECORDS. Keep proper books of record and account in a manner reasonably satisfactory to the Administrative Agent in which full, true and correct entries shall be made of all dealings or transactions in relation to its business and activities. Section 6.2 INSPECTIONS AND AUDITS. Permit the Lenders to make or cause to be made (and, after the occurrence of and during the continuance of an Event of Default, at the Borrower's expense), inspections and audits of any books, records and papers of the Borrower and each of its Subsidiaries and to make extracts therefrom and copies thereof, or to make inspections and examinations of any properties and facilities of the Borrower and its Subsidiaries (including the Collateral), on reasonable notice, at all such reasonable times and as often as any Lender may reasonably require, in order to assure that the Borrower is and will be in compliance with its obligations under the Loan Documents (including the Collateral Documents) or to evaluate the Lenders' investment in the then outstanding Notes. The Administrative Agent and each Lender agrees to hold in confidence all information, whether furnished to it pursuant to any such inspection or audit or otherwise under the Loan Documents, that is indicated as confidential by the Borrower in writing at the time furnished and not otherwise generally available to the public; PROVIDED, THAT, the Administrative Agent and the Lenders shall be permitted to disclose such confidential information (a) among each other and their respective directors, officers, employees, agents and Affiliates, (b) to their attorneys and accountants, (c) in connection with the enforcement of the rights of the Administrative Agent or the Lenders under the Loan Documents, (d) in connection with assignments or participations and the solicitation thereof pursuant to Section 10.12 hereof, provided that each such actual or prospective assignee or purchaser agrees to be bound by the provisions of this sentence, and (e) as may otherwise be requested by any regulatory authority having jurisdiction over the Administrative Agent, the Lenders or such participant or assignee, or by any applicable law, rule, regulation or judicial process. 59 Section 6.3 MAINTENANCE AND REPAIRS. Maintain in good repair, working order and condition, subject to normal wear and tear, all properties and assets from time to time owned by it and used in or necessary for the operation of its business (including the Collateral), and make all reasonable repairs, replacements, additions and improvements thereto, unless any failure to accomplish any of the foregoing would not and could not be reasonably expected to, either singly or in the aggregate, have a material adverse effect on the Collateral or the business, operations or financial condition of the Borrower or any Subsidiary. Section 6.4 CONTINUANCE OF BUSINESS. Do, or cause to be done, all things reasonably necessary to preserve and keep in full force and effect its corporate existence and all permits, rights and privileges necessary for the proper conduct of its business, comply in all material respects with all applicable laws, regulations and orders and, except as otherwise permitted pursuant to and in accordance with Sections 7.4 and 7.7, continue to engage in the same line of business. Section 6.5 COPIES OF CORPORATE DOCUMENTS. Subject to the prohibitions set forth in Section 7.12 hereof, promptly deliver to the Administrative Agent copies of any amendments or modifications to its and any Subsidiary's certificate of incorporation and by-laws, certified with respect to the certificate of incorporation by the Secretary of State of its state of incorporation and, with respect to the by-laws, by the secretary or assistant secretary of such corporation. Section 6.6 PERFORM OBLIGATIONS. Pay and discharge all of its obligations and liabilities, including, without limitation, all taxes, assessments and governmental charges upon its income and properties when due, unless and to the extent only that such obligations, liabilities, taxes, assessments and governmental charges shall be contested in good faith and by appropriate proceedings and that, to the extent required by generally accepted accounting principles then in effect, proper and adequate book reserves relating thereto are established by the Borrower, or, as the case may be, by the appropriate Subsidiary, and then only to the extent that a bond is filed in cases where the filing of a bond is necessary to avoid the creation of a Lien against any of its properties. Section 6.7 NOTICE OF LITIGATION. Promptly notify the Administrative Agent in writing of any litigation, legal proceeding or dispute, other than disputes in the ordinary course of business or, whether or not in the ordinary course of business, involving amounts in excess of $2,500,000, affecting the Borrower or any Subsidiary whether or not fully covered by insurance, and regardless of the subject matter thereof (excluding, however, any actions relating to workers' compensation claims or negligence claims relating to use of motor vehicles, if fully covered by insurance, subject to deductibles). Section 6.8 INSURANCE. (a) (i) In addition to insurance requirements set forth in the Collateral Documents, maintain with responsible insurance companies acceptable to the Administrative Agent such insurance on such of its properties, in such amounts and against such risks as is customarily maintained by similar businesses (provided, that the Borrower and each Subsidiary may in lieu of maintaining such insurance maintain a system or systems of self- 60 insurance in accordance with good business practice and as customary for corporations of established reputation engaged in the same or similar business and owning and operating similar properties as the Borrower or such Subsidiary), including workers' compensation insurance, general liability and property and casualty insurance. All such insurance (except for workers' compensation insurance) shall name the Administrative Agent as loss payee and as additional insured (in the case of general liability), for the benefit of itself, the Lenders and the Issuing Banks, as their interests may appear. Upon request of the Administrative Agent or any Lender, the Borrower shall furnish the Administrative Agent, with sufficient copies for each Lender, at reasonable intervals (but not more than once per policy year), a certificate of an officer of the Borrower (and, if requested by the Administrative Agent, any insurance broker of the Borrower) setting forth the nature and extent of all insurance maintained by the Borrower and its Subsidiaries in accordance with this Section 6.8 or any Collateral Document (and which, in the case of a certificate of a broker, was placed through such broker). (b) Carry all insurance available through the PBGC or any private insurance companies covering its obligations, if any, to the PBGC. Section 6.9 FINANCIAL COVENANTS. Have or maintain, on a consolidated basis, at all times: (a) Total Leverage during any fiscal quarter ending in any period set forth below at not more than the applicable ratio set forth opposite such period:
During each Fiscal Quarter Ending in Each of the Following Periods Maximum Total Leverage -------------------------- ---------------------- from the Closing Date through March 31, 1999 5.85 to 1 from April 1, 1999 through June 30, 1999 5.75 to 1 from July 1, 1999 through December 31, 1999 5.25 to 1 from January 1, 2000 through March 31, 2000 5.85 to 1 from April 1, 2000 through June 30, 2000 5.25 to 1 from July 1, 2000 through December 31, 2000 4.75 to 1 from January 1, 2001 61 through March 31, 2001 5.25 to 1 from April 1, 2001 through June 30, 2001 4.75 to 1 from July 1, 2001 through December 31, 2001 4.25 to 1 from January 1, 2002 through March 31, 2002 4.75 to 1 from April 1, 2002 through Facility Termination Date 4.25 to 1
(b) Interest Coverage for each fiscal period set forth below (determined as of the last day of such fiscal period) at not less than the applicable ratio set forth opposite such fiscal period:
FISCAL PERIOD MINIMUM INTEREST COVERAGE ------------- ------------------------- from the Closing Date through December 31, 1999 1.75 to 1 from January 1, 2000 through June 30, 2000 1.88 to 1 from July 1, 2000 through June 30, 2001 2.00 to 1 from July 1, 2001 through June 30, 2002 2.25 to 1 from July 1, 2002 through June 30, 2003 2.50 to 1 from July 1, 2003 through December 31, 2003 2.75 to 1 from January 1, 2004 through Facility Termination Date 3.00 to 1
(c) That number of Guest-Pay Rooms as of the end of each fiscal quarter of the Borrower (i) which is not less than ninety percent (90%) of the number of Guest Pay Rooms as of the end of the immediately preceding fiscal quarter of the Borrower and (ii) 62 which is not less than ninety percent (90%) of the number of Guest Pay Rooms as of the end of the corresponding fiscal quarter of the Borrower ending in the immediately preceding fiscal year. Section 6.10 NOTICE OF CERTAIN EVENTS. (a) Promptly notify the Administrative Agent in writing of the occurrence of any Reportable Event, as defined in Section 4043 of ERISA, if a notice of such Reportable Event is required under ERISA to be delivered to the PBGC within 30 days after the occurrence thereof, together with a description of such Reportable Event and a statement of the action the Loan Party or the ERISA Affiliate intends to take with respect thereto, together with a copy of the notice thereof given to the PBGC. (b) Promptly notify the Administrative Agent in writing if any Loan Party or ERISA Affiliate receives an assessment of withdrawal liability in connection with a complete or partial withdrawal with respect to any Multiemployer Plan, together with a statement of the action that such Loan Party or ERISA Affiliate intends to take with respect thereto. (c) Promptly notify the Administrative Agent in writing if the Borrower or any other Loan Party receives: (i) any notice of any violation or administrative or judicial complaint or order having been filed or about to be filed against the Borrower or such other Loan Party alleging violations of any Environmental Law and Regulation, or (ii) any notice from any governmental body or any other Person alleging that the Borrower or such other Loan Party is or may be subject to any Environmental Liability; and promptly upon receipt thereof, provide the Administrative Agent with a copy of such notice together with a statement of the action the Borrower or such other Loan Party intends to take with respect thereto. Section 6.11 COMPLY WITH ERISA. Materially comply with all applicable provisions of ERISA and the Code now or hereafter in effect. Section 6.12 ENVIRONMENTAL COMPLIANCE. Operate all property owned, operated or leased by it in material compliance with all Environmental Laws and Regulations, such that no Environmental Liability arises under any Environmental Laws and Regulations, which would result in a Lien on any property of the Borrower or any other Loan Party; PROVIDED, HOWEVER, that in the event that any such claim is made or any such Environmental Liability arises, the Borrower or such other Loan Party shall (subject to the Borrower's or such Loan Party's right to contest such claim in good faith and at its own expense by appropriate legal proceedings, PROVIDED, HOWEVER, that during such contest, the Borrower or such other Loan Party shall, at the option of the Administrative Agent, set aside reserves in an amount satisfactory to the Administrative Agent, assuring the discharge of the Borrower's or such Loan Party's obligations thereunder and of any additional interest charge, penalty or expense arising from or incurred as a result of such contest), at its own cost and expense, in a timely manner, immediately satisfy such claim or Environmental Liability. Section 6.13 FURTHER ASSURANCES. (a) DISCLOSURE. The Borrower shall ensure that all written information, exhibits and reports furnished to the Administrative Agent or the Lenders do not and will not 63 contain any untrue statement of a material fact and do not and will not omit to state any material fact or any fact necessary to make the statements contained therein not misleading, in light of the circumstances in which made, and will promptly disclose to the Administrative Agent and the Lenders and correct any defect or error that may be discovered therein or in any Loan Document or in the execution, acknowledgment or recordation thereof. (b) PROTECTION OF EXISTING INTERESTS. Promptly upon request by the Administrative Agent or the Required Lenders, the Borrower shall (and shall cause any of its Subsidiaries to) do, execute, acknowledge, deliver, record, re-record, file, re-file, register and re-register, any and all such further acts, deeds, conveyances, security agreements, mortgages, assignments, estoppel certificates, financing statements and continuations thereof, termination statements, notices of assignment, transfers, certificates, assurances and other instruments which the Administrative Agent or such Lenders, as the case may be, may reasonably require from time to time in order (i) to carry out more effectively the purposes of this Agreement or any other Loan Document, (ii) to subject to the Liens created by any of the Collateral Documents any of the properties, rights or interests covered by any of the Collateral Documents, (iii) to perfect and maintain the validity, effectiveness and priority of any of the Collateral Documents and the Liens intended to be created thereby, and (iv) to better assure, convey, grant, assign, transfer, preserve, protect and confirm to the Administrative Agent and the Lenders the rights granted or now or hereafter intended to be granted to the Lenders under any Loan Document or under any other document executed in connection therewith. (c) SECURITY INTEREST IN ADDITIONAL COLLATERAL. Promptly, and in any event within 30 days after the acquisition or construction by the Borrower or any other Guarantor of property of the type that would have constituted Collateral on the date hereof (and also including real property that is not being held for sale by the Borrower or its Subsidiaries), in each case in which the Administrative Agent does not have a perfected security interest under the Collateral Documents (other than (x) property of the type covered by a Pledge Agreement which is provided for in subsection 6.13(d) hereof, (y) property subject to Liens permitted under subsection 7.2(b) hereof under agreements which prohibit the creation of additional Liens on such property, or (z) any other property with a fair market value of less than $500,000 individually; PROVIDED that all such other property collectively shall have a fair market value of less than $2,500,000), or within 30 days after request by the Administrative Agent with respect to any other property of the Borrower or its Restricted Subsidiaries deemed material by the Administrative Agent or the Required Lenders (the "ADDITIONAL COLLATERAL"), the Borrower will, and will cause each of the Guarantors to, take all necessary action, including (i) the amendment or supplementing of the Security Agreement to subject such Additional Collateral to the terms thereof, (ii) the filing of appropriate financing statements under the provisions of the UCC, applicable foreign, domestic or local laws, rules or regulations in each of the offices where such filing is necessary or appropriate, and (iii) with respect to real property, the execution of a mortgage and the providing of environmental reports, title insurance policies, surveys and appraisals, in order to grant to the Administrative Agent a perfected Lien (subject only to Permitted Liens and other security interests permitted under the Loan Documents) in such Collateral pursuant to, and to the full extent required by, the Collateral Documents and this Agreement. 64 (d) ADDITIONAL PLEDGE. The Borrower shall, and shall cause each Guarantor to, pursuant to and in accordance with the appropriate Pledge Agreement, pledge and deliver to the Administrative Agent for the benefit of itself, the Lenders and the Issuing Banks, all shares of stock, intercompany promissory notes and other property that would have constituted Collateral under such Pledge Agreement on the date hereof that are acquired by the Borrower or any Guarantor after the date hereof. (e) ADDITIONAL GUARANTORS. The Borrower will cause each Subsidiary of the Borrower established or created after the Closing Date which the Borrower determines in its sole discretion to designate as a Guarantor and Restricted Subsidiary hereunder to execute a Subsidiary Guaranty and thereby become a Guarantor and Restricted Subsidiary for all purposes hereunder. (f) GRANT OF SECURITY BY NEW GUARANTORS. The Borrower will cause each Guarantor established or created after the Closing Date to grant to the Administrative Agent a first priority Lien (subject to Permitted Liens and other security interests permitted under the Loan Documents) on all property (tangible and intangible) of such Guarantor by executing and delivering an appropriate Security Agreement and Pledge Agreement, or on other terms satisfactory in form and substance to the Administrative Agent. The Borrower shall cause each such Guarantor, at its own expense, to execute, acknowledge and deliver, or cause the execution, acknowledgment and delivery of, and thereafter register, file or record in any appropriate governmental office, any documents or instruments reasonably deemed by the Administrative Agent to be necessary or desirable for the creation and perfection of the foregoing Liens. The Borrower will cause each of the Guarantors to take all actions requested by the Administrative Agent (including, without limitation, the filing of UCC-1s) in connection with the granting of such security interests. ARTICLE 7. NEGATIVE COVENANTS. So long as any Lender shall have any Commitment hereunder, or any Loan or any other Obligation shall remain outstanding, unpaid or unsatisfied to the Lenders, the Issuing Banks or the Administrative Agent, the Borrower shall not, and shall not permit any Restricted Subsidiary or any of its other Subsidiaries, to do, agree to do, or permit to be done, any of the following: Section 7.1 INDEBTEDNESS. As to the Borrower or any Restricted Subsidiary, create, incur, permit to exist or have outstanding any Indebtedness, except: (a) Indebtedness of the Borrower and the Guarantors to the Lenders, the Issuing Banks and the Administrative Agent under this Agreement and the Notes; (b) Indebtedness of the Borrower outstanding under the Senior 1995 Notes and the Senior 1996 Notes; 65 (c) Permitted Debt and the TCI Convertible Debt; (d) Taxes, assessments and governmental charges, non-interest bearing accounts payable and accrued liabilities, in any case not more than 120 days past due from the original due date thereof, and non-interest bearing deferred liabilities other than for borrowed money (e.g., deferred compensation and deferred taxes), in each case incurred and continuing in the ordinary course of business; (e) Indebtedness secured by the security interests referred to in subsection 7.2(b) hereof and Capitalized Lease Obligations, in an aggregate amount for such Indebtedness and Capitalized Lease Obligations not exceeding $15,000,000, and in each case incurred only if, after giving effect thereto, the limitation on Capital Expenditures set forth in Section 7.13 hereof would not be breached; (f) Permitted Intercompany Debt outstanding on the date of this Agreement, so long as (i) no Default or Event of Default has occurred and is continuing either before or after giving effect thereto, (ii) no Material Adverse Effect would result therefrom, and (iii) during the time such Debt is outstanding, neither ResNet Inc. nor ResNet LLC shall make any distributions on or in respect of its capital stock or membership interests to any Person other than the Borrower or ResNet Inc.; PROVIDED, HOWEVER, that ResNet LLC may make such distributions as are permitted by subsection 7.5(c) hereof; (g) Indebtedness, not exceeding an amount equal to 5% of the consolidated assets of the Borrower and its Restricted Subsidiaries taken as a whole, of Restricted Subsidiaries which are acquired by the Borrower after the date hereof; PROVIDED, HOWEVER, that such Indebtedness was not created in anticipation of or in connection with such acquisition; (h) Indebtedness not to exceed $1,000,000 in the aggregate incurred by the Borrower in connection with its purchase and construction of improvements on real property constituting the Borrower's headquarters offices; PROVIDED, that such Indebtedness shall not exceed the lesser of the cost or fair market value of such real property and shall not be renewed, extended or, except in accordance with Section 7.8 hereof, prepaid from the proceeds of any borrowing by the Borrower or any Subsidiary; and (i) Refinancings of Indebtedness permitted pursuant hereto in accordance with Section 7.8 hereof. Section 7.2 LIENS. Create, or assume or permit to exist, any Lien on any of the properties or assets of the Borrower or any Restricted Subsidiary, whether now owned or hereafter acquired, except: (a) Permitted Liens; 66 (b) Purchase money mortgages or security interests, conditional sale arrangements and other similar security interests, on motor vehicles and equipment acquired by the Borrower or any Subsidiary (hereinafter referred to individually as a "PURCHASE MONEY SECURITY INTEREST") with the proceeds of the Indebtedness referred to in subsection 7.1(e) hereof; PROVIDED, HOWEVER, that: (i) The transaction in which any Purchase Money Security Interest is proposed to be created is not then prohibited by this Agreement; (ii) Any Purchase Money Security Interest shall attach only to the property or asset acquired in such transaction and shall not extend to or cover any other assets or properties of the Borrower or a Subsidiary; (iii) The Indebtedness secured or covered by any Purchase Money Security Interest shall not exceed the lesser of the cost or fair market value of the property or asset acquired and shall not be renewed, extended or, except in accordance with Section 7.8 hereof, prepaid from the proceeds of any borrowing by the Borrower or any Subsidiary; and (iv) Any such Lien shall be created within one hundred twenty (120) days after the date on which the property or asset to which such Lien relates is acquired; (c) The interests of the lessor under any Capitalized Lease permitted hereunder; (d) Liens securing Indebtedness of newly-acquired Restricted Subsidiaries; PROVIDED, THAT such Liens (i) existed at the time such Restricted Subsidiary was acquired, extend only to the property and assets of such Restricted Subsidiary and were not created in anticipation of or in connection with such acquisition, (ii) do not exceed 5% of the consolidated assets of the Borrower and its Restricted Subsidiaries taken as a whole, and (iii) secure Indebtedness which does not exceed the limitation set forth in subsection 7.1(g) hereof; and (e) A mortgage securing the Indebtedness referred to in subsection 7.1(h) hereof; PROVIDED that such mortgage shall attach only to the real property to which such Indebtedness relates and shall not extend to or cover any other assets or properties of the Borrower or a Subsidiary. Section 7.3 GUARANTIES. As to the Borrower or any Restricted Subsidiary, assume, endorse, be or become liable for, or guarantee, the obligations of any Person, except: (a) as permitted under Sections 7.1 and 7.9 hereof; and (b) by the endorsement of negotiable instruments for deposit or collection in the ordinary course of business. 67 For the purposes hereof, the term "guarantee" or "guaranties" shall include any agreement, whether such agreement is on a contingency or otherwise, to purchase, repurchase or otherwise acquire Indebtedness of any other Person, or to purchase, sell or lease, as lessee or lessor, property or services, in any such case primarily for the purpose of enabling another person to make payment of Indebtedness, or to make any payment (whether as an advance, capital contribution, purchase of an equity interest or otherwise) to assure a minimum equity, asset base, working capital or other balance sheet or financial condition, in connection with the Indebtedness of another Person, or to supply funds to or in any manner invest in another Person in connection with such Person's Indebtedness. Section 7.4 MERGERS, ACQUISITIONS. As to the Borrower or any Restricted Subsidiary, merge or consolidate with any Person (whether or not the Borrower or any Subsidiary is the surviving entity), or acquire all or substantially all of the assets or any of the capital stock of any Person; except, so long as no Default or Event of Default shall have occurred and be continuing either immediately before or after giving effect thereto and no Material Adverse Effect would result therefrom, that (a) any Wholly-Owned Subsidiary of the Borrower may merge with and into the Borrower so long as the Borrower is the surviving entity, (b) any Wholly-Owned Subsidiary of the Borrower may merge with and into any other Wholly-Owned Subsidiary of the Borrower, and (c) any acquisition constituting an Investment made in accordance with the conditions set forth in subsection 7.9(e) hereof shall be permitted hereunder. Section 7.5 REDEMPTIONS; DISTRIBUTIONS. (a) As to the Borrower or any Restricted Subsidiary, make or become obligated to make, directly or indirectly, any purchase, redemption, retirement, repayment, prepayment, defeasance, or acquisition, whether by way of put, call, sinking fund or otherwise, with respect to any shares of any class of capital stock (or warrants or options with respect thereto) of the Borrower or, except as permitted in accordance with subsections 7.9(d) or 7.9(e) hereof, any Subsidiary, now or hereafter outstanding or set apart any sum for any such purpose; PROVIDED, HOWEVER, that the Borrower may purchase or acquire shares of capital stock of the Borrower or a Restricted Subsidiary (or options, warrants or other rights to acquire such capital stock) (i) in exchange for, or out of the proceeds of a substantially concurrent offering of, shares of capital stock of the Borrower or such Restricted Subsidiary or (ii) at any time when Total Leverage (as shown in the most recent certificate delivered pursuant to Section 5.5) is 4.50 to 1.0 or less (before and after giving effect thereto) and no Default or Event of Default has occurred and continuing (before and after giving effect thereto), in an aggregate cumulative amount of $5,000,000 during the term of this Agreement (cumulated with any dividends or distributions made pursuant to subsection 7.5(b)); or (b) As to the Borrower, declare or pay any dividends or make any distribution of any kind on the Borrower's outstanding stock, or set aside any sum for any such purpose, PROVIDED, HOWEVER, that the Borrower may (i) declare or pay any dividend payable solely in shares of its capital stock, (ii) so long as no Default or Event of Default has occurred and is continuing, pay dividends on shares of preferred stock issued after the date of this Agreement (on terms, convenants and conditions satisfactory to the Administrative Agent and the Required 68 Lenders) and solely for cash proceeds if such dividends do not exceed an annual amount equal to ten percent (10%) of such cash proceeds (the "PREFERRED STOCK DIVIDENDS") and (iii) at any time when Total Leverage (as shown in the most recent certificate delivered pursuant to Section 5.5) is 4.50 to 1.0 or less (before and after giving effect thereto) and no Default or Event of Default has occurred and continuing (before and after giving effect thereto), pay such dividends or make such distributions in an aggregate cumulative amount of $5,000,000 during the term of this Agreement (cumulated with any purchases, redemptions or acquisitions made pursuant to subsection 7.5(a)); or (c) As to any Restricted Subsidiary, declare or pay any dividends or make any distribution of any kind on the outstanding capital stock (or membership interests, in the case of a limited liability company) of any Restricted Subsidiary, or set aside any sum for any such purpose, except for payments or distributions made to the Borrower; PROVIDED, HOWEVER, that ResNet LLC shall be permitted to (i) pay PRO RATA dividends or distributions on its outstanding membership interests, including the interests of its minority member, for the purpose of enabling its members to meet their federal, state and local estimated tax obligations or (ii) make a PRO RATA distribution of the Newco Common Stock to its minority member. Section 7.6 STOCK ISSUANCES. As to any Restricted Subsidiary of the Borrower, not issue any additional shares or any right or option to acquire any shares, or any security convertible into any shares, of such Restricted Subsidiary's capital stock, except (a) as permitted under Section 7.5 hereof, (b) for the purpose of qualifying directors of such Restricted Subsidiary, and (c) for issuances, at the greater of cost or fair value (as determined in good faith by the Borrower's board of directors), of securities or other ownership interests in any Restricted Subsidiary of the Borrower constituting an Investment made after the date of this Agreement in accordance with subsection 7.9(e) hereof; PROVIDED, HOWEVER, that all issuances of securities or other ownership interests permitted under clause (c) above shall not exceed a Substantial Portion in regard to Restricted Subsidiaries other than ResNet Inc. Section 7.7 CHANGES IN BUSINESS; ASSET DISPOSITIONS. Make any material change in its business, or in the nature of its operation, or liquidate or dissolve itself (or suffer any liquidation or dissolution), or make any Asset Disposition or sell or transfer (other than in an original issuance) any shares of stock or any Indebtedness, whether now owned or hereafter acquired, or discount, sell, pledge, hypothecate or otherwise dispose of accounts receivable; except (a) (i) the Borrower may dissolve any Subsidiary which is not a Restricted Subsidiary, provided, that, immediately thereafter, all of the proceeds thereof are received by the Borrower in proportion to its ownership of such Subsidiary and (ii) the Borrower and its Subsidiaries may make Asset Dispositions which, in the aggregate in any fiscal year, do not constitute a Substantial Portion, PROVIDED, THAT (1) the asset which is the subject of such Asset Disposition shall not consist of any security or other ownership interest in a Restricted Subsidiary, (2) no Default or Event of Default shall have occurred and be continuing either immediately before or after giving effect thereto, (3) no Material Adverse Effect would result therefrom, (4) the consideration received therefor is at least equal to the fair market value of such Assets, (5) the consideration received therefor is at least 75% in cash and the balance in a promissory note on commercially reasonable terms and not subordinate to any other Indebtedness of the purchaser 69 thereof and (6) the aggregate net proceeds thereof are applied as required by subsection 2.7(a) hereof; and (b) as permitted pursuant to and in accordance with subsection 7.9(e) hereof. Section 7.8 PREPAYMENTS AND REPAYMENTS OF INDEBTEDNESS. As to the Borrower or any Restricted Subsidiary, make any voluntary or optional prepayment, repurchase, redemption or defeasance of any Indebtedness for borrowed money incurred or permitted to exist under the terms of this Agreement, other than Indebtedness evidenced by the Notes; PROVIDED, HOWEVER, that the Borrower or any Restricted Subsidiary may refinance Indebtedness for money borrowed incurred pursuant to and in accordance with Section 7.1 hereof, so long as: (1) except to the extent otherwise permitted pursuant to subsection 7.1(g) hereof, the principal amount of the proposed Indebtedness shall not exceed the principal amount of the Indebtedness being refinanced, (2) such refinancing would not result in the payment of a prepayment penalty or other similar fees in respect thereof which in the aggregate would exceed $10,000,000, but in any case payment of such penalty or fees shall be permitted only to the extent such penalty or fees are payable out of the proceeds of the proposed Indebtedness, (3) the terms and conditions of the proposed Indebtedness are no less favorable to the Borrower, its Restricted Subsidiaries or, in the Administrative Agent's determination, the Lenders, than the Indebtedness being refinanced, and (4) no Default or Event of Default shall have occurred and be continuing either immediately before or after giving effect to such refinancing and no Material Adverse Effect would result from such refinancing. Section 7.9 INVESTMENTS. Make, or suffer to exist, any Investment in any Person, including, without limitation, any shareholder, director, officer or employee of the Borrower or any of its Subsidiaries, except: (a) Investments in: (i) obligations issued or guaranteed by the United States of America; (ii) certificates of deposit, bankers acceptances and other "money market instruments" issued by any commercial bank organized under the laws of the United States or any State thereof or any other country which is a member of the Organization for Economic Cooperation and Development (provided that such bank is acting through a branch or agency located in the United States) and having capital and surplus in an aggregate amount of not less than $100,000,000 (an "ELIGIBLE BANK"); (iii) open market commercial paper bearing the highest credit rating issued by Standard & Poor's Corporation or by another nationally recognized credit rating agency; (iv) repurchase agreements entered into with any Eligible Bank relating to United States of America government obligations; and (v) shares of "money market funds", each having net assets of not less than $100,000,000; 70 in each case maturing or being due or payable in full not more than 180 days after the Borrower's acquisition thereof; (b) Investments in the form of (i) loans or advances to directors, officers or employees of the Borrower or any Subsidiary, or guarantees or assumptions of the payment obligations of such Persons with respect to such loans or advances, made for the purpose of financing the exercise of stock options or similar instruments issued by the Borrower to such Persons (and the payment of taxes related thereto in an aggregate amount not exceeding $3,000,000), which loans or advances are secured by, and repayable out of the proceeds of any sale of, the stock issued upon exercise of such options; PROVIDED that the terms of any such loan, advance, guarantee or assumption have been approved by the Compensation Committee of the Borrower, and (ii) other loans to employees of the Borrower or any Subsidiary not exceeding $60,000 to any one employee, or $250,000 in the aggregate to all employees, in principal amount at any time outstanding. (c) Investments by the Borrower in any Restricted Subsidiary and by any Restricted Subsidiary in the Borrower or another Restricted Subsidiary as in effect on the date hereof; (d) So long as no Default or Event of Default shall have occurred and be continuing either immediately before or after giving effect to any such Investment, Investments by the Borrower or any Restricted Subsidiary consisting of Permitted Intercompany Debt; and (e) (A) Investments in ResNet Inc. consisting of the Newco Investments; PROVIDED, HOWEVER, that up to an additional $5,000,000 of Investments (which shall include the cash portion of any buy-out of PrimeStar Inc.'s interest in ResNet LLC or the Newco Common Stock) may be made in Newco to the extent that any such amount is included within, and subject to the overall limitation, on aggregate Investments permitted under Section 7.9(e)(C); (B) Investments in Restricted Subsidiaries other than ResNet Inc.; (C) Investments, other than those set forth above, by the Borrower or its Subsidiaries in other Persons which do not exceed in the aggregate at any time outstanding an amount equal to 10% of the consolidated assets of the Borrower and its Restricted Subsidiaries taken as a whole; and (D) non-cash, acquisition Investments by the Borrower (x) of any entity which has had positive Operating Cash Flow during the immediately preceding twelve-month period, (y) in which shares of the Borrower's common stock constitute the sole consideration used in the acquisition transaction, and (z) the cumulative aggregate amount of shares of the Borrower's common stock used for such Investments during the term of this Agreement does not exceed 20% of the number of Borrower's shares of common stock outstanding on the date hereof; PROVIDED, THAT in the case of (B), (C) and (D) above: 71 (i) the entire amount of all Indebtedness assumed, directly or indirectly, by the Borrower or any Subsidiary in connection with each such Investment shall be permitted under Section 7.1 hereof; (ii) except to the extent permitted under Section 7.1 hereof, all liabilities associated with any such Investment shall be non-recourse to the Borrower and its Subsidiaries (other than the Subsidiary in which any such Investment is being made), and the Borrower and its Subsidiaries shall have no further obligation to provide funds or otherwise finance such Investment; (iii) each such Investment shall be in Persons incorporated, organized or otherwise formed under the laws of any state of the United States of America or any province of Canada; (iv) no such Investment shall be of a nature which would subject the Administrative Agent or any Lender to regulatory or third party approval in connection with the exercise of their rights and remedies under this Agreement, the Subsidiaries Guaranty, the Collateral Documents or any other Loan Document; and (v) no Default or Event of Default shall have occurred and be continuing either immediately before or after giving effect to such Investment and no Material Adverse Effect would result therefrom. Section 7.10 FISCAL YEAR. Change its fiscal year. Section 7.11 ERISA OBLIGATIONS. (a) Permit the occurrence of any Termination Event, or the occurrence of a termination or partial termination of a Defined Contribution Plan which would result in a liability to any Loan Party or ERISA Affiliate in excess of $100,000; or (b) Permit the present value of all benefit liabilities under all Pension Plans to exceed the current value of the assets of such Pension Plans allocable to such benefit liabilities by more than $100,000; or (c) Permit any accumulated deficiency (as defined in Section 302 of ERISA and Section 412 of the Code) with respect to any Pension Plan, whether or not waived; or (d) Fail to make any contribution or payment to any Multiemployer Plan which any Loan Party or ERISA Affiliate may be required to make under any agreement relating to such Multiemployer Plan, or any law pertaining thereto which results in or is likely to result in a liability in excess of $100,000; or (e) Engage, or permit any Loan Party or ERISA Affiliate to engage, in any prohibited transaction under Section 406 of ERISA or Section 4975 of the Code, for which a civil penalty pursuant to Section 502(i) of ERISA or a tax pursuant to Section 4975 of the Code in excess of $100,000 is imposed; or 72 (f) Engage or permit any Loan Party or ERISA Affiliate to engage, in any breach of fiduciary duty under Part 4 of Title I of ERISA for which twenty percent (20%) of the applicable recovery amount imposed under Section 502(l) of ERISA could exceed $100,000; or (g) Permit the establishment of any Employee Benefit Plan providing post-retirement welfare benefits or establish or amend any Employee Benefit Plan which establishment or amendment could result in liability to any Loan Party or ERISA Affiliate or increase the obligation of any Loan Party or ERISA Affiliate to a Multiemployer Plan which liability or increase, individually or together with all similar liabilities and increases, is material to any Loan Party or ERISA Affiliate; or (h) Permit any Loan Party or ERISA Affiliate to be or become obligated to the PBGC in excess of $100,000 other than in respect of annual premium payments; or (i) Fail, or permit any Loan Party or ERISA Affiliate to fail, to establish, maintain and operate each Employee Benefit Plan in compliance in all material respects with the provisions of ERISA, the Code and all other applicable laws and the regulations and interpretations thereof, which action or omission by such Loan Party or ERISA Affiliate is not curable or resolvable under the Voluntary Compliance Resolutions Program or the Closing Agreement Program with the IRS (which action is at all times being diligently pursued by such Loan Party or ERISA Affiliate in good faith by appropriate proceedings) and would result in a liability to any Loan Party or ERISA Affiliate in excess of $100,000. Section 7.12 AMENDMENTS OF DOCUMENTS. As to the Borrower or any Restricted Subsidiary, modify, amend, supplement or terminate, or agree to modify, amend, supplement or terminate, its certificate of incorporation (except, with respect to the Borrower or a Restricted Subsidiary and to the extent permitted hereunder, in connection with the issuance of capital stock of the Borrower or a Restricted Subsidiary pursuant to a public offering or private placement of such securities; PROVIDED, THAT reasonably prior to the effectiveness of any such amendment, the Borrower shall deliver a copy of such amendment to the Administrative Agent) or by-laws; or modify, amend or supplement, or agree to modify, amend or supplement, any Senior Note Document if the effect of such amendment, modification or supplement is to increase the principal amount of the Senior 1995 Notes or the Senior 1996 Notes, increase the interest rate on the Senior 1995 Notes or the Senior 1996 Notes, change (to earlier dates) the dates upon which payments of principal or interest are due on the Senior 1995 Notes or the Senior 1996 Notes, shorten the amortization schedule on the Senior 1995 Notes or the Senior 1996 Notes, alter any default, event of default or condition thereto with respect to the Senior Note Documents or the remedies applicable thereto in a manner which would be adverse to the Borrower, its Subsidiaries or, in the Administrative Agent's determination, to the Lenders, grant any security interest in favor of the holders of the Senior 1995 Notes or the Senior 1996 Notes, change the redemption provisions of the Senior Note Documents in a manner which, in the Administrative Agent's determination, would be adverse to the Lenders, or, together with all other amendments, 73 modifications or supplements made to the Senior Note Documents, would increase materially the obligations of the Borrower under the Senior Note Documents or confer additional rights on the holders of the Senior 1995 Notes or the Senior 1996 Notes which would be adverse to the Borrower, its Subsidiaries or, in the Administrative Agent's determination, the Lenders. Section 7.13 CAPITAL EXPENDITURES. Make or be or become obligated to make Capital Expenditures in the aggregate for the Borrower and its Restricted Subsidiaries during each fiscal year of the Borrower in excess of the sum of (i) the respective base amounts set forth below opposite each fiscal year (each, a "BASE MAXIMUM CAPITAL EXPENDITURES AMOUNT"), PLUS (ii) the amount of net cash proceeds received by the Borrower during such fiscal year from the issuance by the Borrower after January 1, 1999 of capital stock and/or Permitted Debt:
Fiscal Year Ending Base Maximum Capital December 31, Expenditures Amount ------------ ------------------- 1999 $57,500,000 2000 $55,500,000 2001 $54,000,000 2002 $50,000,000 2003 $45,000,000 2004 $40,000,000 2005 $40,000,000
PROVIDED, HOWEVER, that the amount permitted to be expended in a fiscal year which is not expended in such fiscal year shall be permitted to be expended in the immediately succeeding fiscal year only. Section 7.14 RENTAL OBLIGATIONS. Enter into, or permit to remain in effect, any Lease (other than Capitalized Leases that are governed by subsection 7.1(e) hereof) if, after giving effect thereto, the aggregate amount of all Rentals due from the Borrower and its Restricted Subsidiaries thereunder would exceed $750,000 during any fiscal year. Section 7.15 MANAGEMENT FEES. Pay, or be or become obligated to pay, any Management Fees to any Person, or any interest on any deferred obligation therefor, including, without limitation, to any shareholder, director, officer or employee of the Borrower. Section 7.16 TRANSACTIONS WITH AFFILIATES. Except as expressly permitted by this Agreement, directly or indirectly: (a) make any Investment in an Affiliate; (b) transfer, sell, lease, assign or otherwise dispose of any assets to an Affiliate; (c) merge into or consolidate with or purchase or acquire assets from an Affiliate; or (d) enter into any other transaction directly or indirectly with or for the benefit of any Affiliate (including, without limitation, guarantees and assumptions of obligations of an Affiliate); PROVIDED, HOWEVER, that: (i) Investments expressly permitted by Section 7.9 hereof may be made, (ii) any Affiliate who is a natural person may serve as an employee or director of the Borrower or any Subsidiary and receive reasonable 74 compensation for his services in such capacity, and (iii) the Borrower or any Subsidiary may enter into any transaction with an Affiliate providing for the leasing of property, the rendering or receipt of services or the purchase or sale of product, inventory and other assets in the ordinary course of business if the monetary or business consideration arising therefrom would be substantially as advantageous to the Borrower or a Subsidiary as the monetary or business consideration that would obtain in a comparable arm's length transaction with a Person not an Affiliate (and for this purpose, the payment of a Management Fee by ResNet Inc. to the Borrower shall be deemed to be a permitted transaction hereunder). Section 7.17 HAZARDOUS MATERIAL. (a) Cause or permit: (i) any Hazardous Material to be placed, held, located or disposed of, on, under or at any real property of Borrower or any Subsidiary or any part thereof, except for such Hazardous Materials that are necessary for the Borrower's or any Subsidiary's or any tenant's operation of its business thereon and which shall be used, stored, treated and disposed of in compliance with all applicable Environmental Laws and Regulations or (ii) such real property or any part thereof to be used as a collection, storage, treatment or disposal site for any Hazardous Material. (b) The Borrower and each Subsidiary acknowledges and agrees that the Administrative Agent and the Lenders shall have no liability or responsibility for either: (i) damage, loss or injury to human health, the environment or natural resources caused by the presence, disposal, release or threatened release of Hazardous Materials on any part of such real property; or (ii) abatement and/or clean-up required under any applicable Environmental Laws and Regulations for a release, threatened release or disposal of any Hazardous Materials located at such real property or used by or in connection with the Borrower's or any Subsidiary's or any such tenant's business. ARTICLE 8. EVENTS OF DEFAULT. Section 8.1 EVENT OF DEFAULT. Any of the following shall constitute an "EVENT OF DEFAULT": (a) PAYMENTS. Failure to (a) make any payment or mandatory prepayment of principal when due on any Loan or any Note or (b) make any payment of any interest on any Loan or Note or any Fee or other amount owing under the Loan Documents within five (5) Business Days of when due; or (b) CERTAIN COVENANTS. Failure to perform or observe any of the agreements of the Borrower or any Subsidiary contained in Section 6.9 or Article 7 hereof; or 75 (c) OTHER COVENANTS. (i) Failure by the Borrower to perform or observe any other term, condition or covenant of this Agreement or of any of the other Loan Documents to which it is a party, which shall remain unremedied for a period of thirty (30) days after notice thereof shall have been given to the Borrower by the Administrative Agent; or (ii) Failure by any Loan Party other than the Borrower to perform or observe any term, condition or covenant of any of the Loan Documents to which it or he is a party, which shall remain unremedied for a period of thirty (30) days after notice thereof shall have been given to the Borrower by the Administrative Agent; or (d) OTHER DEFAULTS. (i) Failure to perform or observe any term, condition or covenant of any bond, note, debenture, loan agreement, indenture, guaranty, trust agreement, mortgage or similar instrument to which the Borrower or any Subsidiary is a party or by which it is bound, or by which any of its properties or assets may be affected including, without limitation, any Senior Note Document (a "DEBT INSTRUMENT"), so that, as a result of any such failure to perform, the Indebtedness included therein or secured or covered thereby may be declared due and payable prior to the date on which such Indebtedness would otherwise become due and payable; or (ii) Any event or condition referred to in any Debt Instrument shall occur or fail to occur, so that, as a result thereof, the Indebtedness included therein or secured or covered thereby may be declared due and payable prior to the date on which such Indebtedness would otherwise become due and payable; or (iii) Failure to pay any Indebtedness for borrowed money due at final maturity or pursuant to demand under any Debt Instrument; PROVIDED, HOWEVER, that the provisions of this Section 8.1(d) shall not be applicable to (y) any Debt Instrument other than a guarantee (as defined in Section 7.3 hereof) that, on the date this Section 8.1(d) would otherwise be applicable thereto, relates to or evidences Indebtedness in a principal amount of less than $2,500,000 or (z) Debt Instruments which constitute guaranties (as defined in Section 7.3 hereof) that, on the date this Section 8.1(d) would otherwise be applicable thereto, relate to or evidence, both individually and collectively, Indebtedness in a principal amount of less than $2,500,000; or (e) REPRESENTATIONS AND WARRANTIES. Any representation or warranty made in writing to the Lenders or the Administrative Agent in any of the Loan Documents or in connection with the making of the Loans, or any certificate, statement or report made or delivered in compliance with this Agreement, shall have been false or misleading in any material respect when made or delivered; or (f) BANKRUPTCY. 76 (i) The Borrower or any Subsidiary shall make an assignment for the benefit of creditors, file a petition in bankruptcy, be adjudicated insolvent, petition or apply to any tribunal for the appointment of a receiver, custodian, or any trustee for it or a substantial part of its assets, or shall commence any proceeding under any bankruptcy, reorganization, arrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, whether now or hereafter in effect, or the Borrower or any Subsidiary shall take any corporate action to authorize any of the foregoing actions; or there shall have been filed any such petition or application, or any such proceeding shall have been commenced against it, that remains undismissed for a period of sixty (60) days or more; or any order for relief shall be entered in any such proceeding; or the Borrower or any Subsidiary by any act or omission shall indicate its consent to, approval of or acquiescence in any such petition, application or proceeding or the appointment of a custodian, receiver or any trustee for it or any substantial part of any of its properties, or shall suffer any custodianship, receivership or trusteeship to continue undischarged for a period of sixty (60) days or more; or (ii) The Borrower or any Subsidiary shall generally not pay its debts as such debts become due; or (iii) The Borrower or any Subsidiary shall have concealed, removed, or permitted to be concealed or removed, any part of its property, with intent to hinder, delay or defraud its creditors or any of them or made or suffered a transfer of any of its property that may be fraudulent under any bankruptcy, fraudulent conveyance or similar law; or (g) JUDGMENTS. Any judgment against the Borrower or any Subsidiary or any attachment, levy or execution against any of its properties for any amount in excess of $2,500,000, individually or in the aggregate, shall remain unpaid, unstayed on appeal, undischarged, unbonded or undismissed for a period of thirty (30) days or more; or (h) ERISA. (i) The termination of any Plan or the institution by the PBGC of proceedings for the involuntary termination of any Plan, in either case, by reason of, or that results or could result in, a "material accumulated funding deficiency" under Section 412 of the Code; or (ii) Failure by the Borrower to make required contributions, in accordance with the applicable provisions of ERISA, to each of the Plans hereafter established or assumed by it; or (i) CHANGE OF CONTROL. At any time, (i) any Person or "group" has acquired "beneficial ownership" (as such terms are defined under Section 13d-3 of and Regulation 13D under the Securities Exchange Act of 1934, as amended) either directly or indirectly, of more than forty percent (40%) of the outstanding shares of stock of the Borrower having the right to vote for the election of directors of the Borrower under ordinary circumstances or (ii) more than fifty percent (50%) of the Persons constituting the Borrower's 77 board of directors at the beginning of any consecutive twenty-four (24) month period shall have been replaced by new directors not nominated for membership on the board of directors by two-thirds of the directors who were directors at the beginning of such period. (j) COLLATERAL. (i) any Collateral Document shall for any reason cease to be valid and binding on or enforceable in any material respect against the Borrower or any Loan Party thereto, or the Borrower or any Loan Party shall so state in writing or bring an action to limit its obligations or liabilities thereunder; or (ii) any Collateral Document shall for any reason (other than pursuant to the terms thereof) cease to create a valid security interest in the Collateral purported to be covered thereby or such security interest shall for any reason cease to be a perfected and first priority security interest subject only to Permitted Liens and other security interests permitted under the Loan Documents. Section 8.2 REMEDIES. If any Event of Default occurs, the Administrative Agent shall, at the request of, or may, with the consent of, the Required Lenders, (a) declare the Commitment of each Lender to make Loans, and of any Issuing Bank to issue L/Cs, to be terminated, whereupon such Commitments shall forthwith be terminated; (b) declare the unpaid principal amount of all outstanding Loans and all outstanding Unreimbursed Drawings, together with all interest accrued and unpaid thereon, and all other amounts owing or payable hereunder or under any other Loan Document, to be immediately due and payable, without presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived by the Borrower; and (c) exercise on behalf of itself, the Lenders and the Issuing Banks all rights and remedies available to it and the Lenders under the Loan Documents or applicable law; PROVIDED, HOWEVER, that upon the occurrence of any event specified in paragraph (f) of Section 8.1 above (in the case of clause (i) of paragraph (f) upon the expiration of the 60-day period mentioned therein), the obligation of each Lender to make Loans shall automatically terminate and the unpaid principal amount of all outstanding Loans and all interest and other amounts as aforesaid shall automatically become due and payable without further act of the Administrative Agent or any Lender. Section 8.3 RIGHTS NOT EXCLUSIVE. The rights provided for in this Agreement and the other Loan Documents are cumulative and are not exclusive of any other rights, powers, privileges or remedies provided by law or in equity, or under any other instrument, document or agreement now existing or hereafter arising. 78 Section 8.4 RIGHT OF ADMINISTRATIVE AGENT TO USE AND OPERATE COLLATERAL; CONSENT TO APPOINTMENT OF RECEIVER. (a) Upon the occurrence and during the continuance of any Event of Default, but subject to the provisions of the UCC or other applicable law, the Administrative Agent, on behalf of itself, the Lenders and the Issuing Banks, shall have the right and power to take possession of all or any part of the Collateral, and to exclude the Borrower and all persons claiming under the Borrower wholly or partly therefrom, and thereafter to hold, store, and/or use, operate, manage and control the same. Upon any such taking of possession, the Administrative Agent may, from time to time, at the expense of the Borrower, make all such repairs, replacements, alterations, additions and improvements to and of the Collateral as the Administrative Agent may reasonably deem proper. In any such case the Administrative Agent shall have the right to manage and control the Collateral and to carry on the business and to exercise all rights and powers of the Borrower in respect thereto as the Administrative Agent shall deem best, including the right to enter into any and all such agreements with respect to the operation of the Collateral or any part thereof as the Administrative Agent may see fit, and the Administrative Agent shall be entitled to collect and receive all rents, issues, profits, fees, revenues and other income of the same and every part thereof. The reasonable costs and expenses of the collection, including without limitation, attorneys' fees, shall be borne by the Borrower. Such rents, issues, profits, fees, revenues and other income shall be applied to pay the expenses of holding and operating the Collateral and of conducting the business thereof, and of all maintenance, repairs, replacements, alterations, additions and improvements, and to make all payments which the Administrative Agent may be required or may elect to make, if any, for taxes, assessments, insurance and other charges upon the Collateral or any part thereof, and all other payments which the Administrative Agent may be required or authorized to make under the povision of this Agreement (including legal costs and reasonable attorneys' fees). The remainder of such rents, issues, profits, fees, revenues and other income shall be applied to the payment of the Obligations in such order of priority as provided in the Collateral Documents and, unless otherwise provided by law or by a court of competent jurisdiction, any surplus shall be returned to the Borrower or to any person or party lawfully entitled thereto (including, if applicable, any subordinated creditors of the Borrower). (b) WITHOUT LIMITING THE GENERALITY OF THE FOREGOING AND WITHOUT DEROGATING FROM ANY RIGHT, REMEDY OR OTHER PROVISION CONTAINED IN THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, AT ANY TIME FROM AND AFTER THIRTY (30) DAYS AFTER THE OCCURRENCE OF A PAYMENT DEFAULT, THE ADMINISTRATIVE AGENT SHALL HAVE THE RIGHT TO APPLY FOR AND HAVE A RECEIVER APPOINTED BY A COURT OF COMPETENT JURISDICTION IN ANY ACTION TAKEN BY THE ADMINISTRATIVE AGENT TO ENFORCE ITS RIGHTS AND REMEDIES HEREUNDER IN ORDER TO MANAGE, PROTECT AND PRESERVE THE COLLATERAL AND CONTINUE THE OPERATION OF THE BUSINESS OF THE BORROWER, OR TO SELL OR DISPOSE OF THE COLLATERAL, AND TO COLLECT ALL REVENUES AND PROFITS THEREOF AND APPLY THE SAME TO THE PAYMENT OF ALL EXPENSES AND OTHER CHARGES OF SUCH RECEIVERSHIP, INCLUDING THE COMPENSATION OF THE RECEIVER, SAID 79 EXPENSES TO CONSTITUTE PART OF THE OBLIGATIONS, AND TO THE PAYMENT OF THE OBLIGATIONS AS AFORESAID. TO THE EXTENT NOT PROHIBITED BY APPLICABLE LAW, THE BORROWER HEREBY IRREVOCABLY CONSENTS TO AND WAIVES ANY RIGHT TO OBJECT TO OR OTHERWISE CONTEST THE APPOINTMENT OF A RECEIVER AS PROVIDED ABOVE. THE BORROWER (I) GRANTS SUCH WAIVER AND CONSENT KNOWINGLY AFTER HAVING DISCUSSED THE IMPLICATIONS THEREOF WITH COUNSEL, (II) ACKNOWLEDGES THAT (A) THAT UNCONTESTED RIGHT TO HAVE A RECEIVER APPOINTED FOR THE FOREGOING PURPOSES IS CONSIDERED ESSENTIAL BY THE LENDERS IN CONNECTION WITH THE ENFORCEMENT OF THEIR RIGHTS AND REMEDIES HEREUNDER AND UNDER THE LOAN DOCUMENTS, AND (B) THE AVAILABILITY OF SUCH APPOINTMENT AS A REMEDY UNDER THE FOREGOING CIRCUMSTANCES WAS A MATERIAL FACTOR IN INDUCING THE LENDERS TO MAKE THE LOANS TO THE BORROWER; AND (III) TO THE EXTENT NOT PROHIBITED BY APPLICABLE LAW, AGREES TO ENTER INTO ANY AND ALL STIPULATIONS IN ANY LEGAL ACTIONS, OR AGREEMENTS OR OTHER INSTRUMENTS IN CONNECTION WITH THE FOREGOING AND TO COOPERATE FULLY WITH THE ADMINISTRATIVE AGENT AND THE LENDERS IN CONNECTION WITH THE ASSUMPTION AND EXERCISE OF CONTROL BY THE RECEIVER OVER ALL OR ANY PORTION OF THE COLLATERAL. ARTICLE 9. THE ADMINISTRATIVE AGENT. Section 9.1 APPOINTMENT, POWERS AND IMMUNITIES. Each Lender hereby irrevocably appoints and authorizes the Administrative Agent to act as its agent hereunder and under the other Loan Documents with such powers as are specifically delegated to the Administrative Agent by the terms of this Agreement and the other Loan Documents together with such other powers as are reasonably incidental thereto. The Administrative Agent shall have no duties or responsibilities except those expressly set forth in this Agreement and the other Loan Documents and shall not be a trustee for any Lender. The Administrative Agent shall not be responsible to the Lenders for any recitals, statements, representations or warranties contained in this Agreement or the other Loan Documents in any certificate or other document referred to or provided for in, or received by any of them under, this Agreement or the other Loan Documents, or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or the other Loan Documents or any other document referred to or provided for herein or therein or for the collectibility of the Loans or for any failure by the Borrower or any of the other Loan Parties to perform any of its obligations hereunder or under the other Loan Documents. The Administrative Agent may employ agents and attorneys-in-fact and shall not be answerable, except as to money or securities received by it or its authorized agents, for the negligence or misconduct of any such agents or attorneys-in-fact selected by it with reasonable care. Neither the Administrative Agent nor any of its directors, officers, employees or agents shall be liable or responsible for any action taken or omitted to be taken by it or them hereunder or under the other Loan Documents or in connection herewith or therewith, except for its or their own gross negligence or willful misconduct. 80 Section 9.2 RELIANCE BY ADMINISTRATIVE AGENT. The Administrative Agent shall be entitled to rely upon any certification, notice or other communication (including any thereof by telephone, telex, telegram or cable) believed by it to be genuine and correct and to have been signed or sent by or on behalf of the proper person or persons, and upon advice and statements of legal counsel, independent accountants and other experts selected by the Administrative Agent. As to any matters not expressly provided for by this Agreement or the other Loan Documents, the Administrative Agent shall in all cases be fully protected in acting, or in refraining from acting, hereunder or under the other Loan Documents in accordance with instructions signed by the Required Lenders, and such instructions of the Required Lenders and any action taken or failure to act pursuant thereto shall be binding on all of the Lenders. Section 9.3 EVENTS OF DEFAULT. The Administrative Agent shall not be deemed to have knowledge of the occurrence of a Default (other than the non-payment of principal of or interest on Loans) unless the Administrative Agent has received notice from a Lender or the Borrower specifying such Default and stating that such notice is a "Notice of Default". In the event that the Administrative Agent receives such a notice of the occurrence of a Default, the Administrative Agent shall give notice thereof to the Lenders (and shall give each Lender notice of each such non-payment). The Administrative Agent shall (subject to Section 9.7 hereof) take such action with respect to such Default as shall be directed by the Required Lenders. Section 9.4 RIGHTS AS A LENDER. With respect to its Commitment and the Loans made by it, the Administrative Agent in its capacity as a Lender hereunder shall have the same rights and powers hereunder as any other Lender and may exercise the same as though it were not acting as the Administrative Agent, and the term "Lender" or "Lenders" shall, unless the context otherwise indicates, include the Administrative Agent in its individual capacity. The Administrative Agent and its Affiliates may (without having to account therefor to any Lender) accept deposits from, lend money to and generally engage in any kind of banking, trust or other business with the Borrower or its Affiliates, as if it were not acting as the Administrative Agent, and the Administrative Agent may accept fees and other consideration from the Borrower or its Affiliates, for services in connection with this Agreement or any of the other Loan Documents or otherwise without having to account for the same to the Lenders. Section 9.5 INDEMNIFICATION. The Lenders shall indemnify the Administrative Agent (to the extent not reimbursed by the Borrower under Sections 10.1 and 10.2 hereof), ratably in accordance with the aggregate principal amount of the Loans made by the Lenders (or, if no Loans are at the time outstanding, ratably in accordance with their respective Commitments), for any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind and nature whatsoever that may be imposed on, incurred by or asserted against the Administrative Agent in any way relating to or arising out of this Agreement or any of the other Loan Documents or any other documents contemplated by or referred to herein or therein or the transactions contemplated by or referred to herein or therein or the transactions contemplated hereby and thereby (including, without limitation, the costs and expenses that the Borrower is obligated to pay under Sections 10.1 and 10.2 hereof, but excluding, unless a Default has occurred and is continuing, normal administrative costs and expenses incident to the performance of its agency duties hereunder) or 81 the enforcement of any of the terms hereof or of any such other documents, PROVIDED THAT no Lender shall be liable for any of the foregoing to the extent they arise from the gross negligence or willful misconduct of the party to be indemnified. Section 9.6 NON-RELIANCE ON ADMINISTRATIVE AGENT AND OTHER LENDERS. Each Lender agrees that it has, independently and without reliance on the Administrative Agent or any other Lender, and based on such documents and information as it has deemed appropriate, made its own credit analysis of the Borrower and decision to enter into this Agreement and that it will, independently and without reliance upon the Administrative Agent or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own analysis and decisions in taking or not taking action under this Agreement or the other Loan Documents. The Administrative Agent shall not be required to keep itself informed as to the performance or observance by the Borrower of this Agreement or the other Loan Documents or any other document referred to or provided for herein or therein or to inspect the properties or books of the Borrower. Except for notices, reports and other documents and information expressly required to be furnished to the Lenders by the Administrative Agent hereunder or under the other Loan Documents, the Administrative Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the affairs, financial condition or business of the Borrower, that may come into the possession of the Administrative Agent or any of its Affiliates. Section 9.7 FAILURE TO ACT. Except for action expressly required of the Administrative Agent hereunder, the Administrative Agent shall in all cases be fully justified in failing or refusing to act hereunder or thereunder unless it shall be indemnified to its satisfaction by the Lenders against any and all liability and expense that may be incurred by it by reason of taking or continuing to take any such action. Section 9.8 RESIGNATION OR REMOVAL OF ADMINISTRATIVE AGENT. Subject to the appointment and acceptance of a successor Administrative Agent as provided below, the Administrative Agent may resign at any time by giving not less than thirty (30) days' prior written notice thereof to the Lenders and the Borrower, and the Administrative Agent may be removed at any time with or without cause by the Required Lenders. Upon any such resignation or removal, the Required Lenders shall have the right to appoint a successor Administrative Agent from among the Lenders. If no successor Administrative Agent shall have been so appointed by the Required Lenders and shall have accepted such appointment within 30 days after the retiring Administrative Agent's giving of notice of resignation or the Required Lenders' removal of the retiring Administrative Agent, then the retiring Administrative Agent may, on behalf of the Lenders, after consultation with the Borrower, appoint a successor Administrative Agent from among the Lenders which shall be a bank with a combined capital and surplus of at least $100,000,000. Upon the acceptance of any appointment as Administrative Agent hereunder by a successor Administrative Agent, such successor Administrative Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations hereunder. After any retiring Administrative Agent's resignation or removal hereunder as Administrative Agent, the provisions of this Article 9 shall continue in effect for its 82 benefit in respect of any actions taken or omitted to be taken by it while it was acting as the Administrative Agent. Section 9.9 SHARING OF PAYMENTS. (a) Prior to any acceleration by the Administrative Agent and the Lenders of the Obligations: (i) in the event that any Lender shall obtain payment in respect of a Note, or interest thereon, whether voluntarily or involuntarily, and whether through the exercise of a right of banker's lien, set-off or counterclaim against the Borrower or any other Loan Party or otherwise, in a greater proportion than any such payment obtained by any other Lender in respect of the corresponding Note held by it, then the Lender so receiving such greater proportionate payment shall purchase for cash a participation from the other Lender or Lenders such portion of each such other Lender's or Lenders' Loan as shall be necessary to cause such Lender receiving the proportionate overpayment to share the excess payment with each Lender; and (ii) in the event that any Lender shall obtain payment in respect of any Interest Rate Contract to which such Lender is a party, whether voluntarily or involuntarily, and whether through the exercise of a right of banker's lien, set-off or counterclaim against the Borrower or any other Loan Party or otherwise, such Lender shall be permitted to retain the full amount of such payment and shall not be required to share such payment with any other Lender. (b) Upon or following any acceleration by the Administrative Agent and the Lenders of the Obligations, in the event that any Lender shall obtain payment in respect of a Note, or interest thereon, or in respect of an Interest Rate Contract to which such Lender is a party, or receive any collateral or proceeds thereof with respect to any Note or any Interest Rate Contract to which it is a party, whether voluntarily or involuntarily, and whether through the exercise of a right of banker's lien, set-off or counterclaim against the Borrower or any other Loan Party or otherwise, in a greater proportion than any such payment obtained by any other Lender in respect of the aggregate amount of the corresponding Note held by such Lender and any Interest Rate Contract to which such Lender is a party, then the Lender so receiving such greater proportionate payment or such greater proportionate amount of collateral, shall purchase for cash from the other Lender or Lenders such portion of each such other Lender's or Lenders' Loan, or shall provide the other Lenders with the benefits of any such collateral, or the proceeds thereof, as shall be necessary to cause such Lender receiving the proportionate overpayment to share the excess payment or benefits of such collateral or proceeds ratably with each Lender. For the purposes of this subsection 9.9(b), payments on Notes received by each Lender and receipt of collateral by each Lender shall be in the same proportion as the proportion of: (A) the sum of: (x) the Obligations owing to such Lender in respect of the Notes held by such Lender, plus (y) the Obligations owing to such Lender in respect of Interest Rate Contracts to which such Lender is party, if any, to (B) the sum of: (x) the Obligations owing to all of the Lenders in respect of all 83 of the Notes, plus (y) the Obligations owing to all of the Lenders in respect of all Interest Rate Contracts to which any Lender is a party; PROVIDED, HOWEVER, that, with respect to subsections 9.9(a)(i) and (b) above, if all or any portion of such excess payment or benefits is thereafter recovered from the Lender that received the proportionate overpayment, such purchase of Loans or payment of benefits, as the case may be, shall be rescinded, and the purchase price and benefits returned, to the extent of such recovery, but without interest. Section 9.10 COLLATERAL MATTERS. (a) The Administrative Agent is authorized on behalf of all the Lenders, without the necessity of any notice to or further consent from the Lenders, from time to time to take any action with respect to any Collateral or the Collateral Documents which may be necessary to perfect and maintain perfected the security interest in and Liens upon the Collateral granted pursuant to the Collateral Documents. (b) The Lenders irrevocably authorize the Administrative Agent, at its option and in its discretion, to release any Lien granted to or held by the Administrative Agent upon any Collateral (i) upon termination of the Commitments and payment in full of all Loans and all other Obligations payable under this Agreement and under any other Loan Document; (ii) constituting property sold or to be sold or disposed of as part of or in connection with any Asset Disposition permitted hereunder pursuant to Section 7.7; (iii) constituting property in which the Borrower or any Subsidiary of the Borrower owned no interest at the time the Lien was granted or at any time thereafter; (iv) constituting property leased to the Borrower or any Subsidiary of the Borrower under a lease which has expired or been terminated in a transaction permitted under this Agreement or is about to expire and which has not been, and is not intended by the Borrower or such Subsidiary to be, renewed or extended; (v) consisting of an instrument evidencing Indebtedness or other debt instrument, if the Indebtedness evidenced thereby has been paid in full; or (vi) if approved, authorized or ratified in writing by the Required Lenders or all the Lenders, as the case may be, as provided in Section 10.6 hereof. Upon request by the Administrative Agent at any time, the Lenders will confirm in writing the Administrative Agent's authority to release particular types or items of Collateral pursuant to this subsection 9.10(b). Section 9.11 SYNDICATION AGENTS. None of the Lenders identified on the cover page, introduction or signature pages of this Agreement as a Syndication Agent or Arranger shall have any right, power, obligation, liability, responsibility or duty under this Agreement other than those applicable to all Lenders as such. Each Lender acknowledges that it has not relied, and will not rely, on any of the Lenders identified as a Syndication Agent or Arranger in deciding to enter into this Agreement or in taking or refraining from taking any action hereunder or pursuant hereto. ARTICLE 10. MISCELLANEOUS PROVISIONS. 84 Section 10.1 FEES AND EXPENSES; INDEMNITY. The Borrower will promptly pay all costs of the Administrative Agent in preparing the Loan Documents and all costs and expenses of the issue of the Notes and of the Borrower's and the other Loan Parties' performance of and compliance with all agreements and conditions contained herein on its part to be performed or complied with (including, without limitation, all costs of filing or recording any assignments, mortgages, financing statements and other documents and all lien search, appraisal and environmental review fees and expenses), and the reasonable fees and expenses and disbursements of counsel to the Administrative Agent in connection with the preparation, execution and delivery, syndication, administration, interpretation and enforcement of this Agreement, the other Loan Documents and all other agreements, instruments and documents relating to this transaction, the consummation of the transactions contemplated by all such documents, the preservation of all rights of the Lenders and the Administrative Agent, the negotiation, preparation, execution and delivery of any amendment, modification or supplement of or to, or any consent or waiver under, any such document (or any such instrument that is proposed but not executed and delivered) and with any claim or action threatened, made or brought against any of the Lenders or the Administrative Agent arising out of or relating to any extent to this Agreement, the other Loan Documents or the transactions contemplated hereby or thereby (other than a claim or action resulting from the gross negligence, willful misconduct, or intentional violation of law by the Administrative Agent and/or the Lenders). In addition, the Borrower will promptly pay all costs and expenses (including, without limitation, reasonable fees and disbursements of counsel) suffered or incurred by each Lender in connection with its enforcement of the payment of the Notes held by it or any other sum due to it under this Agreement or any of the other Loan Documents or any of its other rights heeunder or thereunder. In addition to the foregoing, the Borrower shall indemnify each Lender and the Administrative Agent, their Affiliates, and each of their respective directors, officers, employees, attorneys, agents and Affiliates against, and hold each of them harmless from, any loss, liabilities, damages, claims, costs and expenses (including reasonable attorneys' fees and disbursements) suffered or incurred by any of them arising out of, resulting from or in any manner connected with, the execution, delivery and performance of each of the Loan Documents, the Loans and any and all transactions related to or consummated in connection with the Loans (other than as a result of the gross negligence, willful misconduct or intentional violation of law by the Administrative Agent and/or the Lenders), including, without limitation, losses, liabilities, damages, claims, costs and expenses suffered or incurred by any Lender or the Administrative Agent or any of their respective directors, officers, employees, attorneys, agents or Affiliates arising out of or related to any Environmental Liability or Environmental Proceeding, or in investigating, preparing for, defending against, or providing evidence, producing documents or taking any other action in respect of any commenced or threatened litigation, administrative proceeding or investigation under any federal securities law or any other statute of any jurisdiction, or any regulation, or at common law or otherwise against the Administrative Agent, the Lenders or any of their officers, directors, affiliates, agents or Affiliates, that is alleged to arise out of or is based upon: (i) any untrue statement or alleged untrue statement of any material fact of the Borrower and its affiliates in any document or schedule filed with the SEC or any other governmental body; (ii) any omission or alleged omission to state any material fact required to be stated in such document or schedule, or necessary to make the statements made therein, in light of the circumstances under which made, not misleading; (iii) any acts, practices or omission or alleged acts, practices or 85 omissions of the Borrower or its agents related to the making of any acquisition, purchase of shares or assets pursuant thereto, financing of such purchases or the consummation of any other transactions contemplated by any such acquisitions that are alleged to be in violation of any federal securities law or of any other statute, regulation or other law of any jurisdiction applicable to the making of any such acquisition, the purchase of shares or assets pursuant thereto, the financing of such purchases or the consummation of the other transactions contemplated by any such acquisition; or (iv) any withdrawals, termination or cancellation of any such proposed acquisition for any reason whatsoever. The indemnity set forth herein shall be in addition to any other obligations or liabilities of the Borrower to the Administrative Agent and the Lenders hereunder or at common law or otherwise. The provisions of this Section 10.1 shall survive the payment of the Notes and the termination of this Agreement. Section 10.2 TAXES. If, under any law in effect on the date of the closing of any Loan hereunder, or under any retroactive provision of any law subsequently enacted, it shall be determined that any federal, state or local tax is payable in respect of the issuance of any Note, or in connection with the filing or recording of any assignments, mortgages, financing statements, or other documents (whether measured by the amount of Indebtedness secured or otherwise) as contemplated by this Agreement, then the Borrower will pay any such tax and all interest and penalties, if any, and will indemnify the Lenders and the Administrative Agent against and save each of them harmless from any loss or damage resulting from or arising out of the nonpayment or delay in payment of any such tax. If any such tax or taxes shall be assessed or levied against any Lender or any other holder of a Note, such Lender, or such other holder, as the case may be, may notify the Borrower and make immediate payment thereof, together with interest or penalties in connection therewith, and shall thereupon be entitled to and shall receive immediate reimbursement therefor from the Borrower. Notwithstanding any other provision contained in this Agreement, the covenants and agreements of the Borrower in this Section 10.2 shall survive payment of the Notes and the termination of this Agreement. Section 10.3 PAYMENTS. As set forth in Article 2 hereof, all payments by the Borrower on account of principal, interest, fees and other charges (including any indemnities) shall be made to the Administrative Agent at its Payment Office, in lawful money of the United States of America in immediately available funds, by wire transfer or otherwise, not later than 2:00 p.m. (New York City time) on the date such payment is due. Any such payment made on such date but after such time shall, if the amount paid bears interest, be deemed to have been made on, and interest shall continue to accrue and be payable thereon until, the next succeeding Business Day. If any payment of principal or interest becomes due on a day other than a Business Day, such payment may be made on the next succeeding Business Day and such extension shall be included in computing interest in connection with such payment. All payments hereunder and under the Notes shall be made without set-off or counterclaim and in such amounts as may be necessary in order that all such payments shall not be less than the amounts otherwise specified to be paid under this Agreement and the Notes (after withholding for or on account of: (i) any present or future taxes, levies, imposts, duties or other similar charges of whatever nature imposed by any government or any political subdivision or taxing authority thereof, other than any tax (except those referred to in clause (ii) below) on or measured by the net income of the Lender to which any such payment is due pursuant to applicable federal, 86 state and local income tax laws, and (ii) deduction of amounts equal to the taxes on or measured by the net income of such Lender payable by such Lender with respect to the amount by which the payments required to be made under this sentence exceed the amounts otherwise specified to be paid in this Agreement and the Notes). Upon payment in full of any Note, the Lender holding such Note shall mark the Note "Paid" and return it to the Borrower. Section 10.4 SURVIVAL OF AGREEMENTS AND REPRESENTATIONS; CONSTRUCTION. All agreements, representations and warranties made herein shall survive the delivery of this Agreement and the Notes. The headings used in this Agreement and the table of contents are for convenience only and shall not be deemed to constitute a part hereof. All uses herein of the masculine gender or of singular or plural terms shall be deemed to include uses of the feminine or neuter gender, or plural or singular terms, as the context may require. Section 10.5 LIEN ON AND SET-OFF OF DEPOSITS. As further security for the due payment and performance of all the Obligations, the Borrower hereby grants to Administrative Agent for the ratable benefit of the Lenders a Lien on any and all deposits or other sums at any time credited by or due from the Administrative Agent or any Lender to the Borrower, whether in regular or special depository accounts or otherwise, and any and all monies, securities and other collateral of the Borrower, and the proceeds thereof, now or hereafter held or received by or in transit to any Lender or the Administrative Agent from or for the Borrower, whether for safekeeping, custody, pledge, transmission, collection or otherwise, and any such deposits, sums, monies, securities and other collateral, may at any time after the occurrence and during the continuance of any Event of Default be set-off, appropriated and applied by any Lender or the Administrative Agent against any of the Obligations, whether or not any of such Obligations is then due or is secured by any Collateral. Section 10.6 AMENDMENTS AND WAIVERS; ENTIRE AGREEMENT. Any provision of this Agreement, the Notes or the other Loan Documents may be amended or waived if, but only if, such amendment or waiver is in writing and is signed by the Borrower and the Required Lenders (and, if the rights or duties of the Administrative Agent are affected thereby, by the Administrative Agent); PROVIDED THAT no such amendment or waiver shall, unless signed by all the Non-Defaulting Lenders, (i) increase the Commitment of any Lender or subject any Lender to any additional obligation (it being understood that a waiver of any Default or Event of Default or of a non-scheduled reduction in the Aggregate Commitment shall not constitute a change in the terms of any Commitment of any Lender), (ii) reduce the principal of or rate of interest on any Loan or Fees or Unreimbursed Drawing hereunder (other than as a result of waiving the applicability of any Post-Default Rate), (iii) extend the date fixed for any payment of principal of any Loan pursuant to Article 2 hereof or of interest on any Loan or any Fees or Unreimbursed Drawing hereunder or for any termination of any Commitment (it being understood that any waiver of the application of any prepayment of, or the method of application of any prepayment to the amortization of, the Loans shall not constitute any such extension), (iv) release any Guarantor (other than ResNet LLC, which shall be automatically released as a Guarantor upon termination of its existence so long as the Newco Common Stock is thereafter held by ResNet Inc. or the Borrower) or release all or substantially all of the Collateral (except as expressly permitted by this Agreement and the Loan Documents), (v) change the definition of Required 87 Lenders or the percentage of the Commitments or of the aggregate unpaid principal amount of the Loans and Aggregate Revolving Commitment which shall be required for the Lenders or any of them to take any action under this Section 10.6 or any other provision of this Agreement or (vi) amend or modify this Section 10.6. Any waiver or consent shall be effective only in the specific instance and for the purpose for which given. No consent to or demand on the Borrower in any case shall, of itself, entitle it to any other or further notice or demand in similar or other circumstances. This Agreement, the other Loan Documents and agreements referred to herein embody the entire agreement and understanding among the Lenders, the Administrative Agent and the Borrower and supersede all prior agreements and understandings relating to the subject matter hereof. Section 10.7 REMEDIES CUMULATIVE; COUNTERCLAIMS. Each and every right granted to the Administrative Agent and the Lenders hereunder or under any other document delivered hereunder or in connection herewith, or allowed it by law or equity, shall be cumulative and may be exercised from time to time. No failure on the part of the Administrative Agent or any Lender or the holder of any Note to exercise, and no delay in exercising, any right shall operate as a waiver thereof, nor shall any single or partial exercise of any right preclude any other or future exercise thereof or the exercise of any other right. The due payment and performance of the Obligations shall be without regard to any counterclaim, right of offset or any other claim whatsoever that the Borrower may have against any Lender or the Administrative Agent and without regard to any other obligation of any nature whatsoever that any Lender or the Administrative Agent may have to the Borrower, and no such counterclaim or offset shall be asserted by the Borrower in any action, suit or proceeding instituted by any Lender or the Administrative Agent for payment or performance of the Obligations. Section 10.8 ADDITIONAL ACTIONS. At any time and from time to time, upon the request of the Administrative Agent, the Borrower shall execute, deliver and acknowledge or cause to be executed, delivered and acknowledged, such further documents and instruments and do such other acts and things as the Administrative Agent may reasonably request in order to fully effect the purposes of this Agreement, the other Loan Documents and any other agreements, instruments and documents delivered pursuant hereto or in connection with the Loans. Section 10.9 NOTICES. All notices, requests, reports and other communications pursuant to this Agreement shall be in writing, either by letter (delivered by hand or commercial messenger service or sent by certified mail, return receipt requested, except for routine reports delivered in compliance with Article 5 hereof which may be sent by ordinary first-class mail) or telegram or telecopy, addressed as follows: (a) If to the Borrower: LodgeNet Entertainment Corporation 3900 West Innovation Street Sioux Falls, South Dakota 57107 Attention: Mr. Jeffrey T. Weisner Senior Vice President and Chief Financial Officer 88 Telecopier No.: (605) 330-1323 with a copy to: Daniel P. Johnson, Esq. Director of Corporate and Legal Affairs LodgeNet Entertainment Corporation 3900 West Innovation Street Sioux Falls, South Dakota 57107 Telecopier No.: (605) 330-1323 (b) If to any Lender: To its address set forth below its name on the signature pages hereof, with a copy to the Administrative Agent; and (c) If to the Administrative Agent: National Westminster Bank Plc, as Administrative Agent 65 East 55th Street New York, New York 10022 Attention: Mr. Andrew S. Weinberg Telecopier No.: (212) 418-4599 with a copy (other than in the case of Borrowing Notices and reports and other documents delivered in compliance with Article 5 hereof) to: Winston & Strawn 35 West Wacker Drive Chicago, Illinois 60601 Attention: James M. Reum, Esq. Telecopier No.: (312) 558-5700 Any notice, request, demand or other communication hereunder shall be deemed to have been given on: (x) the day on which it is telecopied to such party at its telecopier number specified above (provided such notice shall be effective only if followed by one of the other methods of delivery set forth herein) or delivered by receipted hand or such commercial messenger service to such party at its address specified above, or (y) on the third Business Day after the day deposited in the mail, postage prepaid, if sent by mail, or (z) on the day it is delivered to the telegraph company, addressed as aforesaid, if sent by telegraph. Any party hereto may change the Person, address or telecopier number to whom or which notices are to be given hereunder, by notice duly 89 given hereunder; PROVIDED, HOWEVER, that any such notice shall be deemed to have been given hereunder only when actually received by the party to which it is addressed. Section 10.10 COUNTERPARTS. This Agreement may be signed in any number of counterparts with the same effect as if the signatures thereto and hereto were upon the same instrument. Section 10.11 SEVERABILITY. The provisions of this Agreement are severable, and if any clause or provision hereof shall be held invalid or unenforceable in whole or in part in any jurisdiction, then such invalidity or unenforceability shall affect only such clause or provision, or part thereof, in such jurisdiction and shall not in any manner affect such clause or provision in any other jurisdiction, or any other clause or provision in this Agreement in any jurisdiction. Each of the covenants, agreements and conditions contained in this Agreement is independent and compliance by the Borrower with any of them shall not excuse non-compliance by the Borrower with any other. All covenants hereunder shall be given independent effect so that if a particular action or condition is not permitted by any of such covenants, the fact that it would be permitted by an exception to, or be otherwise within the limitations of, another covenant shall not avoid the occurrence of a Default or an Event of Default if such action is taken or condition exists. Section 10.12 SUCCESSORS AND ASSIGNS. (a) The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that the Borrower may not assign or otherwise transfer any of its rights and obligations under this Agreement without the prior written consent of all the Lenders. (b) Any Lender may at any time grant to one or more banks or other institutions (each a "PARTICIPANT") participating interests in its Commitment or any or all of its Loans. In the event of any such grant by a Lender of a participating interest to a Participant, whether or not upon notice to the Borrower and the Administrative Agent, such Lender shall remain responsible for the performance of its obligations hereunder, and the Borrower and the Administrative Agent shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement. Any agreement pursuant to which any Lender may grant such a participating interest shall provide that such Lender shall retain the sole right and responsibility to enforce the obligations of the Borrower hereunder including, without limitation, the right to approve any amendment, modification or waiver of any provision of this Agreement; PROVIDED that such participation agreement may provide that such Lender will not agree to any modification, amendment or waiver of this Agreement described in clause (i), (ii), (iii) or (iv) of Section 10.6 without the consent of the Participant. The Borrower agrees that each Participant shall, to the extent provided in its participation agreement, be entitled to the benefits of Sections 2.16, 2.18 and 2.19 hereof with respect to its participating interest. An assignment or other transfer which is not permitted by subsection (c) or (d) below shall be given effect for purposes of this Agreement only to the extent of a participating interest granted in accordance with this subsection (b). 90 (c) Any Lender may at any time assign to one or more banks or other institutions (each an "ASSIGNEE") all, or a proportionate part (comprising equal or unequal percentages of such Lender's Term Loan, on the one hand, and such Lender's Revolving Loans and Revolving Commitment, on the other hand) of all, of its rights and obligations under this Agreement and the other Loan Documents, and such Assignee shall assume such rights and obligations, pursuant to an Assignment and Assumption Agreement in substantially the form of Exhibit E hereto executed by such Assignee and such transferor Lender, with (and subject to) the subscribed consent of the Borrower, which shall not be unreasonably withheld, and the Administrative Agent; PROVIDED that if (i) an Assignee is an affiliate of such transferor Lender or was a Lender immediately prior to such assignment or (ii) a Default or Event of Default has occurred and is continuing, no such consent of the Borrower shall be required. No assignment pursuant to the immediately preceding sentence shall to the extent such assignment represents an assignment to an institution other than one or more Lenders hereunder, be in an aggregate amount less than $5,000,000 unless the entire Commitment of the assigning Lender is so assigned. Upon execution and delivery of such instrument and payment by such Assignee to such transferor Lender of an amount equal to the purchase price agreed between such transferor Lender and such Assignee, such Assignee shall be a Lender party to this Agreement and shall have all the rights and obligations of a Lender with a Commitment as set forth in such instrument of assumption, and the transferor Lender shall be released from its obligations hereunder to a corresponding extent, and no further consent or action by any party shall be required. Upon the consummation of any assignment pursuant to this subsection (c), the transferor Lender, the Administrative Agent and the Borrower shall make appropriate arrangements so that, if required, a new Note or Notes are issued to the Assignee. In connection with any such assignment, the transferor Lender shall pay to the Administrative Agent an administrative fee for processing such assignment in the amount of $3,000. If the Assignee is not incorporated under the laws of the United States of America or a state thereof, it shall deliver to the Borrower and the Administrative Agent certification as to exemption from deduction or withholding of any United States federal income taxes in accordance with subsection 2.16(f) hereof. (d) Any Lender may at any time assign all or any portion of its rights under this Agreement and any other Loan Document to a Federal Reserve Bank. No such assignment shall release the transferor Lender from its obligations hereunder. (e) No Assignee, Participant or other transferee of any Lender's rights shall be entitled to receive any greater payment under Sections 2.16, 2.18 or 10.3 hereof than such Lender would have been entitled to receive with respect to the rights transferred, unless such transfer is made with the Borrower's prior written consent or by reason of the provisions of Sections 2.16 or 2.18 hereof requiring such Lender to designate a different Applicable Lending Office under certain circumstances or at a time when the circumstances giving rise to such greater payment did not exist. Section 10.13 GOVERNING LAW; CONSENT TO JURISDICTION; WAIVER OF TRIAL BY JURY. (a) THIS AGREEMENT, THE OTHER LOAN DOCUMENTS AND ALL OTHER DOCUMENTS AND INSTRUMENTS EXECUTED AND DELIVERED IN CONNECTION HEREWITH AND THEREWITH, SHALL BE 91 GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS AND DECISIONS OF THE STATE OF NEW YORK WITHOUT REGARD TO ITS RULES PERTAINING TO CONFLICTS OF LAWS. (b) THE BORROWER IRREVOCABLY CONSENTS THAT ANY LEGAL ACTION OR PROCEEDING AGAINST IT UNDER, ARISING OUT OF OR IN ANY MANNER RELATING TO THIS AGREEMENT, AND EACH OTHER LOAN DOCUMENT MAY BE BROUGHT IN ANY COURT OF THE STATE OF NEW YORK, COUNTY OF NEW YORK, OR IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK. THE BORROWER, BY THE EXECUTION AND DELIVERY OF THIS AGREEMENT, EXPRESSLY AND IRREVOCABLY ASSENTS AND SUBMITS TO THE PERSONAL JURISDICTION OF ANY OF SUCH COURTS IN ANY SUCH ACTION OR PROCEEDING. THE BORROWER FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF ANY COMPLAINT, SUMMONS, NOTICE OR OTHER PROCESS RELATING TO ANY SUCH ACTION OR PROCEEDING BY DELIVERY THEREOF TO IT BY HAND OR BY MAIL IN THE MANNER PROVIDED FOR IN SECTION 10.3 HEREOF. THE BORROWER HEREBY EXPRESSLY AND IRREVOCABLY WAIVES ANY CLAIM OR DEFENSE IN ANY SUCH ACTION OR PROCEEDING BASED ON ANY ALLEGED LACK OF PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM NON CONVENIENS OR ANY SIMILAR BASIS. THE BORROWER SHALL NOT BE ENTITLED IN ANY SUCH ACTION OR PROCEEDING TO ASSERT ANY DEFENSE GIVEN OR ALLOWED UNDER THE LAWS OF ANY STATE OTHER THAN THE STATE OF NEW YORK UNLESS SUCH DEFENSE IS ALSO GIVEN OR ALLOWED BY THE LAWS OF THE STATE OF NEW YORK. NOTHING IN THIS SECTION 10.13 SHALL AFFECT OR IMPAIR IN ANY MANNER OR TO ANY EXTENT THE RIGHT OF ANY LENDER TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST THE BORROWER IN ANY JURISDICTION OR TO SERVE PROCESS IN ANY MANNER PERMITTED BY LAW. (c) EACH OF THE BORROWER, THE LENDERS AND THE ADMINISTRATIVE AGENT WAIVES TRIAL BY JURY IN ANY LITIGATION IN ANY COURT WITH RESPECT TO, IN CONNECTION WITH, OR ARISING OUT OF, THIS AGREEMENT, ANY OF THE OTHER LOAN DOCUMENTS, OR ANY INSTRUMENT OR DOCUMENT DELIVERED PURSUANT TO THIS AGREEMENT, OR THE VALIDITY, PERFECTION, INTERPRETATION, COLLECTION OR ENFORCEMENT THEREOF. ARTICLE 11. INCREASES IN COMMITMENTS; CHANGES IN LENDERS Section 11.1 RESIGNATION OF LENDERS. The parties hereto hereby acknowledge and confirm that immediately upon the Closing Date the Loans owing to First Union National Bank and First Hawaiian Bank (collectively, the "Resigning Lenders") together with all accrued interest thereon shall be repaid in full and each of the Resigning Lenders shall thereupon cease to be Lenders and shall cease to have any rights or obligations under this Agreement or under any 92 other Loan Documents. Upon each of the Resigning Lender's receipt of an amount equal to its outstanding Loans and accrued interest, such Resigning Lender shall return to the Borrower the promissory note made payable by the Borrower to each such Lender marked "Paid in Full". Section 11.2 ADDITION OF NEW LENDERS. The parties hereto hereby acknowledge and confirm that immediately upon the Closing Date (i) each of Fleet Bank, N.A., Morgan Stanley Senior Funding, Inc., State Street Bank and Trust Company and Sun Trust Bank, Central Florida, N.A. (each, a "New Lender" and collectively, the "New Lenders") shall become a party to this Agreement and shall have the rights and obligations of a Lender hereunder, and (ii) Commitments of all or some of the Lenders may or shall change and, accordingly, the Aggregate Commitment and the amount of each Lender's respective Commitments shall be as reflected on Schedule I hereto. Section 11.3 NO RELIANCE BY NEW LENDERS. Each of the New Lenders (i) confirms that it has received a copy of this Agreement, together with copies of such financial statements and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to become a Lender under this Agreement, (ii) agrees that it will independently and without reliance upon the Administrative Agent or any Lender other than itself, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decision in taking or not taking action under this Agreement, (iii) acknowledges that neither the Administrative Agent nor any Lender makes any representation or warranty nor does the Administrative Agent or any Lender assume any responsibility with respect to (a) any statements, warranties or representations made in or in connection with this Agreement or any other instrument or document furnished pursuant thereto or (b) the financial condition of the Borrower or any other Loan Party, or the performance or observance by the Borrower or any other Loan Party of any of their Obligations under this Agreement or any other instrument or document furnished pursuant thereto, (iv) appoints and authorizes the Administrative Agent to take such action as its agent on its behalf and to exercise such powers under this Agreement as are delegated to the Administrative Agent by the terms hereof, together with such powers as are reasonably incidental thereto, and (v) agrees that it will perform in accordance with their terms all of the obligations which, by the terms of this Agreement, are required to be performed by it as a Lender. Section 11.4 NEW NOTES. The Borrower shall, simultaneously with the execution and delivery of this Agreement, execute and deliver in favor of (i) each of the New Lenders a Term Note and a Revolving Note in respective principal amounts equal to the Term Commitment and Revolving Commitment of such Lender as shown on Schedule I hereto, and (b) each of the other Lenders a Term Note and new Revolving Note in respective principal amounts equal to the Term Commitment and Revolving Commitment of such Lender as shown on Schedule I hereto (collectively, all of the above-described promissory notes are defined as the "New Notes"), whereupon such Lenders shall return the existing promissory notes to the Borrower marked "Refinanced by New Notes". Section 11.5 ADJUSTMENT OF LOAN AMOUNTS. In order to effect the foregoing, the Lenders shall, on the Closing Date, make appropriate adjustments among themselves in order 93 that the amount of Loans outstanding to the Borrower from any Lender under this Agreement is, in principal amount (as of the Closing Date), in the same proportion to the outstanding aggregate principal amount of all Loans that such Lender's Commitment bears to the Aggregate Commitment, after giving effect to the resignation of the Resigning Lenders from the Lender group, the addition of the New Lenders to the Lender group, and the increase in the Aggregate Commitment. All references in this Agreement, the Loan Documents and all other instruments, documents and agreements executed and delivered pursuant to any of the foregoing, to "Commitment Percentage", "the ratable benefit of the Lenders", "pro rata", or terms of similar effect shall be deemed to refer to the ratable interests of the Lenders, as their respective pro rata interests shall be adjusted to reflect the changes in the Commitments of each of the Lenders as set forth on Schedule I hereto. The Borrower and each of the other Loan Parties agrees and consents to the terms of this Article 11. [signature page follows] 94 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed on the date first above written. LODGENET ENTERTAINMENT CORPORATION By -------------------------------- Title ----------------------------- NATIONAL WESTMINSTER BANK PLC, AS ADMINISTRATIVE AGENT, ISSUING BANK AND AS A LENDER By -------------------------------- Title ----------------------------- Lending Office for Base Rate and Eurodollar Loans: National Westminster Bank Plc 65 East 55th Street, 24th Floor New York, New York 10022 Attention: Ian Tarachand Telephone: (212) 401-1419 Telecopier: (212) 401-1494 Address for Notices: National Westminster Bank Plc 65 East 55th Street New York, New York 10022 Attention: Andrew S. Weinberg Telephone: (212) 418-4567 Telecopier: (212) 418-4599 95 BANKBOSTON, N.A., AS SYNDICATION AGENT, ISSUING BANK AND LENDER By: -------------------------------- Title: ----------------------------- Lending Office for Base Rate and Eurodollar Loans: BankBoston, N.A. 100 Federal Street Boston, MA 02110 Attention: Ms. Margie Hery Telephone: (617) 434-9725 Telecopier: (617) 434-9820 Address for Notices: BankBoston, N.A. 100 Federal Street Boston, MA 02110 Attention: Mr. Daniel M. Kortick Telephone: (617) 434-6757 Telecopier: (617) 434-3401 MORGAN STANLEY SENIOR FUNDING, INC. AS SYNDICATION AGENT AND LENDER By: -------------------------------- Title: ----------------------------- Lending Office for Base Rate and Eurodollar Loans: Morgan Stanley Dean Witter 1585 Broadway New York, NY 10036 Attention: Mr. Richard Biggica Telephone: (212) 761-4838 Telecopier: (212) 761-0592 Address for Notices: Morgan Stanley Dean Witter 1585 Broadway New York, NY 10036 Attention: Mr. Henry F. D'Alessandro Telephone: (212) 761-1051 Telecopier: (212) 761-0322 MERCANTILE BANK NATIONAL ASSOCIATION By: -------------------------------- Title: ----------------------------- Lending Office for Base Rate and Eurodollar Loans: Mercantile Bank National Association 7th and Washington, 12th Floor St. Louis, Missouri 63101 Attention: ----------------------- Telephone: ----------------------- Telecopier: ---------------------- Address for Notices: Mercantile Bank National Association 7th and Washington, 12th Floor St. Louis, MO 63101 Attention: Mr. Alec Blanc Telephone: (314) 418-3922 Telecopier: (314) 418-8292 U.S. BANK NATIONAL ASSOCIATION By: -------------------------------- Title: ----------------------------- Lending Office for Base Rate and Eurodollar Loans: U.S. Bank National Association 601 Second Avenue South Minneapolis, MN 55402 Attention: Ms. Denise Seidl Telephone: (612) 973-0619 Telecopier: (612) 973-0823 Address for Notices: U.S. Bank National Association 601 Second Avenue South Minneapolis, MN 55402 Attention: Mr. Josh Pirozzolo Telephone: (612) 973-0520 Telecopier: (612) 973-0823 FLEET BANK, N.A. By: -------------------------------- Title: ----------------------------- Lending Office for Base Rate and Eurodollar Loans: Fleet Bank 1185 Avenue of the Americas New York, NY 10036 Attention: ----------------------- Telephone: ----------------------- Telecopier: ---------------------- Address for Notices: Fleet Bank 1185 Avenue of the Americas New York, NY 10036 Attention: Mr. Russ Lopinto Telephone: (212) 819-6045 Telecopier: (212) 816-6202 STATE STREET BANK AND TRUST COMPANY By: -------------------------------- Title: ----------------------------- Lending Office for Base Rate and Eurodollar Loans: State Street Bank and Trust Company 225 Franklin Street Boston, Massachusetts 02110 Attention: ----------------------- Telephone: ----------------------- Telecopier: ---------------------- Address for Notices: State Street Bank and Trust Company 225 Franklin Street Boston, Massachusetts 02110 Attention: Ms. Diane Rooney Telephone: (617) 664-4963 Telecopier: (617) 664-3708 SUNTRUST BANK, CENTRAL FLORIDA, NATIONAL ASSOCIATION By: -------------------------------- Title: ----------------------------- Lending Office for Base Rate and Eurodollar Loans: Sun Trust Bank 200 South Orange Avenue Orlando, Florida 32801 Attention: Ms. Sarah Grenzer Telephone: (407) 237-5280 Telecopier: (407) 237-4253 Address for Notices: Sun Trust Bank 200 South Orange Avenue Orlando, Florida 32801 Attention: Mr. David Miller Telephone: (407) 237-4299 Telecopier: (407) 237-5126 UNION BANK OF CALIFORNIA, N.A. By: -------------------------------- Title: ----------------------------- Lending Office for Base Rate and Eurodollar Loans: Union Bank of California, N.A. 455 South Figueroa Street Los Angeles, California 90071 Attention: ----------------------- Telephone: ----------------------- Telecopier: ---------------------- Address for Notices: Union Bank of California, N.A. 455 South Figueroa Street Los Angeles, California 90071 Attention: Mr. James Opdyke Telephone: (213) 236-7881 Telecopier: (213) 236-5747 SCHEDULE I TERM AND REVOLVING COMMITMENTS
Term Revolving Bank Commitment Commitment Percentage National Westminster Bank Plc 8,333,333.34 8,333,333.34 11.2% BankBoston, N.A. 8,333,333.33 8,333,333.33 11.1% Morgan Stanley Senior Funding, Inc. 8,333,333.33 8,333,333.33 11.1% Mercantile Bank National Association 10,000,000.00 10,000,000.00 13.3% U.S. Bank National Association 10,000,000.00 10,000,000.00 13.3% Fleet Bank, N.A. 7,500,000.00 7,500,000.00 10% State Street Bank and Trust Company 7,500,000.00 7,500,000.00 10% Sun Trust Bank, Central Florida, N.A. 7,500,000.00 7,500,000.00 10% Union Bank of California 7,500,000.00 7,500,000.00 10% -------------- -------------- ----- Total $75,000,000.00 $75,000,000.00 100%
SCHEDULE II AMORTIZATION OF TERM LOANS
- ----------------------------------------------------------- Term Loan Principal Payment Date Amount - ----------------------------------------------------------- March 31, 2001 $3,750,000 - ----------------------------------------------------------- June 30, 2001 $3,750,000 - ----------------------------------------------------------- September 30, 2001 $3,750,000 - ----------------------------------------------------------- December 31, 2001 $3,750,000 - ----------------------------------------------------------- March 31, 2002 $4,687,500 - ----------------------------------------------------------- June 30, 2002 $4,687,500 - ----------------------------------------------------------- September 30, 2002 $4,687,500 - ----------------------------------------------------------- December 31, 2002 $4,687,500 - ----------------------------------------------------------- March 31, 2003 $4,687,500 - ----------------------------------------------------------- June 30, 2003 $4,687,500 - ----------------------------------------------------------- September 30, 2003 $4,687,500 - ----------------------------------------------------------- December 31, 2003 $4,687,500 - ----------------------------------------------------------- March 31, 2004 $5,625,000 - ----------------------------------------------------------- June 30, 2004 $5,625,000 - ----------------------------------------------------------- September 30, 2004 $5,625,000 - ----------------------------------------------------------- December 31, 2004 $5,625,000 - -----------------------------------------------------------
EXHIBIT A FORM OF TERM NOTE $________________ New York, New York February ___, 1999 FOR VALUE RECEIVED, the undersigned LODGENET ENTERTAINMENT CORPORATION, a Delaware corporation (the "Borrower"), hereby unconditionally promises to pay to the order of _________________________________ ("Lender"), at the address of NATIONAL WESTMINSTER BANK PLC, as administrative agent (the "Administrative Agent") for Lender, at 65 East 55th Street, New York, New York 10022, or at such other place as the Administrative Agent may from time to time designate in writing, in lawful money of the United States of America and in immediately available funds, the principal sum of _______________________ DOLLARS AND NO CENTS ($____________), payable on the dates and in the amounts set forth in the Credit Agreement defined below. This Term Note is one of the Notes referred to in, was executed and delivered pursuant to, and evidences the obligation of the Borrower under, that certain Second Amended and Restated Credit Agreement dated as of February 25, 1999 by and among the Borrower, the Administrative Agent, Bank Boston, N.A. and Morgan Stanley Dean Witter, as Syndication Agents, and the other financial institutions from time to time party thereto (as the same may be amended, restated, modified or supplemented and in effect from time to time, the "Credit Agreement"), to which reference is hereby made for a statement of the terms and conditions under which the loan evidenced hereby is made and is to be repaid and for a statement of the Administrative Agent's and Lender's remedies upon the occurrence of an Event of Default. Capitalized terms used but not otherwise defined herein have the meanings set forth in the Credit Agreement. The Term Loan made by Lender to the Borrower pursuant to the Credit Agreement evidenced hereby and all payments on account of principal hereof shall be recorded by Lender and prior to any transfer thereof, endorsed on SCHEDULE A attached hereto which is part of this Term Note or otherwise in accordance with its usual practices, PROVIDED, HOWEVER, that the failure to so record or any error in any such record shall not affect the Borrower's obligations under this Term Note. The Borrower further promises to pay interest on the outstanding unpaid principal amount hereof from the date hereof until payment in full hereof at the rate from time to time applicable to the Term Loan evidenced hereby as determined in accordance with the Credit Agreement. This Term Note is secured pursuant to the Credit Agreement and the Loan Documents referred to therein, and reference is made thereto for a statement of the terms and conditions of such security. A-1 The Administrative Agent shall have the continuing exclusive right to apply and to reapply any and all payments hereunder against the Obligations in the manner set forth in the Credit Agreement. The Borrower hereby waives demand, presentment and protest and notice of demand, presentment, protest and nonpayment. The Borrower further agrees, subject only to any limitation imposed by applicable law, to pay all reasonable expenses, including attorneys' fees and legal expenses, incurred by the holder of this Term Note in endeavoring to collect any amounts payable hereunder which are not paid when due, whether by acceleration or otherwise in accordance with the provisions of the Credit Agreement. THIS TERM NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK; PROVIDED THAT THE ADMINISTRATIVE AGENT AND LENDER SHALL RETAIN ALL RIGHTS ARISING UNDER FEDERAL LAW. Whenever possible each provision of this Term Note shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Term Note shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Term Note. Whenever in this Term Note reference is made to the Administrative Agent, Lender or the Borrower, such reference shall be deemed to include, as applicable, a reference to their respective permitted successors and assigns and, in the case of Lender, any financial institutions to which it has sold or assigned all or any part of its commitment to make the Term Loan evidenced hereby as permitted under the Credit Agreement. The provisions of this Term Note shall be binding upon and shall inure to the benefit of such permitted successors and assigns. The Borrower's successors and assigns shall include, without limitation, a receiver, trustee or debtor in possession of or for the Borrower. LODGENET ENTERTAINMENT CORPORATION By: ---------------------------- Name: -------------------------- Title: ------------------------- A-2 SCHEDULE A Term Note dated February ___, 1999 PRINCIPAL PAYMENTS - ----------------------------------------------------------------------------- Amount of Amount of Unpaid Principal Principal Principal Notation Date Borrowed Repaid Balance Made by - ----------------------------------------------------------------------------- - ----------------------------------------------------------------------------- A-3 EXHIBIT B FORM OF REVOLVING NOTE $________________ New York, New York February ___, 1999 FOR VALUE RECEIVED, the undersigned LODGENET ENTERTAINMENT CORPORATION, a Delaware corporation (the "Borrower"), HEREBY PROMISES TO PAY to the order of _________________________________ ("Lender"), at the address of NATIONAL WESTMINSTER BANK PLC, as administrative agent (the "Administrative Agent") for Lender, at 65 East 55th Street, New York, New York 10022, or at such other place as the Administrative Agent may designate from time to time in writing, in lawful money of the United States of America and in immediately available funds, the principal sum of _______________________ DOLLARS AND NO CENTS ($____________) or, if less, the aggregate unpaid amount of Lender's Commitment Percentage (as defined in the Credit Agreement (as hereunder defined)) under the Credit Agreement. The principal amount of this Revolving Note shall be payable in the amounts and at such times as set forth in the Credit Agreement with any then outstanding principal amount of this Revolving Note being payable in full on the Facility Termination Date (as defined in the Credit Agreement). This Revolving Note is one of the Notes referred to in, was executed and delivered pursuant to, and evidences the obligation of the Borrower under, that certain Second Amended and Restated Credit Agreement dated as of February 25, 1999 by and among the Borrower, the Administrative Agent, BankBoston, N.A. and Morgan Stanley Dean Witter, as Syndication Agents, and the other financial institutions from time to time party thereto (as the same may be amended, restated, modified or supplemented and in effect from time to time, the "Credit Agreement"), to which reference is hereby made for a statement of the terms and conditions under which the loans evidenced hereby are made and are to be repaid and for a statement of the Administrative Agent's and Lender's remedies upon the occurrence of an Event of Default. Capitalized terms used but not otherwise defined herein have the meanings set forth in the Credit Agreement. The Revolving Loans made by Lender to the Borrower pursuant to the Credit Agreement and all payments on account of principal hereof shall be recorded by Lender, and prior to any transfer thereof, endorsed on SCHEDULE A attached hereto which is part of this Revolving Note or otherwise in accordance with its usual practices; PROVIDED, HOWEVER, that the failure to so record or any error in any such record shall not affect the Borrower's obligations under this Revolving Note. The Borrower further promises to pay interest on the outstanding unpaid principal amount hereof from the date hereof until payment in full hereof at the rate from time to time applicable to the Revolving Loans as determined in accordance with the Credit Agreement. B-1 This Revolving Note is secured pursuant to the Credit Agreement and the Loan Documents referred to therein, and reference is made thereto for a statement of the terms and conditions of such security. The Administrative Agent shall have the continuing exclusive right to apply and to reapply any and all payments hereunder against the Obligations in the manner set forth in the Credit Agreement. The Borrower hereby waives demand, presentment and protest and notice of demand, presentment, protest and nonpayment. The Borrower further agrees, subject only to any limitation imposed by applicable law, to pay all reasonable expenses, including attorneys' fees and legal expenses, incurred by the holder of this Revolving Note in endeavoring to collect any amounts payable hereunder which are not paid when due, whether by acceleration or otherwise in accordance with the provisions of the Credit Agreement. THIS REVOLVING NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK; PROVIDED THAT THE ADMINISTRATIVE AGENT AND LENDER SHALL RETAIN ALL RIGHTS ARISING UNDER FEDERAL LAW. Whenever possible each provision of this Revolving Note shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Revolving Note shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Revolving Note. Whenever in this Revolving Note reference is made to the Administrative Agent, Lender or the Borrower, such reference shall be deemed to include, as applicable, a reference to their respective permitted successors and assigns and, in the case of Lender, any financial institutions to which it has sold or assigned all or any part of its commitment to make the Revolving Loans as permitted under the Credit Agreement. The provisions of this Revolving Note shall be binding upon and shall inure to the benefit of such permitted successors and assigns. The Borrower's successors and assigns shall include, without limitation, a receiver, trustee or debtor in possession of or for the Borrower. LODGENET ENTERTAINMENT CORPORATION By: ---------------------------- Name: -------------------------- Title: ------------------------- B-2 SCHEDULE A Revolving Note dated February ___, 1999 PRINCIPAL PAYMENTS - -------------------------------------------------------------------------------- Amount of Amount of Unpaid Principal Principal Principal Notation Date Borrowed Repaid Balance Made by - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- B-3 EXHIBIT C FORM OF NOTICE OF BORROWING ______________, ___ National Westminster Bank Plc, as Administrative Agent 65 East 55th Street, 21st Floor New York, New York 10022 Attention: Ian Tarachand Re: NOTICE OF BORROWING Gentlemen: The undersigned, LODGENET ENTERTAINMENT CORPORATION, a Delaware corporation (the "Borrower"), hereby refers to that certain Second Amended and Restated Credit Agreement dated as of February 25, 1999 (as from time to time amended, restated, supplemented or otherwise modified, the "Credit Agreement", the terms defined therein being used herein as therein defined), among the Borrower, National Westminster Bank Plc, as Administrative Agent, BankBoston, N.A. and Morgan Stanley Dean Witter, as Syndication Agents, and the other financial institutions from time to time party thereto, and hereby gives you notice, pursuant to Section 2.3 of the Credit Agreement, that the undersigned hereby requests a Borrowing under the Credit Agreement, and in that connection sets forth below the information relating to such Borrowing as required by Section 2.3 of the Credit Agreement: (i) The aggregate amount of the requested Borrowing is $____________ [minimum of $500,000 or any multiple of $500,000 in excess thereof for Base Rate Loans; $1,000,000 or any multiple of $1,000,000 in excess thereof for Eurodollar Loans]. (ii) The requested date for the Borrowing is ___________, ___ [must be a Business Day]. (iii) The Borrowing shall be comprised of [Eurodollar/Base Rate Loans]. (iv) For Eurodollar Loans requested herein, the duration of the Interest Period is ___________. [Failure to specify shall result in Interest Period of one (1) month.] C-1 The undersigned hereby certifies that all conditions precedent set forth in Section 4.2 of the Credit Agreement have been fulfilled. Very truly yours, LODGENET ENTERTAINMENT CORPORATION By: ---------------------------- Name: -------------------------- Title: ------------------------- C-2 EXHIBIT D FORM OF NOTICE OF CONVERSION/CONTINUATION ______________, ___ National Westminster Bank Plc, as Administrative Agent 65 East 55th Street, 21st Floor New York, New York 10022 Attention: Ian Tarachand Re: NOTICE OF CONVERSION/CONTINUATION Gentlemen: The undersigned, LODGENET ENTERTAINMENT CORPORATION, a Delaware corporation (the "Borrower"), hereby refers to that certain Second Amended and Restated Credit Agreement dated as of February 25, 1999 (as from time to time amended, restated, supplemented or otherwise modified, the "Credit Agreement", the terms defined therein being used herein as therein defined), among the Borrower, National Westminster Bank Plc, as Administrative Agent, BankBoston, N.A. and Morgan Stanley Dean Witter, as Syndication Agents, and the other financial institutions from time to time party thereto, and hereby gives you notice, pursuant to Section 2.4 (b) of the Credit Agreement, that the undersigned hereby requests a conversion or continuation of Loans under the Credit Agreement, and in that connection sets forth below the information relating to such conversion or continuation as required by Section 2.4(b) of the Credit Agreement: (i) The proposed conversion date or continuation date is ____________. (ii) The aggregate amount of Loans to be converted or continued is $___________. (iii) The nature of the proposed conversion or continuation is as follows: -------------------------- -------------------------- -------------------------- D-1 (iv) For conversion into or continuations involving Eurodollar Loans herein, the duration of the requested Interest Period is _________. [Failure to specify shall result in Interest Period of one (1) month.] The undersigned hereby certifies that all conditions precedent set forth in Section 4.2 of the Credit Agreement have been fulfilled. Very truly yours, LODGENET ENTERTAINMENT CORPORATION By: ---------------------------- Name: -------------------------- Title: ------------------------- D-2 EXHIBIT E ASSIGNMENT AND ASSUMPTION AGREEMENT Dated ___________ Reference is hereby made to that certain Second Amended and Restated Credit Agreement dated as of February 25, 1999 (the "CREDIT AGREEMENT") by and among LodgeNet Entertainment Corporation, a Delaware corporation (the "BORROWER"), National Westminster Bank Plc, as Administrative Agent, BankBoston, N.A. and Morgan Stanley Dean Witter, as Syndication Agents, and the other financial institutions from time to time party thereto. Capitalized terms used herein that are defined in the Credit Agreement that are not otherwise defined herein shall have the respective meanings ascribed thereto in the Credit Agreement. _______________________________, a __________________ (the "ASSIGNOR") and _______________________________________, a ________________, (the "ASSIGNEE") agree as follows: 1. The Assignor hereby sells and assigns to the Assignee, and the Assignee hereby purchases and assumes from the Assignor, a __ % interest in and to all of the Assignor's rights and obligations under the Credit Agreement and the other Loan Documents as of the Effective Date (as defined below) (including, without limitation, such percentage interest in the Assignor's Term Commitment and Revolving Commitment as in effect on the Effective Date, the Term and Revolving Loans owing to the Assignor on the Effective Date, and the Term and Revolving Notes held by the Assignor). 2. The Assignor: (i) represents and warrants that as of the date hereof its Term and Revolving Commitment (without giving effect to assignments thereof that have not yet become effective) are $__________ and $__________, respectively, and the aggregate outstanding principal amount of Term and Revolving Loans owing to it (without giving effect to assignments thereof that have not yet become effective) are $__________ and $__________, respectively; (ii) represents and warrants that it is the legal and beneficial owner of the interest being assigned by it hereunder, and that such interest is free and clear of any adverse claim; (iii) makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the Credit Agreement or any other instrument or document furnished pursuant thereto; and (iv) makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Borrower or any other Loan Party or the performance or observance by the Borrower or any other Loan Party of any of its obligations under the Credit Agreement or any other instrument or document furnished pursuant thereto; and (v) attaches the Term and Revolving Notes referred to in paragraph 1 above and requests that the Administrative Agent exchange such Notes for new Notes as follows: (y) a Term Note dated the Effective Date (as such term is defined below) in the principal amount of $__________ payable to the order of the Assignee and a Term Note dated E-1 the Effective Date in the principal amount of $ __________ payable to the order of the Assignor, and (z) a Revolving Note dated the Effective Date in the principal amount of $_________ payable to the order of the Assignee and a Revolving Note dated the Effective Date in the principal amount of $_________ payable to the order of the Assignor. 3. The Assignee: (i) confirms that it has received a copy of the Credit Agreement, together with copies of such financial statements and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment and Assumption Agreement; (ii) agrees that it will, independently and without reliance upon the Administrative Agent, the Assignor or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Credit Agreement; (iii) appoints and authorizes the Administrative Agent to take such action as its agent on its behalf and to exercise such powers under the Credit Agreement as are delegated to the Administrative Agent by the terms thereof, together with such powers as are reasonably incidental thereto; (iv) agrees that it will perform in accordance with their terms all of the obligations which by the terms of the Credit Agreement are required to be performed by it as a Lender; and (v) specifies as its addresses for Base Rate Loans and Eurodollar Loans (and address for notices) the offices set forth beneath its name on the signature page hereof. 4. The effective date for this Assignment and Assumption Agreement shall be ________________ (the "EFFECTIVE DATE"). Following the execution of this Assignment and Assumption Agreement, it will be delivered to the Administrative Agent for acceptance by the Administrative Agent and the Borrower. 5. Upon such acceptance, as of the Effective Date: (i) the Assignee shall be a party to the Credit Agreement and, to the extent provided in this Assignment and Assumption Agreement, have the rights and obligations of a Lender thereunder and (ii) the Assignor shall, to the extent provided in this Assignment and Assumption Agreement, relinquish its rights and be released from its obligations under the Credit Agreement. 6. Upon such acceptance, from and after the Effective Date, the Administrative Agent shall make all payments under the Credit Agreement and the Notes in respect of the interest assigned hereby (including, without limitation, all payments of principal, interest and commitment fees with respect thereto) to the Assignee. The Assignor and Assignee shall make all appropriate adjustments in payments under the Credit Agreement and the Notes for periods prior to the Effective Date directly between themselves. 7. This Assignment and Assumption Agreement shall be governed by, and construed in accordance with, the laws of the State of New York. E-2 IN WITNESS WHEREOF, the parties hereto have caused this Assignment and Acceptance to be duly executed on the date first above written. [NAME OF ASSIGNOR] By ------------------------------ Title --------------------------- [NAME OF ASSIGNEE] By ------------------------------ Title --------------------------- Lending Office for Base Rate and Eurodollar Loans: Address for Notices: Accepted this ___ day Accepted this ___ day of ______________, ___ of ______________, ___ NATIONAL WESTMINSTER BANK PLC, LODGENET ENTERTAINMENT as Administrative Agent CORPORATION By By ---------------------------- ------------------------------ Title Title ------------------------- --------------------------- E-3 EXHIBIT F BORROWER U.S. LEGAL OPINION 1. Each of the Borrower and ResNet Inc. is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware. Each of the Borrower and ResNet Inc. has the requisite corporate power and authority to own, pledge, mortgage and operate its properties, to lease any properties it operates under lease, to conduct its business as presently conducted and to execute and deliver each of the Loan Documents to which it is a party. Each of the Borrower and ResNet Inc. is duly licensed or qualified and is in good standing as a foreign corporation in each jurisdiction in which the character of the properties owned or leased by it or the nature of the business transacted by it makes such licensing or qualification necessary, except where the failure to qualify or be so licensed would not have a material adverse effect on the financial condition or business of the Borrower or ResNet Inc. 2. The execution, delivery and performance of each of the Loan Documents to which the Borrower or ResNet Inc. is a party have been duly authorized by the Borrower and ResNet Inc. (as applicable), and each of the Loan Documents constitutes the legal, valid and binding obligation of the Borrower and ResNet Inc. (as applicable) enforceable in accordance with its terms. 3. Assuming the proceeds of the loans are used solely for the purposes set forth in the Credit Agreement, neither the execution and delivery by each of the Borrower and ResNet Inc. of the Loan Documents to which it is a party, nor the consummation by each of the Borrower and ResNet Inc. of the transactions contemplated thereby: (i) violates any provision of the Borrower's or ResNet Inc.'s respective certificates of incorporation or bylaws; (ii) violates any law or regulation (including any applicable order or decree of any court or governmental instrumentality known to us) applicable to the Borrower or ResNet Inc.; (iii) results in the breach of, or constitutes a default under, any indenture, mortgage, deed of trust, lease or other agreement to which the Borrower or ResNet Inc. is a party or by which they or each of their respective properties are bound; (iv) results in the creation or imposition of any lien upon any of the property of the Borrower or ResNet Inc. under any indenture, mortgage or other agreement described in clause (iii) above; or (v) requires the consent or approval of, or any filing or registration with, any governmental body, agency or authority. 4. To our knowledge, there are no judgments outstanding against the Company or ResNet Inc. Except as set forth on Schedule 3.6 of the Credit Agreement, there is no action, suit or proceeding pending before any court or any governmental or regulatory authority, against or otherwise involving the Borrower or its Subsidiaries, or to our knowledge threatened, which, if adversely determined, would have a material adverse effect upon the consolidated financial condition or business of the Borrower. 5. To our knowledge, neither the Borrower nor ResNet Inc. is in default with respect to any agreement, resolution, decree, bond, note, indenture, order or judgment to which it is a F-2 party or by which it is bound, or any other agreement or other instrument by which any of the properties or assets owned or used by the Borrower or its Subsidiaries in the conduct of their respective businesses is affected. 6. Neither the Borrower nor ResNet Inc. is an "investment company" registered or required to be registered under the Investment Company Act of 1940, as amended, or controlled by such a company. 7. Neither the Borrower nor ResNet Inc. is a "holding company" or a "subsidiary company" of a "holding company" or an "affiliate" of a "holding company" within the meaning of the Public Utility Holding Company Act of 1935, as amended. 8. The interest rates applicable to the obligations of the Borrower under the Credit Agreement and the Notes do not violate any law, rule or regulation prescribing a maximum rate of interest. F-3 EX-10.29 5 EXHIBIT 10.29 CONFIDENTIAL TREATMENT REQUEST. CONFIDENTIAL PORTIONS OF THIS AGREEMENT HAVE BEEN REDACTED AND HAVE BEEN SEPARATELY FILED WITH THE COMMISSION CONFIDENTIAL LICENSE AGREEMENT FOR USE OF NINTENDO VIDEO GAME SYSTEMS WITH HOTEL GUEST ENTERTAINMENT SYSTEM THIS AGREEMENT is entered into by and between NINTENDO OF AMERICA INC., a corporation of Washington, having an address for notice purposes of 4820 - 150th Avenue N.E., P.O. Box 957, Redmond, Washington 98052, Attn: General Counsel (Fax: 425-882-3585) ("NINTENDO"), and LODGENET ENTERTAINMENT CORPORATION, a corporation of Delaware, having an address for notice purposes of 3900 West Innovation Street, Sioux Falls, South Dakota 57107-7200 Attn: President (Fax: 605-988-1323) ("LODGENET"). 1. RECITALS 1.1 NINTENDO distributes and sells high-quality video game systems, including the SUPER NINTENDO ENTERTAINMENT SYSTEM-Registered Trademark- or SUPER NES-Registered Trademark- and the NINTENDO 64-Registered Trademark- or N64-TM- 1.2 NINTENDO or its parent corporation, Nintendo Co., Ltd. ("NCL"), is the holder of various patents, trademarks, copyrights, mask works and other proprietary rights and information which relate to NINTENDO's video game systems. 1.3 LODGENET is engaged in the business of owning, operating and providing in-room hotel guest entertainment systems for the lodging industry. 1.4 LODGENET owns certain intellectual property rights which relate to in-room hotel guest entertainment for the lodging industry. 1.5 NINTENDO and LODGENET previously entered into an agreement pursuant to which LODGENET has placed a modified version of NINTENDO's SUPER NES in various hotels as part of LODGENET's hotel guest entertainment system. 1.6 The parties desire to terminate their prior agreement (but not the continuing obligations set forth under Paragraph 12.5 of the prior agreement) and enter into a new agreement pursuant to which LODGENET would acquire a non-exclusive license under NINTENDO or NCL's intellectual property rights to use, license and sell modified versions of NINTENDO's N64 as part of LODGENET's hotel guest entertainment system. NOW, THEREFORE, the parties agree as follows: 2. DEFINITIONS 2.1 "Actual Cost(s)" shall mean NINTENDO's actual cost to provide the product to LODGENET, including order processing, materials, production, shipping, warranty and administration, as determined by NINTENDO on an order by order basis. 2.2 "Approved Subdistributor(s)" shall mean the subdistributors of LODGENET set forth at SCHEDULE 1, together with any other subdistributors that the parties may mutually agree upon in writing in the future. 2.3 "Approved Subdistributor Acknowledgment" shall mean a written acknowledgment in the form set forth at SCHEDULE 4. NINTENDO-LODGENET HOTEL LICENSE AGREEMENT PAGE 1 MAY 12, 1998 (FINAL) 2.4 "Approved Subdistributor Request" shall mean a written request in the form set forth at SCHEDULE 3. 2.5 "Delivery" shall mean F.O.B. NINTENDO, Redmond, Washington, USA. 2.6 "Effective Date" shall mean the last date of signature below. 2.7 "Game Media" shall mean floppy disks, CDS or other medium containing the Licensed Games in a format which can be downloaded for use on the applicable Nintendo System. 2.8 "Game List" shall mean a listing of the then-current Licensed Game titles available for license to LODGENET under this Agreement. 2.9 "Gross Revenue" shall mean 100% of all revenue generated from the Nintendo Systems and/or Licensed Games by a Licensed Hotel, without deduction for any costs, fees or bad debt, but not including any Licensed Hotel guest adjustments or applicable sales taxes which a Licensed Hotel is required to pay on such revenue. 2.10 "Guest Information Record" shall mean a written report from a Licensed Hotel to LODGENET or an Approved Subdistributor in the form set forth at SCHEDULE 6. 2.11 "Hotel Guest System(s)" shall mean interactive hotel guest entertainment systems. 2.12 "Licensed Game(s)" shall mean video games approved by NINTENDO for play on the Nintendo Systems. 2.13 "Licensed Hotel(s)" shall mean any hotel property in which a Hotel Guest System from LODGENET that incorporates a Nintendo System has been installed. 2.14 "Licensed Hotel Acknowledgment" shall mean a written acknowledgment in the form set forth at SCHEDULE 2. 2.15 "Licensed Intellectual Proper(ties)" shall mean the Licensed Patents and the Licensed Proprietary Information, together with the trademarks, copyrights, mask works and trade secrets owned by or licensed to NINTENDO or NCL and associated with the Licensed Products. 2.16 "Licensed Patent(s)" shall mean the patents and patent applications owned or used under license by NINTENDO or NCL and associated with Hotel Guest Systems for video game play and/or to the Licensed Products, specifically including US Patent No. 5,581,270 and any divisionals, continuations, reissues or reexaminations thereof, and also including any patent applications owned or used under license by NINTENDO or NCL which are filed during the Term that cover or relate to Hotel Guest Systems for video game play. 2.17 "Licensed Product(s)" shall mean collectively or individually the Super NES, Super NES Controller, N64, N64 Controller, Licensed Games and Game Media. The Licensed Products shall not include the communication protocols developed by LODGENET and incorporated into the Super NES, Super NES Controller, N64 or N64 Controller. 2.18 "Licensed Proprietary Information" shall mean collectively or individually, technical and proprietary information, know-how, techniques, methods, information and trade secrets owned by or licensed to NINTENDO or NCL, relating to the development, design, operation, manufacture and sale of the Licensed Products. NINTENDO-LODGENET HOTEL LICENSE AGREEMENT PAGE 2 MAY 12, 1998 (FINAL) 2.19 "Licensee Monthly Royalty Report" shall mean a written report from LODGENET or an Approved Subdistributor in the form set forth at SCHEDULE 5. 2.20 "Monthly Board Reconciliation Report" shall mean a written report from LODGENET to NINTENDO in the form set forth at SCHEDULE 7. 2.21 "N64" shall mean NINTENDO's N64 video game system modified for use with LODGENET's Hotel Guest System. 2.22 "N64 Controller(s)" shall mean NINTENDO's standard hand controller for use with the N64, as adapted for use with LODGENET's Hotel Guest System. 2.23 "NDA(s)" shall mean, individually or collectively, those certain agreements between the parties entitled: (a) "Nintendo of America Inc. Non-Disclosure Agreement" dated March 11, 1992; and, (b) "Product Developer Non-Disclosure Agreement For "Nintendo 64" Home System" dated October 16, 1996. 2.24 "Nintendo System(s)" shall mean, individually or collectively, the Super NES and the N64, adapted for use with LODGENET's Hotel Guest System. 2.25 "Notice(s)" shall mean all notices, reports, and statements under this Agreement, which shall be sufficiently given when placed in writing and: (a) personally served or delivered to the party entitled to such Notice; (b) deposited, postage prepaid, with an overnight air courier service, addressed to the person and address stated herein, or to such other person or address as may be provided in a Notice by one party to the other, or, (c) transmitted by facsimile with an original sent concurrently by overnight air courier, addressed to the person, facsimile number, and address stated above, or to such other person, address or facsimile number as may be provided in a Notice by one party to the other. Notice shall be deemed effective upon the earlier of actual receipt or five (5) business days after mailing or transmittal. 2.26 "Prior Agreement" shall mean the agreement between the parties entitled "Confidential License Agreement for Use of Super Nintendo Entertainment System With Integrated Hotel Entertainment and Hotel Guest Related Communications System", as amended, with an effective date of May 12, 1993 and an expiration date of May 12, 2000. 2.27 "Product Specification(s)" shall mean the technical and operating specifications for the Nintendo Systems and the N64 Controller, as mutually agreed upon by the parties. 2.28 "Room(s)" shall mean hotel guest rooms, and shall include each location in which a Nintendo System is available for use or which has the capability of accessing the use of a Nintendo System by means of a communication link or other system, including, but not limited to a Hotel Guest System. A suite within a Licensed Hotel shall be considered as one "Room" for purposes of this Agreement. Rooms shall not include public areas within a Licensed Hotel or any other location. 2.29 "Super NES" shall mean NINTENDO's Super NES modified for use with LODGENET's Hotel Guest System 2.30 "Super NES Controller(s)" shall mean a hand controller designed by or for LODGENET for use with the Super NES. 2.31 "Term" shall mean ten (10) years from the Effective Date, together with any extension of the Term under Paragraph 13.6 herein. NINTENDO-LODGENET HOTEL LICENSE AGREEMENT PAGE 3 MAY 12, 1998 (FINAL) 2.32 "Territory" shall mean those countries set forth at SCHEDULE 1, together with any other countries that the parties may mutually agree upon in writing in the future. 2.33 "Test Game(s)" shall mean up to five (5) N64 video games selected by NINTENDO and provided on Game Media for use during an approved beta test. 3. PRODUCT SPECIFICATIONS; DEVELOPMENT OF PROTOTYPE N64; BETA TEST 3.1 PROTOTYPE N64 AND N64 CONTROLLER DELIVERY. NINTENDO agrees to develop prototypes of the N64 and the N64 Controller to operate in connection with LODGENET's Hotel Guest System, in accordance with the schedule mutually to be agreed upon by the parties. NINTENDO and LODGENET shall confer on an ongoing basis to discuss specifications for the prototype N64 and N64 Controller. To the extent necessary during the testing process, NINTENDO shall provide to LODGENET prototypes of the N64 or N64 Controller for use in the testing process. 3.2 BETA TEST: TEST GAMES. LODGENET agrees to undertake beta testing at two operational hotel properties (each of which shall also be a Licensed Hotel) to ascertain the technical, operational and marketing compatibility of the N64 and the N64 Controller prototypes with LODGENET's Hotel Guest System. NINTENDO agrees to supply to LODGENET a sufficient number of prototypes for use during the beta test only. LODGENET is authorized to install and utilize the Test Games during the beta test in Rooms of the Licensed Hotels for a period of not more than sixty (60) days. In the event LODGENET or the Licensed Hotels elect to charge for use of the Test Games during the beta test, LODGENET shall pay royalties to NINTENDO with respect to the use of the Test Games as specified at Section 8 herein. 3.3 BETA TEST COMPLETION; N64 AND N64 CONTROLLER PRODUCT SPECIFICATIONS. Following completion of the beta test, the parties shall mutually agree in writing on the Product Specifications for the N64 and N64 Controllers to be provided under this Agreement. 3.4 PROVISION OF APPROVED PRODUCT. NINTENDO agrees to sell to LODGENET the N64 and N64 Controllers meeting the Product Specifications. NINTENDO may, at its option, utilize remanufactured parts or components in the N64 and the N64 Controllers, provided all Product Specifications are met. 3.5 CHANGE IN PRODUCT SPECIFICATIONS. Changes in the Product Specifications shall be made only upon the mutual agreement of the parties. In the event it is necessary to change Product Specifications for the PAL television standard, the parties shall mutually agree upon a development schedule and a beta test program. 4. GRANT OF RIGHTS; SALE: LICENSE BY NINTENDO 4.1 GRANT. NINTENDO hereby grants to LODGENET and LODGENET hereby accepts under the terms and conditions provided herein, a nonexclusive right and license to the Licensed Intellectual Properties to: (a) use (but, with the exception of the Super NES Controller, not make) the Licensed Products; and, (b) make, use or sell Hotel Guest Systems incorporating the Licensed Products for video game play. All such rights and licenses shall be exercised solely in connection with the placement of LODGENET's Hotel Guest System for video game play in Rooms of Licensed Hotels in the Territory. 4.2 SALE AND LICENSE OF LICENSED PRODUCTS TO LODGENET. To carry out the grant in Paragraph 4.1, NINTENDO agrees sell to LODGENET the N64 and the N64 Controllers and to license and provide to LODGENET the Licensed Games for play on the Super NES and the N64. NINTENDO-LODGENET HOTEL LICENSE AGREEMENT PAGE 4 MAY 12, 1998 (FINAL) 4.3 RIGHT TO UTILIZE THE LICENSED PRODUCTS IN THE LICENSED HOTELS. LODGENET shall have the right to utilize the Licensed Products in the Licensed Hotels. Prior to the commencement of services incorporating the Licensed Products, each Licensed Hotel shall have either: (a) signed a Licensed Hotel Acknowledgment; or, (b) signed an agreement with LODGENET or an Approved Subdistributor which includes all provisions contained in the Licensed Hotel Acknowledgment. LODGENET agrees to enforce such acknowledgment or agreement, in addition to all applicable restrictions, conditions and limitations of this Agreement with respect to each Licensed Hotel. If LODGENET does not undertake such enforcement efforts, NINTENDO may, without prejudice to any rights or claim of indemnity it may have for breach of this Agreement, upon twenty (20) days' Notice to LODGENET, undertake such enforcement efforts, recovering from LODGENET all reasonable costs and expenses associated with such enforcement efforts. LODGENET shall provide reasonable assistance as may be requested by NINTENDO. 4.4 EXCEPTION TO REQUIREMENT TO OBTAIN LICENSED HOTEL ACKNOWLEDGMENT OR AGREEMENT. With respect to Licensed Hotels of LODGENET continuing from the Prior Agreement, LODGENET or an Approved Subdistributor shall not be required to obtain a Licensed Hotel Acknowledgment or an agreement containing those provisions if the following conditions apply: (a) the Licensed Hotel has not purchased or otherwise acquired title to or an ownership interest of any kind whatsoever to all or any part of the Licensed Products; (b) LODGENET continuously maintains the ability to immediately render the Licensed Products inoperable by the Licensed Hotel; and, (c) LODGENET shall immediately render the Licensed Products inoperable by the Licensed Hotel in the event LODGENET becomes aware of a default by the Licensed Hotel with respect to any representation, warranty or agreement relating to the use of the Licensed Products or in the event of any termination of the Agreement between NINTENDO and LODGENET or the business relationship between LODGENET and the Licensed Hotel. Notwithstanding this exception, LODGENET shall obtain a Licensed Hotel Acknowledgment or agreement containing those provisions for any new Licensed Hotel hereunder and for any renewal or restatement of its agreements with Licensed Hotels continuing from the Prior Agreement. 4.5 RIGHT TO APPOINT APPROVED SUBDISTRIBUTORS. LODGENET shall have the right to appoint Approved Subdistributors of the Licensed Products in the Territory, following submission to and approval by NINTENDO of an Approved Subdistributor Request. Prior to receiving the Licensed Products, each Approved Subdistributor shall have either: (a) signed an Approved Subdistributor Acknowledgment; or, (b) signed a written agreement with LODGENET which includes all provisions contained in the Approved Subdistributor Acknowledgment. LODGENET agrees to enforce such acknowledgment or agreement, in addition to all applicable restrictions, conditions and limitations of this Agreement with respect to each Approved Subdistributor. If LODGENET does not undertake such enforcement efforts, NINTENDO may, upon twenty (20) days' Notice to LODGENET, undertake such enforcement efforts, recovering from LODGENET all reasonable costs and expenses associated with such enforcement efforts. LODGENET shall provide reasonable assistance as may be requested by NINTENDO. 4.6 LICENSED GAME TITLES: GAME LIST. The license of the Licensed Games to LODGENET shall include the right to utilize a minimum of Five (5) Licensed Game titles from the current Game List in each Licensed Hotel. Upon execution of this Agreement, NINTENDO shall provide LODGENET with the current Game List and expiration date for use of each game title. Thereafter, NINTENDO may add or delete game titles from the Game List by providing a new Game List to LODGENET. LODGENET represents and warrants that on or before the expiration date for each game title, it shall remove, disable or destroy all copies of the game title, whether in the possession of LODGENET, an Approved Subdistributor or a Licensed Hotel, including copies installed on any Licensed Hotel's host computer. NINTENDO-LODGENET HOTEL LICENSE AGREEMENT PAGE 5 MAY 12, 1998 (FINAL) 4.7 DELIVERY; AUTHORIZATION TO COPY. NINTENDO has previously provided LODGENET with Game Media for Licensed Game titles on the current Game List. In the future, NINTENDO shall provide LODGENET with Game Media for any game titles on the then-current Game List that may be requested by LODGENET. Upon delivery to NINTENDO of a signed Approved Subdistributor Acknowledgment, LODGENET is authorized to copy the Game Media for any titles on the then-current Game List and to provide them to an Approved Subdistributor. LODGENET or an Approved Subdistributor may load the Licensed Games onto the Hotel Guest System of the Licensed Hotels. In the event Licensed Games are copied or delivered electronically hereunder, LODGENET and/or an Approved Subdistributor shall use a secure network line or such state-of-the-art encryption technology in making the transfer as is commercially available at the time. LODGENET shall remain liable for the security of the Licensed Games at all times during and after such transfers as set forth in Paragraphs 4.4 and 5.7. 4.8 CONTROLLER FOR SUPER NES. LODGENET shall have the right to develop or purchase third party game controllers for use only with the Super NES, subject to NINTENDO's prior approval with respect to its quality and operation of such Super NES Controller. Such approval shall not be unreasonably withheld or delayed. 4.9 CONTROLLER FOR N64. LODGENET and NINTENDO shall cooperate in the adaptation of the N64 Controller for use in LODGENET's Hotel Guest System. As between NINTENDO and LODGENET, all adaptations and inventions associated with or derived from such adaptations, including all design patents and industrial design rights, but excluding LODGENET's copyrights in communication protocols, shall be owned solely by NINTENDO and/or NCL. During the Term and any extension thereof, NINTENDO shall not sell or license any N64 Controller for use in Hotel Guest Systems that bears the LODGENET logo or the same button color configuration as the N64 Controller adapted for use with the LODGENET Hotel Guest System. 5. OBLIGATIONS AND UNDERTAKINGS OF LODGENET 5.1 GOOD FAITH OBLIGATION TO MARKET AND PROMOTE. LODGENET undertakes and agrees to use good faith efforts to market and promote the Licensed Products throughout the Territory. 5.2 MINIMUM INSTALLATION REQUIREMENTS FOR N64. LODGENET agrees to install the N64 as a part of LODGENET's Hotel Guest System in not less than *** Rooms during each of the first seven (7) calendar years during the Term commencing in 1999. Installations may consist of new Rooms and/or existing Rooms converted from the Super NES to the N64. Installations in excess of the required minimum installation in any year may be counted toward the minimum installation for the following year. 5.3 DISPOSITION OF REMOVED OR RETIRED SUPER NES. As LODGENET replaces the existing Super NES units in Hotel Guest Systems with the N64, the removed or retired Super NES units shall be destroyed or secured by LODGENET for reuse only in Rooms of a Licensed Hotel as set forth in the Monthly Board Reconciliation Report at SCHEDULE 7. 5.4 DISPOSITION OF LICENSED GAMES FOR REMOVED OR RETIRED SUPER NES. As LODGENET replaces the existing Super NES units in Hotel Guest Systems with the N64, all copies of the removed Super NES Licensed Games shall be destroyed or returned to NINTENDO. 5.5 MINIMUM PLACEMENT LEVEL WITHIN EACH LICENSED HOTEL. Except with NINTENDO's prior consent, which shall not be unreasonably withheld or delayed, the Licensed Products shall not be placed at or in a Licensed Hotel unless the Licensed Products are accessible to or operating within at least 75% of the Rooms in a particular hotel. - -------------- *** - Confidential treatment requested. NINTENDO-LODGENET HOTEL LICENSE AGREEMENT PAGE 6 MAY 12, 1998 (FINAL) 5.6 LIMITATIONS ON SALE AND LICENSE. With regard to all aspects of the Licensed Products, LODGENET may only sell to, license to, or permit utilization by: (a) Approved Subdistributors who have signed an Approved Subdistributor Acknowledgment; or, (b) Licensed Hotels who have signed a Licensed Hotel Acknowledgment or who have otherwise met the conditions of paragraph 4.4 herein. During the Term and continuing after the expiration or termination hereof, the Nintendo Systems shall be used by LODGENET, the Approved Subdistributors and the Licensed Hotels only in combination with Licensed Games authorized and supplied by NINTENDO under a then current license agreement. 5.7 SECURITY OF LICENSED GAMES AND GAME MEDIA. LODGENET shall take all reasonable measures to insure that the Licensed Games, Test Games, Game Media and any backup copies thereof are maintained in a secure location and/or transmitted or copied only as permitted herein by a secure means, whether by LODGENET, the Approved Subdistributors and/or the Licensed Hotels. 6. PROTECTION, OWNERSHIP AND ASSIGNMENT OF INTELLECTUAL PROPERTIES 6.1 RIGHTS IN THE LICENSED INTELLECTUAL PROPERTIES. LODGENET agrees that, as between LODGENET and NINTENDO, all right, title, and interest in the Licensed Intellectual Properties are solely the property of NINTENDO and/or NCL. 6.2 LIMITATION ON USE OF LICENSED INTELLECTUAL PROPERTIES. LODGENET, the Approved Subdistributors and the Licensed Hotels shall not in any manner represent that they have any ownership in the Licensed Intellectual Properties. Use of the Licensed Intellectual Properties shall not create any right, title or interest in or to the Licensed Intellectual Properties in favor of LODGENET, an Approved Subdistributor or a Licensed Hotel. LODGENET, the Approved Subdistributors and the Licensed Hotels are not authorized to use the Licensed Intellectual Properties in any manner not specifically authorized under this Agreement. 6.3 MODIFICATIONS TO THE LICENSED PRODUCTS. LODGENET shall not make any modifications to the Licensed Products nor shall LODGENET permit, instruct or encourage an Approved Subdistributor or a Licensed Hotel to make such modifications. 6.4 ASSIGNMENT AND CROSS LICENSE OF PATENTS. 6.4.1 ASSIGNMENT TO NINTENDO. LODGENET assigns to NINTENDO all right, title and interest to: (a) any inventions, modifications, improvements or alterations which relate to Hotel Guest Systems incorporating video game play that LODGENET may jointly develop with NINTENDO during the Term; and, (b) any inventions, modifications, improvements or alterations which incorporate, use, or enhance the Licensed Products or the Licensed Intellectual Properties or any other proprietary information, trade secrets or know-how owned, developed or acquired by NINTENDO and/or NCL that LODGENET may individually or jointly develop with NINTENDO during the Term. Upon request of NINTENDO, LODGENET will assist in, testify and/or execute any documents, statements, affidavits or assignments relating to such inventions, modifications, improvements or alterations that NINTENDO deems appropriate to establish and protect its rights hereunder, at no out-of-pocket cost to LODGENET. 6.4.2 LICENSE TO LODGENET. NINTENDO grants back to LODGENET and its customers a non-exclusive, royalty free license to make, use and sell any of the inventions, modifications, improvements or alterations which have been assigned to NINTENDO by LODGENET under paragraph 6.4.1 for use in connection with LODGENET's Hotel Guest Systems, for the Term. NINTENDO-LODGENET HOTEL LICENSE AGREEMENT PAGE 7 MAY 12, 1998 (FINAL) 6.4.3 LICENSE TO NINTENDO. If during the Term, without the assistance of NINTENDO and without the violation of the Non-Disclosure Agreements, LODGENET files or obtains any patents incorporating, enhancing, or using video game play in Hotel Guest Systems, LODGENET grants to NINTENDO and its customers a non-exclusive, royalty-free license to make, use and sell such patented technology solely for the purpose of providing: (a) NINTENDO's video game products; or, (b) aspects of systems which are necessary to deliver video game products sold or licensed by NINTENDO, and for no other purpose, for the respective terms of the patents. 6.5 PATENT MARKINGS. LODGENET will place in a conspicuous location on any product made or sold under any Licensed Patent, a patent notice in accordance with 35 USC Section 287, as may be specified by NINTENDO. LODGENET shall not be responsible for any such markings on any Licensed Products purchased from or supplied by NINTENDO (it being understood that the responsibility for any such markings shall be NINTENDO's). LODGENET shall not mark the Licensed Products with any patent marking other than with markings of NINTENDO's patents as specified by NINTENDO. 7. PRODUCT WARRANTY; SERVICE TRAINING 7.1 NINTENDO SYSTEMS WARRANTY. NINTENDO hereby warrants to LODGENET that the Nintendo Systems: (a) are free from material defects in material and workmanship; and, (b) will operate in accordance with the Product Specifications for a period of fourteen (14) months from the date of manufacture. If a covered defect occurs within the warranty period, upon return of the defective Nintendo System to NINTENDO, NINTENDO agrees to repair or replace (at NINTENDO's option) the Nintendo System, in conformance with the Product Specifications, within fourteen (14) business days from the date of receipt by NINTENDO. NINTENDO shall pay shipping charges on the return shipment to LODGENET. All other shipping, freight, duty and tax charges as may be incurred for warranty service shall be for LODGENET's account. 7.2 LICENSED GAME WARRANTY. NINTENDO hereby warrants to LODGENET that, during the Term, the Licensed Games: (a) shall be free from material defects in operation; and, (b) will operate on the Nintendo Systems in accordance the game play instructions provided by NINTENDO. If a defect covered under this warranty occurs within the warranty period, upon Notice from LODGENET to NINTENDO designating the Licensed Game title and the nature of the defect, NINTENDO will either replace the Licensed Game title with a new copy of the Licensed Game title or, if NINTENDO elects not to replace the Licensed Game Title, allow LODGENET to select an alternate Licensed Game title from the Game List provided by NINTENDO, at no additional charge. NINTENDO shall fulfill its warranty obligation hereunder within fourteen (14) business days from the date Notice is received by NINTENDO. 7.3 OUT-OF-WARRANTY SERVICE. During the Term, NINTENDO agrees to make available to LODGENET out-of-warranty service for the Nintendo Systems within fourteen (14) business days from the date of receipt by NINTENDO. The charge for each out-of-warranty repair shall be *** for each Super NES and *** for each N64, or such other amounts as the parties may agree on, in writing, from time to time. Service pricing shall be subject to reasonable adjustment by NINTENDO. LODGENET shall contact NINTENDO in advance of submitting an out-of-warranty service request to obtain a return authorization number, NINTENDO shall pay shipping charges on the return shipment to LODGENET. All other shipping, freight, duty and tax charges as may be incurred for out-of-warranty service shall be for LODGENET's account. Payment for out-of-warranty service shall be made by LODGENET to NINTENDO net thirty (30) days from the date of the return shipment. - ----------------- *** - Confidential treatment requested. NINTENDO-LODGENET HOTEL LICENSE AGREEMENT PAGE 8 MAY 12, 1998 (FINAL) 7.4 QUALITY CONTROL FOR N64 CONTROLLERS. In lieu of warranty coverage, NINTENDO agrees to inspect and conduct random tests prior to shipment of all N64 Controllers purchased by LODGENET under this Agreement, using customary and reasonable industry standards. 8. ORDER PURCHASE AND PAYMENTS 8.1 PURCHASE PRICE AND PAYMENT FOR THE NINTENDO SYSTEMS AND N64 CONTROLLERS. The purchase price for each N64 Controller and each Nintendo System shall be ***. Following receipt of a price request from LODGENET, NINTENDO shall provide LODGENET with an estimate of cost for use on the written purchase order and the standby letter of credit. The purchase price shall be subject to adjustment by NINTENDO within a reasonable period after Delivery (provided that such price shall not exceed ***. Payment shall be made net thirty (30) days from Delivery and shall be secured by an irrevocable standby letter of credit for the amount of the order, issued by a bank approved by NINTENDO or confirmed, at LODGENET's expense, if requested by NINTENDO. Concurrently with the payment hereunder, LODGENET shall transmit to NINTENDO (Attn: Gateway Program Manager, Facsimile: 425-558-7100) the date and number of the purchase order to which the payment is to be applied. 8.2 DELIVERY OF N64 AND N64 CONTROLLERS. NINTENDO agrees to make Delivery of the N64 and N64 Controllers conforming to the Product Specifications within one hundred and twenty (120) days from the date NINTENDO receives LODGENET's written purchase order. 8.3 LICENSED GAME ROYALTY. LODGENET shall pay NINTENDO a royalty for the Licensed Games utilized in a Hotel Guest System. Royalty payments to NINTENDO shall commence when the Licensed Games are available for use in a Licensed Hotel Room. The royalty payable by LODGENET to NINTENDO shall be as follows: 8.3.1 ROYALTY PAYABLE UPON EFFECTIVE DATE. Upon the Effective Date, and continuing until LODGENET shall have: (i) placed orders for the N64 with NINTENDO for cumulative amounts in excess of ***; and, (ii) installed and commenced payment of royalties for Licensed Games on the N64 as a part of the Hotel Guest System in at least *** Rooms in Licensed Hotels, LODGENET shall pay a royalty for any Licensed Games utilized in a Hotel Guest System of *** per calendar month, per Room. 8.3.2 ROYALTY PAYABLE AFTER N64 CONDITIONS ARE MET. From and after the first day of the month following the month in which LODGENET shall have: (i) placed orders for the N64 with NINTENDO for cumulative amounts in excess of ***; and, (ii) installed and commenced payment of royalties for Licensed Games on the N64 as a part of the Hotel Guest System in at least *** Rooms in Licensed Hotels, LODGENET shall pay a revised royalty for any Licensed Games utilized in a Hotel Guest System as follows: (a) For the first *** Rooms, a royalty shall be paid of *** per calendar month, per Room for use of the Licensed Games; and, (b) For each additional Room thereafter, a royalty shall be paid of *** of the Gross Revenue for all such additional Rooms per calendar month, but in no event less than *** per Room per calendar month or any portion thereof. The calculation of Rooms covered under this Agreement and royalties payable thereon shall be made monthly as set forth in the Licensee Monthly Royalty Report at Schedule 5. - ---------------- *** - Confidential treatment requested. NINTENDO-LODGENET HOTEL LICENSE AGREEMENT PAGE 9 MAY 12, 1998 (FINAL) 8.3.3 *** IF N64 CONDITIONS ARE MET. Within forty-five (45) days after meeting the conditions set forth at Paragraph 8.3.2, *** equal to the difference between the royalties paid under Paragraph 8.3.1 and the royalties that would have been payable under Paragraph 8.3.2 for the time period commencing with the first month after LODGENET has placed in excess of *** in orders for the N64 and ending with the month in which LODGENET shall have installed and commenced payment of royalties for Licensed Games on the N64 as a part of the Hotel Guest System in at least *** Rooms in Licensed Hotels. No interest shall be payable by NINTENDO on the *** royalties. 8.4 MINIMUM ROYALTY TERM FOR EACH LICENSED HOTEL. Each Licensed Hotel shall agree to use the Licensed Games for a minimum initial term of twelve (12) months for each Room able to access a Nintendo System. LODGENET shall not be obligated to enforce this requirement with respect to any Licensed Hotel that is in bankruptcy or otherwise ceases to do business. 8.5 TERMS OF PAYMENT FOR LICENSED GAME ROYALTY. Royalties shall be payable monthly by LODGENET to NINTENDO on or before the 20th day of the month for the prior month's use. Payments shall be made either by wire transfer to a bank designated by NINTENDO in the United States or by a check drawn on a US Bank, in either case to be received by NINTENDO on or before the due date. Royalties shall be payable only in US Dollars. Concurrently with the payment hereunder, LODGENET shall transmit to NINTENDO (Attn: Gateway Program Manager, Facsimile: 425-558-7100) a copy of the Licensee Monthly Royalty Report, in the form set forth at SCHEDULE 5, compiled by LODGENET for the time period covered by the payment. 8.6 LATE PAYMENT INTEREST. Any payment due under this Agreement which is overdue by more than ten (10) calendar days, shall be assessed interest at the rate of one and one-half percent (1 1/2%) per month. In the event that during any twelve (12) month period during the Term, late payments occur during more than two (2) consecutive months or any four (4) months, regardless of whether consecutive, NINTENDO, at its option, may require LODGENET to place a standby letter of credit, at LODGENET's expense, to secure timely payment of estimated royalty amounts owing or to become owing. 8.7 WITHHOLDING; TAXES. Any withholding by an Approved Subdistributor or a Licensed Hotel on payments to LODGENET shall be for LODGENET's account and shall not reduce the royalty payment due to NINTENDO by LODGENET. 9. ADVERTISING AND PROMOTION OF THE LICENSED PRODUCTS 9.1 QUALITY. LODGENET agrees that any promotional materials or items or any advertisements, in whatever medium, for the Licensed Products shall be of a high-quality, comparable to that currently employed by NINTENDO for its video game products. 9.2 ARTWORK AND GAME PLAY INFORMATION SUBMISSIONS AND APPROVALS. For each Licensed Game title, NINTENDO shall provide to LODGENET, in the form of digital files or hard copy, as NINTENDO may elect,: (a) a short summary of each game title and general operating information; (b) camera ready art work featuring screen shots, package art or advertising graphics; and, (c) trademark and copyright marking notices. LODGENET shall, in turn, incorporate such materials into the Hotel Guest Systems and/or copy and provide such materials to each Approved Subdistributor and each Licensed Hotel. LODGENET, the Approved Subdistributors and the Licensed Hotels are authorized to utilize such materials solely in connection with the advertising and promotion of the Licensed Games. - ----------------- *** - Confidential treatment requested. NINTENDO-LODGENET HOTEL LICENSE AGREEMENT PAGE 10 MAY 12, 1998 (FINAL) 9.3 ART WORK APPROVALS; SUBMISSION OF SAMPLES. LODGENET, the Approved Subdistributors and the Licensed Hotels may create advertising and promotional materials featuring the Licensed Games to be used in connection with the advertising and promotion of the Licensed Products and/or LODGENET's Hotel Guest System. The Approved Subdistributors and the Licensed Hotels shall submit such materials to LODGENET and LODGENET, in turn, shall submit such materials to NINTENDO for review and evaluation. NINTENDO shall within fifteen (15) business days of receipt of such samples, in writing, approve or disapprove such samples. If any of the samples are disapproved as to quality, NINTENDO shall specify the reasons for such disapproval and state what corrections and/or improvements are necessary. After making any necessary corrections and/or any necessary improvements to the disapproved samples, the Approved Subdistributor or the Licensed Hotel shall resubmit new samples to LODGENET who shall, in turn, submit such samples to NINTENDO for approval by NINTENDO. Submitted materials may be forwarded by LODGENET to NINTENDO by facsimile transmission, provided they remain legible. No promotional items or advertisements, in whatever medium, for the Licensed Games shall be distributed or utilized by LODGENET, the Approved Subdistributors or the Licensed Hotels without obtaining prior written approval by NINTENDO. 9.4 PRESS RELEASES OR OTHER MATERIALS USING NINTENDO'S NAME OR TRADEMARKS. LODGENET, the Approved Subdistributors and the Licensed Hotels may prepare press releases, press remarks or other materials using NINTENDO's name, trademarks and/or logos. All such materials shall be submitted in advance to NINTENDO for review and evaluation. NINTENDO shall within fifteen (15) business days of receipt, in writing, approve or disapprove such materials. If any of the materials are disapproved, NINTENDO shall specify the reasons and state what changes are necessary. After making any changes, LODGENET shall submit revised materials to NINTENDO for approval by NINTENDO. Submitted materials may be forwarded to NINTENDO by facsimile transmission. No press releases, press remarks or other materials using NINTENDO's name, trademarks or logos shall be made, released or distributed by LODGENET, the Approved Subdistributors or the Licensed Hotels without obtaining prior written approval by NINTENDO. 10. RECORDS AND AUDIT 10.1 RECORDS. LODGENET shall keep accurate and complete records with respect to the sale or use of the Nintendo Systems and the license or use of the Licensed Games to Approved Subdistributors and the Licensed Hotels in sufficient detail to enable the royalties to be determined and to also enable NINTENDO to monitor placement of the Licensed Products. 10.2 REPORT. On or before the 20th day of each month, LODGENET shall furnish to NINTENDO (Attn: Gateway Program Manager, Facsimile 425-882-3585) a Licensee Monthly Royalty Report, in the form set forth at SCHEDULE 5, detailing the prior month's usage of the Licensed Games by LODGENET, the Approved Subdistributors and the Licensed Hotels. To the extent the Territory includes more than one country, LODGENET may provide such reports on a country by country basis. 10.3 FAILURE TO REPORT LICENSED GAME USAGE; PENALTY. If at any time NINTENDO reasonably determines that LODGENET has failed to pay royalties and report commencement of a Licensed Hotel's use of Licensed Games in a given hotel location or Room as a part of the Licensee Monthly Royalty Report and royalty payment to NINTENDO and if such first royalty payment is not made within forty-five (45) days from the date it would have been due, then, upon NINTENDO's Notice to LODGENET, royalty payments calculated at the rate of ***, per calendar month, together with interest from the initial due date, shall be due and payable retroactive to the date of LODGENET's installation of the Nintendo Systems in such Licensed Hotel, without regard to actual use or availability of Licensed Games in a Room. - ----------------------- *** - Confidential treatment requested. NINTENDO-LODGENET HOTEL LICENSE AGREEMENT PAGE 11 MAY 12, 1998 (FINAL) 10.4 TRACKING OF NINTENDO SYSTEMS. Within thirty (30) days following the end of each month, LODGENET shall provide NINTENDO (Attn: Gateway Program Manager, Facsimile 425-882-3585) with the Monthly Board Reconciliation Report, in the form set forth at SCHEDULE 7, certified in writing by an authorized officer of LODGENET, detailing the disposition of all Nintendo Systems purchased under this Agreement and under the Prior Agreement. 10.5 CERTIFICATION; AUDIT. Upon the written request of NINTENDO, but no more frequently than once per year, LODGENET shall submit to NINTENDO a written certification from LODGENET's president or chief financial officer, and/or from the President or chief financial officer of each Approved Subdistributor, certifying that such individual has examined the records with respect to the transactions contemplated by this Agreement for the period (not to exceed 24 months) specified in NINTENDO's request and that the royalty payments and reports submitted by LODGENET to NINTENDO during that period are accurate and correct. In addition, NINTENDO may, at it's option, arrange for a licensed accountant to examine the records of LODGENET or any Approved Subdistributor to confirm the accuracy of records and royalty payments submitted under this Agreement. NINTENDO shall conduct the audit during normal business hours, upon not less than thirty (30) days Notice to LODGENET. NINTENDO shall bear the expense of the audit unless the audit shows an error in NINTENDO's favor amounting to a loss to NINTENDO in excess of five percent (5%) of the actual royalty payable to NINTENDO for the period examined, in which event LODGENET shall bear the expense of the audit. 10.6 CONFIDENTIALITY OF LODGENET RECORDS. Nintendo agrees to maintain as confidential all records and royalty reports supplied by LODGENET to NINTENDO under this Section 10. Notwithstanding this limitation, NINTENDO may use information regarding use of the Licensed Games which has been included in such records and reports in statistical reporting and general analysis or any other manner which does not disclose the identity of LODGENET, the Approved Subdistributors or the Licensed Hotels. 11. CONFIDENTIAL INFORMATION 11.1 NINTENDO'S CONFIDENTIAL INFORMATION. LODGENET agrees to hold all Licensed Proprietary Information in confidence and will use such Licensed Proprietary Information only in accordance with this Agreement. LODGENET agrees, however, this obligation of confidentiality shall not apply to: (a) information which was actually known by the receiving party (and not subject to any limitation or restriction, including any other license, confidentiality or nondisclosure agreement with the disclosing party) prior to the disclosure thereof by the disclosing party; (b) information which hereafter becomes publicly known and otherwise a part of the public domain through no action or fault on the part of the receiving party and without violation of any limitation or restriction by any third party; or, (c) information of a general business nature that does not identify the information source or constitute competitive information. 11.2 LODGENET'S CONFIDENTIAL INFORMATION. NINTENDO agrees that it will hold all confidential information received from LODGENET in confidence and will use such information only in accordance with this Agreement. LODGENET's Confidential Information shall include the communication protocols and other proprietary technical information relating to LODGENET's Hotel Guest System. However, this obligation of confidentiality shall not apply to: (a) information which was actually known by NINTENDO (and not subject to any limitation or restriction, including any other license, confidentiality or non-disclosure agreement with LODGENET) prior to the disclosure thereof by LODGENET, (b) information which hereafter becomes publicly known and otherwise a part of the public domain through no action or fault on the part of NINTENDO and without violation of any limitation or restriction by any third party; or, (c) information of a general business nature that does not identify the information source or constitute competitive information. NINTENDO-LODGENET HOTEL LICENSE AGREEMENT PAGE 12 MAY 12, 1998 (FINAL) 11.3 AGREEMENT CONFIDENTIALITY. Both parties are to maintain the terms of this Agreement in confidence. However, either party may disclose the existence, date and general subject matter of this Agreement, but shall not disclose to any third party any other terms of the Agreement. 12. WARRANTY; LIMITATION OF LIABILITY 12.1 CORPORATE AUTHORITY. NINTENDO represents and warrants that it has the right to enter into this Agreement and to grant the rights and licenses herein. 12.2 INTELLECTUAL PROPERTIES WARRANTY. NINTENDO warrants that it (or NCL) is and will remain throughout the Term, the owner or authorized licensee of the Licensed Intellectual Properties. NINTENDO agrees to defend, indemnify and hold harmless LODGENET and the Licensed Hotels from all damages arising out of any infringement or claim of infringement by the Licensed Products or the Licensed Intellectual Properties. NINTENDO's obligations shall be contingent upon: (a) the absence of any claim of infringement based upon a Licensed Hotel, Approved Subdistributor or LODGENET's modification or combination of the Licensed Products with other elements, if the infringement would not have occurred but for such combined use or modification; (b) LODGENET giving NINTENDO prompt written notice of any claim; (c) NINTENDO being granted control of the defense, compromise or settlement of such claim; and, (d) NINTENDO being given an immediate right to provide a substitution for any allegedly infringing Licensed Game title with another Licensed Game title. LODGENET shall assist NINTENDO to the extent reasonably required to effect a removal or substitution of a Licensed Game or to defend against any infringement claim, at no out-of-pocket expense to LODGENET. LODGENET shall be entitled to extend this warranty to the Approved Subdistributors and the Licensed Hotels; provided, however, that in the event of a claim for indemnity by an Approved Subdistributor or a Licensed Hotel, LODGENET, the Approved Subdistributor (if applicable) and the Licensed Hotel must each meet the requirements set forth in this paragraph 12.2 (a) through (d). Subject to the terms of a protective order specified by NINTENDO, LODGENET may at its expense, monitor any defense or proceeding in connection with any such claim. 12.3 HOLD HARMLESS; LIMITS OF INDEMNIFICATION. NINTENDO agrees to indemnify and hold harmless LODGENET from any act or omission, whether negligent or otherwise, in the performance of the obligations, representations or warranties as are specifically set forth in this Agreement. LODGENET agrees to indemnify and hold harmless NINTENDO from any act or omission, whether negligent or otherwise, by LODGENET, its Approved Subdistributors or its Licensed Hotels, in the performance of the obligations, representations or warranties as are specifically set forth in this Agreement. In no circumstance shall either party be liable in contract, tort (including negligence or breach of statutory duty) or otherwise for loss (whether direct or indirect) of profits, business, or anticipated savings or for any indirect or consequential loss. 13. TERM AND TERMINATION 13.1 TERM. This Agreement shall not be binding until it has been signed by or on behalf of each party, in which event it shall be effective as of the Effective Date. Unless otherwise terminated as provided in this Section, this Agreement is to continue in full force and effect for the Term. 13.2 DEFAULT OR BREACH. In the event that either party is in default or commits a breach of this Agreement, and if such default or breach shall not be cured within thirty (30) days after Notice of such default or breach is given by the non-defaulting party to the defaulting party, then at any time after the expiration of such thirty (30) days, the non-defaulting party may give Notice to the defaulted party of its election to terminate this Agreement. Thereupon the Agreement shall NINTENDO-LODGENET HOTEL LICENSE AGREEMENT PAGE 13 MAY 12, 1998 (FINAL) terminate on the date specified in such Notice, which shall not be less than fifteen (15) days following the receipt of such Notice. Such right of termination shall not be exclusive of any other remedies or means of redress to which the non-defaulting party may be lawfully entitled. 13.3 BANKRUPTCY/INSOLVENCY. At NINTENDO's option, this Agreement can be terminated immediately and without notice in the event that LODGENET: (a) makes an assignment for the benefit of creditors; (b) becomes insolvent; (c) files a voluntary petition for bankruptcy; (d) acquiesces to any involuntary bankruptcy petition; (e) is adjudicated as a bankrupt; or, (f) ceases to do business. 13.4 SURVIVAL OF TERMINATION. The following rights and obligations survive any expiration and/or termination of this Agreement to the degree necessary to permit their complete fulfillment or discharge: (a) NINTENDO's right to receive, and LODGENET's obligation to make payment for any order of the Licensed Products or for any royalties for the Licensed Games accrued on the date of termination; (b) the confidentiality obligations specified herein; (c) any cause of action or claim of either party, accrued or to accrue, because of any breach or default by the other party; (d) the indemnity obligations as specified herein; (e) NINTENDO's warranty obligations under paragraph 7.1 with respect to Nintendo Systems purchased during the Term; and, (f) LODGENET's software royalty obligations under any period of continued software use that may be elected by LODGENET under paragraph 13.6 herein. 13.5 TERMINATION OF USE OF LICENSED INTELLECTUAL PROPERTIES. Upon expiration and/or termination of this Agreement, LODGENET, the Approved Subdistributors and the Licensed Hotels will cease all use of the Licensed Products and the Licensed Intellectual Properties for any purpose, and will not disclose to third parties any Licensed Proprietary Information. LODGENET shall also return to NINTENDO all writings, drawings, models, data and other materials and things, without making any copies, in LODGENET's possession or in the possession of any employee, agent or contractor receiving the information through LODGENET, which constitute or relate to or disclose any Licensed Proprietary Information. LODGENET shall also obtain and destroy all copies of the Licensed Games and the Test Games, including copies installed on the computers of the Licensed Hotels or backup copies thereof, whether in the possession of LODGENET, an Approved Subdistributor, the Licensed Hotel or any past or present employee, agent or contractor of LODGENET, an Approved Subdistributor or the Licensed Hotels. LODGENET shall provide a written certification signed by an authorized corporate officer, confirming the destruction of all such copies within twenty (20) days after the date of expiration or termination of this Agreement. 13.6 OPTION TO EXTEND USE OF LICENSED GAMES ONLY. Provided this Agreement has not been terminated due to breach or default by LODGENET, upon Notice to NINTENDO within 90 days prior to the expiration of the Term, LODGENET (and its Approved Subdistributors and Licensed Hotels) may extend this Agreement and continue use of the Licensed Games on the Nintendo Systems as a part of the Hotel Guest System for up to two (2) years after the expiration of the Term, provided that NINTENDO shall have no continuing obligation to sell or provide warranties regarding the Nintendo Systems or the N64 Controllers, and, provided further, that neither party shall be bound by any obligation under paragraph 14.2 herein. 14. COVENANT NOT TO SUE 14.1 COVENANT NOT TO SUE. Each party agrees and covenants not to directly or indirectly bring any legal action against the other party, or against the licensed customers, purchasers and/or users of the products made, sold or used by the other party, for patent infringement of US Patent No. 5,581,270 owned by NINTENDO and US Patent Nos. 5,675,828 and NINTENDO-LODGENET HOTEL LICENSE AGREEMENT PAGE 14 MAY 12, 1998 (FINAL) 5,641,319 owned by LODGENET. This covenant shall be binding upon the parties and their assigns and successors for the term of the patents. 14.2 EXCEPTION TO RELEASE. The foregoing covenant shall not apply to any claim against the entities identified at SCHEDULE 8, or their assignees or successors in interest, until the earlier of: (a) the expiration or termination of this Agreement; or (b) the conclusion of the legal actions identified at SCHEDULE 9. 15. GENERAL PROVISIONS 15.1 RECITALS. The recitals herein constitute an integral part of the agreement reached and are to be considered as such. 15.2 CAPTIONS. The captions contained in this Agreement have been inserted for reference and convenience only and do not define, limit or describe the scope of this Agreement or the intent of any provision. 15.3 NON-ASSIGNABILITY/SUBLICENSING. Neither party may assign, delegate, sublicense or otherwise transfer this Agreement, including by operation of law or by the sale or transfer of more than fifty percent (50%) of the stock, assets or ownership interest or control of one party, without the prior written consent of the other party. Such consent shall not be unreasonably withheld or delayed. 15.4 FORCE MAJEURE. Neither party shall be liable for any breach of this Agreement occasioned by any cause beyond the reasonable control of such party, which, for purposes of this Agreement shall include governmental action, war, riot or civil commotion, fire, floods, labor disputes, restraints affecting shipping or credit, delay of carriers, inadequate supply of suitable materials, or any other cause which could not with reasonable diligence be controlled or prevented by the parties. 15.5 WAIVER. The waiver by any party of a breach or default of any provision of this Agreement or any right hereunder by the other party shall not constitute a waiver by such party of any succeeding breach of the same or other provision; nor shall any delay or omission on the part of either party to exercise or avail itself of any right, power or privilege that it has or may have hereunder, operate as a waiver of any such right, power or privilege by such party. 15.6 COMPLIANCE WITH APPLICABLE LAWS. The parties shall at all times comply with all applicable laws and regulations affecting this Agreement and the performance by the parties of this Agreement. LODGENET, at its own expense, shall negotiate and obtain any approval, license or permit required for its provision of the Licensed Products to the Approved Subdistributors or the Licensed Hotels in the Territory, including but not limited to, any necessary safety, electronic emissions or electrical approvals. 15.7 GOVERNING LAW; VENUE. This Agreement shall be governed by, subject to and construed under the laws of the State of Washington. 15.8 UNENFORCEABILITY. In the event that any term, clause or provision of this Agreement shall be construed to be or adjudged invalid, void or unenforceable, such term, clause or provision shall be construed as severed from this Agreement, and the remaining terms, clauses and provisions shall remain in effect. NINTENDO-LODGENET HOTEL LICENSE AGREEMENT PAGE 15 MAY 12, 1998 (FINAL) 15.9 ASSOCIATION: The parties, by this Agreement, do not intend to create a partnership, principal/agent, master/servant, or joint venture relationship, and nothing in this Agreement shall be construed as creating such a relationship between the parties. 15.10 INTEGRATION. This Agreement, together with the NDAs, constitute the entire agreement between the parties relating to the subject matter hereof. All prior negotiations, representations, agreements and understandings are merged into, extinguished by and completely expressed by it. Neither party shall be bound by any definition, condition, warranty, representation, modification, consent or waiver other than as expressly stated herein unless set forth in a writing executed by the party to be bound. 15.11 EQUITABLE RELIEF. Both parties acknowledge that in the event of a breach of this Agreement, no adequate remedy at law will be available to either party and that either party will be entitled to injunctive or other equitable relief in addition to any relief available at law. 15.12 ATTORNEYS' FEES. In the event that it is necessary for either party to this Agreement to undertake legal action to enforce any of the terms, conditions or rights contained herein, or to defend any such action, the prevailing party in any such action shall be entitled to recover from the other party all reasonable attorneys' fees, costs and expenses relating to such legal action. 15.13 SIGNATURE AUTHORITY WARRANTY. Each party represents and warrants that the party signing this Agreement on behalf of their respective company is empowered with full authority and authorization to so act. 15.14 SIGNATURE BY FAX; COUNTERPARTS. This Agreement may be signed in counterparts. A signature transmitted by facsimile shall be considered an original for purposes of this Agreement. IN WITNESS WHEREOF, NINTENDO and LODGENET have signed this Agreement on the dates set forth below, to be effective as of the Effective Date. NINTENDO: LODGENET: NINTENDO OF AMERICA INC. LODGENET ENTERTAINMENT CORPORATION By: /s/ Phil Rogers By: /s/ Steve Truckenmiller --------------------------- -------------------------- Title: Executive Vice President, Title: Vice President, Operations Guest Pay -------------------- ---------------------- Date: 5/12/98 Date: 5/18/98 -------------------- ---------------------- Schedule 1: Territory and Approved Subdistributors Schedule 2: Licensed Hotel Acknowledgment Schedule 3: Approved Subdistributor Request Schedule 4: Approved Subdistributor Acknowledgment Schedule 5: Licensee Monthly Royalty Report Schedule 6: Guest Information Record Schedule 7: Monthly Board Reconciliation Report Schedule 8: List of Entities Under Paragraph 14.2 Schedule 9: List of Actions Under Paragraph 14.2 NINTENDO-LODGENET HOTEL LICENSE AGREEMENT PAGE 16 MAY 12, 1998 (FINAL) SCHEDULE 1 TERRITORY
TERRITORY SUBDISTRIBUTOR United States N/A Canada N/A Brazil Sistema de Televisao Rua do Ruocia, 313 Sao Paulo, Brazil Attn: Ms. Katia Murgell Dominican Republic Roombar, SA Aristides Fiallo Cabral, No. 2, Ste. 301 Santo Domingo, Dominican Republic Panama, Costa Rica, Belize, C.C. Video Guatemala, El Salvador, a/k/a Five Star Entertainment Honduras, Nicaragua Apartado 5007, Balboa Panama, Panama Peru Ditel, SA Calle S. Juan 705 Urbanizacion las Gardenias-Surco Lima 33, Peru Venezuela TCI Netvision Edificio Galipan, Torre B Planta Baja, Locales 8 y 9 El Rosal, Venezuela
*This Schedule 1 may be revised from time to time by the parties to add or delete Territories and/or Approved Subdistributors by signature of both parties below. Revised Schedule 1 With an Effective Date of: 5/12/98 ------------------- Signed by NINTENDO: /s/ Phil Rogers Date: 5/12/98 ---------------------- ------------------- Signed by LODGENET:/s/ Steve Truckenmiller Date: 5/18/98 ----------------------- ------------------- NINTENDO-LODGENET HOTEL LICENSE AGREEMENT PAGE 17 MAY 12, 1998 (FINAL) SCHEDULE 2 LICENSED HOTEL ACKNOWLEDGMENT LODGENET ENTERTAINMENT CORP. ("LodgeNet") is an authorized licensee of Nintendo of America Inc. ("Nintendo") for use of select NINTENDO video game products in authorized hotel guest rooms. As a customer of LODGENET, you are subject to limitations on the use of NINTENDO products and Nintendo's intellectual properties as part of the LodgeNet System, and agree as follows: 1. NONEXCLUSIVE RIGHTS: LICENSED INTELLECTUAL PROPERTIES. You agree that all right, title and interest in the intellectual properties associated with the NINTENDO video game system and game software belong to Nintendo. You shall not represent that you have any ownership in Nintendo's intellectual properties. 2. MODIFICATION AND USE OF THE NINTENDO GAME SYSTEM. You agree not to modify the NINTENDO game system or game software provided with your LodgeNet System. You agree to use only the licensed NINTENDO games. You may not operate any games or other software on the NINTENDO game system. 3. SECURITY OF NINTENDO GAME MEDIA. You agree to keep the NINTENDO games in a secure location and not to permit any copying of any NINTENDO games. 4. TERMINATION; NO CONTINUING USE. Upon termination of your agreement with LodgeNet or upon written notice from LodgeNet or Nintendo of the termination of the license agreement between Nintendo and LodgeNet, you acknowledge that all use of the NINTENDO game systems and NINTENDO games at your hotel shall terminate. 5. ADVERTISING AND PROMOTION OF NINTENDO GAMES. You agree to use Nintendo's trademarks and copyrights only as authorized by LodgeNet or Nintendo and in connection with the advertising and promotion of the authorized NINTENDO games on the LodgeNet System. All such advertising and promotion shall be of good quality. Advertising and promotion materials related to the NINTENDO products which are created by you or your agents must be approved in advance of use. Such materials must be transmitted to LodgeNet prior to use (Fax:__________ Attn:__________ who, in turn, will provide them to Nintendo. Nintendo will promptly review and provide approval and/or corrections for such materials. You may also obtain preapproved Nintendo art from LodgeNet, which, if not modified, may be used without additional approval, solely in connection with the advertising and promotion of the licensed NINTENDO products. You must properly identify ownership of all trademarks and copyrights of Nintendo in all advertising and promotional materials. 6. LIMITATION ON LIABILITY. Nintendo makes no representations or warranties to you or your customers regarding the NINTENDO products. Nintendo disc!aims all implied representations and warranties, including warranties of merchantability and fitness for a particular purpose. Nintendo does not warrant to you that use of Nintendo's products or intellectual property rights will not infringe upon the rights of others. 7. REPRESENTATIONS. You represent and warrant to Nintendo that you are not engaged in any illegal activities; there are no criminal proceedings pending against you; you respect the intellectual property rights of others; and, you are not engaged in the manufacture, sale or distribution of products which infringe the intellectual property rights of others. Please acknowledge your acceptance by signing and returning an original of this Acknowledgment to LodgeNet. Accepted this __ day of __________, 19__. - ------------------------------------------ Printed Name of Licensed Hotel By: --------------------------------------- Printed Name: Title: ------------------------------------ NINTENDO-LODGENET HOTEL LICENSE AGREEMENT PAGE 18 MAY 12, 1998 (FINAL) SCHEDULE 3 APPROVED SUBDISTRIBUTOR REQUEST TO: Nintendo of America Inc. ATTN: Nintendo Gateway Manager FAX: (425) 882-3585 LODGENET ENTERTAINMENT CORP. ("LodgeNet") desires to appoint the following SUBDISTRIBUTOR ("Subdistributor") under our agreement with Nintendo of America Inc. ("Nintendo") for use of select NINTENDO products in authorized hotel guest rooms: - ------------------------------------------ (Subdistributor's Name) - ------------------------------------------ (Subdistributor's Street Address) - ------------------------------------------ (Subdistributor's City/Province/Country) - ------------------------------------------ (Subdistributor's Phone &, Fax Numbers) - ------------------------------------------ (Subdistributor's Contact Person) - ------------------------------------------ (Territory to be Served by Subdistributor) LodgeNet represents and warrants to Nintendo that we have conducted a reasonable investigation of the Subdistributor's financial condition and business activities; and based on that investigation, we believe that: 1. Subdistributor will be able to fulfill its financial obligations to us; 2. Subdistributor respects the intellectual property rights of third parties, is not engaged in any illegal or illicit activities and is not a party to any criminal proceedings; and, 3. Subdistributor is not, directly or indirectly, owned in any part by Sony or Sega. These representations are an integral part of the agreement between LodgeNet and Nintendo and any breach of these representations by LodgeNet to Nintendo would constitute a material breach of the agreement between LodgeNet and Nintendo. With regard to the subdistributor agreement between LodgeNet and Subdistributor: 1. We have enclosed a copy of the signed Approved Subdistributor Acknowledgment; or, 2. We represent and warrant to Nintendo that LodgeNet has entered into a written agreement with Subdistributor which contains all provisions of the Approved Subdistributor Acknowledgment specified by Nintendo, including a representation by Subdistributor that Subdistributor is not engaged in any illegal or illicit activities, that there are no criminal proceedings pending against the Subdistributor; and Subdistributor is not, directly or indirectly, owned in any part by Sony or Sega. LODGENET ENTERTAINMENT CORP. By: --------------------------------------- Printed Name: Title: ------------------------------------ Date: ------------------------------------- NINTENDO's RETURN APPROVAL: NINTENDO OF AMERICA INC. By: --------------------------------------- Printed Name: Title: ------------------------------------ Date: ------------------------------------- NINTENDO-LODGENET HOTEL LICENSE AGREEMENT PAGE 19 MAY 12, 1998 (FINAL) SCHEDULE 4 APPROVED SUBDISTRIBUTOR ACKNOWLEDGMENT LODGENET ENTERTAINMENT CORP. ("LodgeNet") is an authorized licensee of select NINTENDO brand video game products for use in authorized hotel guest rooms. Pursuant to the terms of our license agreement with Nintendo of America Inc. ("Nintendo"), LodgeNet must obtain Nintendo's approval to your appointment as our subdistributor for the territory of __________ and to your use of proprietary information and intellectual property rights associated with the NINTENDO products. In order to induce Nintendo to approve your appointment, you must agree as follows: 1. LODGENET AGREEMENT. You are a subdistributor of LodgeNet and will not have a contractual relationship with Nintendo. Nintendo requires that you acknowledge Nintendo's rights as provided herein. Nintendo is a beneficiary of your commitments and Nintendo has reserved the right to enforce its rights directly. 2. APPROVED SUBDISTRIBUTOR RESPONSIBILITIES. Your hotel customers must also acknowledge Nintendo's rights. It is your responsibility to obtain a Licensed Hotel Acknowledgment, in the form attached as SCHEDULE 2, from each hotel in which you place NINTENDO products. 3. NONEXCLUSIVE RIGHTS; INTELLECTUAL PROPERTY RIGHTS; CONFIDENTIALITY. You agree that all right, title and interest in the proprietary information and intellectual property rights associated with the NINTENDO products belong to Nintendo and are licensed to LodgeNet on a nonexclusive basis and granted to you, as an Approved Subdistributor of LodgeNet. You will not at any time do or cause to be done anything impairing Nintendo's rights. You shall not represent that you have any ownership in Nintendo's rights. You agree to keep technical and proprietary information related to the NINTENDO products confidential and to permit only those employees having a need to know such information to have access thereto. 4. MODIFICATION AND USE OF NINTENDO PRODUCTS. You agree not to modify the NINTENDO products. You acknowledge and agree that the NINTENDO video game systems may only be used with the NINTENDO game software licensed for hotel use and provided to LodgeNet by Nintendo. 5. SECURITY OF NINTENDO GAME SOFTWARE. You agree to keep the licensed NINTENDO game software in a secure location and shall not copy or permit copying thereof; provided, however, that you may make 1 backup copy. 6. TERMINATION; NO CONTINUING USE. Upon termination of your agreement with LodgeNet or upon written notice that the agreement between Nintendo and LodgeNet has terminated, you shall terminate all use of the NINTENDO products and return or destroy all copies of the licensed NINTENDO game software disks, backup copies thereof, and all documents materials containing Nintendo's proprietary information or intellectual properties, including all copies of game software in the possession of or on the host computer of any hotel customer, agent or technician. 7. GUEST INFORMATION. You agree to provide Nintendo (through LodgeNet) with information on the use of the NINTENDO products by your hotel customers. The information shall be presented in a form substantially similar to the Guest Information Record set forth at SCHEDULE 6. 8. RECORDS; AUDIT. For Nintendo's benefit, you shall retain and cause your hotel customers to retain accurate and complete records with respect to the use of the NINTENDO products. Such records shall provide the basis for the information contained in attached SCHEDULE 6 and shall include: (a) total number of NINTENDO video game engines installed and the total number of guest rooms serviced by each LodgeNet System, by hotel; (b) the date of installation NINTENDO-LODGENET HOTEL LICENSE AGREEMENT PAGE 20 MAY 12, 1998 (FINAL) and use of each LodgeNet System incorporating NINTENDO products, by hotel; and, (c) the licensed NINTENDO game software titles offered by each hotel. 9. ADVERTISING AND PROMOTION OF NINTENDO PRODUCTS. You agree to use Nintendo's trademarks and copyrights only in connection with the advertising and promotion of the authorized NINTENDO products. All such advertising and promotion shall be of good quality. Advertising and promotion materials related to the NINTENDO products which are created by you, your agents, or your hotel customers must be approved in advance of use. Such materials must be transmitted to LodgeNet prior to use (Fax:___________ Attn:_____________), who, in turn, will provide them to Nintendo. Nintendo will promptly review and provide approval and/or corrections for such materials. You may also obtain preapproved NINTENDO art from LodgeNet, which, if not modified, may be used without additional approval, solely in connection with the advertising and promotion of the licensed NINTENDO products. You must properly identify ownership of all trademarks and copyrights of Nintendo in all advertising and promotional materials. 10. LIMITATION ON LIABILITY. Nintendo makes no representations or warranties to you regarding their products. Nintendo disclaims all implied representations and warranties, including implied warranties of merchantability or fitness for a particular purpose. Nintendo does not warrant to you that use of Nintendo's products or its intellectual property rights will not infringe upon the rights of others. 11. HOLD HARMLESS. You agree to indemnify and hold Nintendo harmless against any and all losses, claims, demands, damages, liabilities and expenses, including reasonable attorneys' fees to the extent arising from any act or omission by you or your employees or agents not authorized by Nintendo. 12. SUBDISTRIBUTOR REPRESENTATIONS. You represent and warrant to Nintendo that you are not engaged in any illegal activities; there are no criminal proceedings pending against you; you respect the intellectual property rights of others; you are not engaged in the manufacture, sale or distribution of products which infringe the intellectual property rights of others; and, you are not, directly or indirectly, owned by Nintendo's competitors, Sony or Sega. 13. OTHER AGREEMENTS. This agreement is signed by you for the benefit of Nintendo and LodgeNet. This agreement does not supersede or amend any other obligations you may have to LodgeNet, except where a conflict may exist, in which event the terms of this agreement shall prevail. 14. COUNTERPARTS; FACSIMILE. This agreement may be signed in counterparts with signatures submitted by facsimile. Please acknowledge your understanding and acceptance of the provisions set forth above by countersigning and returning two (2) copies of this letter to LodgeNet. LODGENET ENTERTAINMENT CORP. By: -------------------------------------- Printed Name: Its: -------------------------------------- Accepted this __ day of _____________, 19__. APPROVED SUBDISTRIBUTOR - ------------------------------------------- (Printed Name of Approved Subdistributor) By: -------------------------------------- Printed Name: Its: -------------------------------------- SCHEDULE 2: Licensed Hotel Acknowledgment SCHEDULE 6: Guest Information Record NINTENDO-LODGENET HOTEL LICENSE AGREEMENT PAGE 21 MAY 12, 1998 (FINAL) SCHEDULE 5 LICENSEE MONTHLY ROYALTY REPORT FOR MONTH: # OF GAMES AVAILABLE: TOTAL GROSS REVENUE FOR THIS MONTH *** # OF DAYS IN MONTH AVAILABLE:
- ------------------------------------------------------------------------------- Boards CURRENT (New Installations) # OF # OF # OF # OF DAYS MONTH HOTEL/NAME ROOMS SNES N64 AVAILABLE BUYS - ------------------------------------------------------------------------------- Beginning Balance 443,500 9540 Sleepy Time Inn 205 6 31 95 Dreamland Lodge 125 3 31 50 ZZZZ's 500 11 31 150 (Include any monthly adjustments in this section. Should an existing hotel increase or decrease room count) - ------------------------------------------------------------------------------- Monthly Totals 660 9 11 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Cumulative Totals 444,360 9,649 11 295 - ------------------------------------------------------------------------------- (Beginning Balance + Monthly Totals)
# OF TOTAL AVG. MIN. PLAYED SNES GAME TIDES BUYS MINUTES PLAYED (TOTAL MIN/# BUYS) --------------- ---- -------------- ------------------ Vegas Stake's 25 1,100 44 Super Punch Out 40 1,200 30 F-Zero 30 1,000 33 Super Play Action Football 25 1,200 48 Ken Griffey Major Leag Baseball 20 900 45 Super Mario World 35 800 23 Tetris & Dr. Mario 35 1,200 34 The Legend of Zelda 20 1,200 60 Donkey Kong Country 35 1,200 34 Super Soccer 30 1,200 40 Totals 295 11,000
ALL AMOUNTS SHOULD BE REFLECTED IN U.S. DOLLARS. - ------------------------------------------------------------------------------- ROYALTY PAYMENT DETAILS *** *** *** *** *** *** TOTAL ROYALTY DUE NOA: *** - -------------------------------------------------------------------------------
# OF TOTAL AVG. MIN. PLAYED N64 GAME TITLES BUYS MINUTES PLAYED (TOTAL MIN/# BUYS) --------------- ----- -------------- ------------------ Game #1 Game #2 Game #3 Game #4 Game #5 Totals
- ---------------------- *** - Confidential treatment requested. NINTENDO-LODGENET HOTEL LICENSE AGREEMENT PAGE 22 MAY 12 1998 (FINAL) SCHEDULE 6 GUEST INFORMATION RECORD FOR MONTH: # OF GAMES AVAILABLE: # OF DAYS IN MONTH AVAILABLE:
------------------------------ Total Gross Revenues - -------------------------------------------------------------------------- Boards CURRENT # OF # OF # OF # OF DAYS MONTH HOTEL/NAME ROOMS SNES N64 AVAILABLE BUYS - -------------------------------------------------------------------------------------------------------- Beginning Balance 150 4 31 60 (New Installations) - --------------------------------------------------------------------------------------------- Monthly Totals 150 4 - --------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------- Cumulative Totals 150 4 60 - --------------------------------------------------------------------------
(BEGINNING BALANCE + MONTHLY TOTALS) (Include any monthly adjustments in this section. Should an existing hotel increase or decrease room count.)
# OF TOTAL AVG. MIN. PLAYED GAME TITLES BUYS MINUTES PLAYED (TOTAL MIN/# BUYS) - ----------- ---- -------------- ------------------ Vegas Stakes 20 1100 55 Super Punch Out 20 1200 60 F-Zero 12 1000 83 Super Play Action Football 10 1200 120 Ken Griffey Major Leag. 20 900 45 Baseball Super Mario World 30 800 27 Tetris & Dr. Mario 30 1200 40 The Legend of Zelda 10 1200 120 Donkey Kong Country 35 1200 34 Super Soccer 18 1200 67 Totals 205 11000
NINTENDO-LODGENET HOTEL LICENSE AGREEMENT PAGE 23 MAY 12 1998 (FINAL) SCHEDULE 7 MONTHLY BOARD RECONClLIATION REPORT Total Boards Shipped to Date: 34
Cat. Total - --------------------------------------------------------------------------------- Installations: Active 30 - --------------------------------------------------------------------------------- Hotel #1 Yes 24 Hotel #2 No 6 - --------------------------------------------------------------------------------- Installations: In Transit 2 - --------------------------------------------------------------------------------- Hotel #3 2 - --------------------------------------------------------------------------------- Engineering 2 Samples: - --------------------------------------------------------------------------------- Mfg. Test. 2 - --------------------------------------------------------------------------------- Spares: 0 - --------------------------------------------------------------------------------- - --------------------------------------------------------------------------------- Demonstration Systems: 0 - --------------------------------------------------------------------------------- - --------------------------------------------------------------------------------- Inventory 0 - --------------------------------------------------------------------------------- (Within this category reflect any boards that are obsolete, no longer in use, or boards that have been destroyed or replaced with newer technology by using a separate line item for each sub category. ) - --------------------------------------------------------------------------------- R&D 0 - --------------------------------------------------------------------------------- Category Combined Grand Total 34 34
NINTENDO-LODGENET HOTEL LICENSE AGREEMENT PAGE 24 MAY 12, 1998 (FINAL) SCHEDULE 8 LIST OF ENTITIES UNDER PARAGRAPH 14.2 Paragraph 14.2 of the Agreement shall apply to the following entities: On Command Corporation ("OCC") On Command Video Corporation On Command Development Corporation SpectraVision, Inc. On Command Canada, Inc. Spectravision Barbados Kalevision Systems, Inc. Spectradyne of Bahamas Spectradyne of Bermuda Spectradyne of Texas Spectradyne of GMBH Spectradyne International, Inc. On Command Hong Kong, Limited On Command Australia Pty Limited Spectradyne Singapore Pte Limited On Command (Thailand) Limited In addition, this Schedule 8 shall apply to any entity which is more than 30% owned, directly or indirectly, by OCC, but excluding any entity not listed above that as of the Effective Date is a party to a license agreement with NINTENDO. LODGENET shall provide NINTENDO at least annually with an updated list of entities known or believed by LODGENET to be owned, directly or indirectly, by OCC. NINTENDO-LODGENET HOTEL LICENSE AGREEMENT PAGE 25 MAY 12, 1998 (FINAL) SCHEDULE 9 LIST OF ACTlONS UNDER PARAGRAPH 14.2 Paragraph 14.2(b) of the Agreement shall apply to the following legal actions, including any appeals thereof:
CAUSE NUMBER COURT - ------------------------------------------------------------------------------------------------ Civil Action 95-0546 MJJ US District Court for the N. District of California Civil Action 96-4295-DLJ US District Court for the N. District of California Civil Action 974135 US District Court for the District of S. Dakota, Southern Division Civil Action 97-4136 US District Court for the District of S. Dakota, Southern Division
NINTENDO-LODGENET HOTEL LICENSE AGREEMENT PAGE 26 MAY 12, 1998 (FINAL) EX-12.1 6 EXHIBIT 12.1 EXHIBIT 12.1 LODGENET ENTERTAINMENT CORPORATION AND SUBSIDIARIES Statement Regarding Computation of Ratios (Unaudited) (Dollar amounts in thousands) Computation of Coverage of Fixed Charges - -------------------------------------------------------------------------------
1994 1995 1996 1997 1998 --------- --------- --------- --------- --------- Net loss $ (4,650) $ (7,026) $(16,610) $(25,619) $(39,912) Add: Equity in losses of unconsolidated affiliate -- -- -- -- 738 Extraordinary loss (1) 1,324 -- 3,253 -- -- Cumulative effect of change in accounting principle (2) -- -- -- 210 -- Provision for income taxes -- 66 28 344 375 Add fixed charges (3): Interest 966 4,522 8,243 17,895 23,064 Amortization of debt costs 203 260 564 1,008 1,004 Interest portion of rentals 74 106 159 210 174 --------- --------- --------- --------- --------- Earnings available to cover fixed charges (2,083) (2,072) (4,363) (5,952) (14,557) Less fixed charges 1,243 4,888 8,966 19,113 24,242 --------- --------- --------- --------- --------- Deficiency in the coverage of fixed charges $ (3,326) $ (6,960) $ (13,329) $ (25,065) $ (38,799) --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
- ------------ (1) In 1994--loss on early termination of the Company's then bank credit facility. In 1996--loss on early redemption of the Company's 9.95% and 10.35% Senior Notes. (2) In 1997--charge for the effect of adopting EITF Issue 97-13 related to accounting for certain business reengineering costs. (3) Fixed charges consist of interest on all indebtedness, including amortization of debt issuance expense and capitalized interest, and one-third of rental expense (which is estimated to represent the interest portion thereof). EX-23.1 7 EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included in this Form 10-K into the Company's previously filed Registration Statement File No. 33-67676. ARTHUR ANDERSEN LLP Minneapolis, Minnesota, March 12, 1999 EX-27 8 EXHIBIT 27
5 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 5,240 0 28,386 (800) 0 38,912 355,895 (146,458) 306,030 31,151 262,375 0 0 119 11,655 306,030 166,351 166,351 74,008 74,008 101,434 848 23,048 (39,537) 375 (39,912) 0 0 0 (39,912) (3.45) (3.45)
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