-----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, UtFViG+psE7RBvPuV0bLNuA0I624lr7CGCllE4Ak+sENX7NzW5hHogEF7PThTVeN +D/d6uEm77vj48uQ8QxQIg== 0000912057-97-009247.txt : 19970319 0000912057-97-009247.hdr.sgml : 19970319 ACCESSION NUMBER: 0000912057-97-009247 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970318 SROS: NASD 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: 1934 Act SEC FILE NUMBER: 000-22334 FILM NUMBER: 97558750 BUSINESS ADDRESS: STREET 1: 808 WEST AVENUE NORTH CITY: SIOUX FALLS STATE: SD ZIP: 57104 BUSINESS PHONE: 6053301330 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 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 17, 1997 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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, 1996 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 (I.R.S. Employer Incorporation) Identification Number)
808 WEST AVENUE NORTH, SIOUX FALLS, SOUTH DAKOTA 57104 (Address of Principal Executive Offices)(Zip Code) (605)330-1330 (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 12, 1997, the aggregate market value of the common stock held by non-affiliates of the Registrant was approximately $136 million.The number of shares of common stock of the Registrant outstanding as of March 12, 1997 was 11,208,369. DOCUMENTS INCORPORATED BY REFERENCE--Part III of this From 10-K is incorporated by reference from Registrant's definitive proxy statement for the 1997 Annual Meeting of Stockholders which will be filed within 120 days of the fiscal year ended December 31, 1996. This Report contains a total of 62 pages, excluding exhibits. The exhibit index appears on page 39. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 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 provides video on-demand, network-based video games, cable television programming and other interactive entertainment and information services to the lodging and multi-family dwelling unit ("MDU") markets utilizing its proprietary broadband local area network ("B-LAN"-SM- ) system architecture. Through its rapid growth, the Company has become the second largest provider of such services to the lodging market (based on total rooms served), currently serving over 516,000 rooms in over 3,400 hotel properties throughout the United States and Canada. In January 1996, the Company formed ResNet Communications, Inc. ("ResNet") to extend its B-LAN-SM- system architecture and operational expertise into the MDU market. In October 1996, TCI Satellite MDU, Inc. ("TCI Satellite"), an affiliate of Tele-Communications, Inc. ("TCI"), agreed to invest up to $40 million in ResNet in exchange for up to a 36.99% interest in ResNet and agreed to provide ResNet with long-term access to the digital DBS signals provided by TCI Satellite for the MDU market on a nationwide basis. LodgeNet and ResNet generally operate under exclusive long-term contracts in the lodging and MDU markets. The Company's lodging guest pay contracts typically have terms of 5 to 7 years and ResNet's MDU contracts are expected to have terms of 8 to 12 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 Company has experienced substantial growth in the number of guest pay rooms served, total revenue and earnings before interest, taxes, depreciation and amortization ("EBITDA"). From 1991 through 1996, guest pay rooms served increased from 73,415 to 400,245, revenues increased from $19.6 million to $97.7 million, and EBITDA increased from $2.9 million to $24.7 million. LODGING SERVICES. The Company provides its services in the lodging market to corporate-managed hotel chains such as ITT Sheraton, The Ritz-Carlton Company, Harrah's Casino Hotels, Delta Hotels and Resorts, Outrigger, La Quinta Inns, Red Roof Inns and Budgetel Inns, as well as many individual 1 properties flying the Marriott, Holiday Inn, Hilton, Inter-Continental, Prince, Radisson, Westin, Doubletree, Embassy Suites, and other flags. The lodging market in the United States comprises approximately 3.4 million rooms. The Company believes that approximately 1.9 million of these rooms are located in the Company's target market of hotels having more than 100 rooms. The Company provides its services under exclusive, long-term contracts throughout the United States and Canada, and in other select countries through licensing arrangements with strategic partners. The average remaining life of the Company's existing guest pay contracts is over four years, with less than 7% of these contracts due to expire before 1998. In the lodging market, the Company's services include Guest Scheduled-SM- on-demand movies, network-based Super Nintendo-Registered Trademark- video games, PRIMESTAR digital-Registered Trademark- satellite-delivered basic and premium cable television programming, and other interactive entertainment and information services. On-demand services enable a guest to purchase and start a movie on-demand, rather than restricting the guest to a predetermined start time. Video games can be started on-demand by a hotel guest who is charged an hourly rate for play time. Free-to-guest services typically involve a customized package of basic and premium cable television programming which the hotel purchases from the Company and provides at no charge to guests. Other services, which are typically provided at no charge to the guest, include guest surveys, folio review and video checkout. The Company is able to offer its interactive services by virtue of the high-speed, two-way digital communications design of its proprietary B-LAN-SM- system architecture. The Company's open-architecture, UNIX-based platform enables the Company to upgrade system software to support the introduction of new services or integrate new technologies as they become commercially available and economically viable. The Company believes it is a leader in providing innovative products and services to the lodging industry. The Company believes that it was the first in the lodging market to install network-based interactive video games, the first to install in-room printers for video checkout and other applications, and the first to utilize a Video Room Card-SM- (an image-based menu and purchasing protocol, utilizing pictures and graphics to replace the simple text menus traditionally utilized by its competitors). In 1995, LodgeNet redesigned its interactive system, enabling the Company to deliver what it believes is the first cost-effective system for on-demand movies and network-based video games to mid-size hotels of 100 to 150 rooms, a market segment the Company believes has been historically underserved by guest pay providers. The Company believes that the scalability and advanced features of its redesigned system for mid-size hotels were principal factors in the recent awarding by La Quinta Inns of its over 30,000-room account, Red Roof Inns of its over 27,000-room account and Budgetel Inns of its over 8,000-room account to the Company over other competitors. The Company believes that the mid-size hotel segment represents a large and attractive market for the Company's services that will generate financial returns similar to those achieved by the Company in larger full-service hotels. In April 1996, the Company entered into an agreement with PRIMESTAR Partners L.P. ("PRIMESTAR") pursuant to which the Company was appointed as the exclusive third-party provider (other than the partners in PRIMESTAR and their affiliated distributors) of the PRIMESTAR-Registered Trademark- DBS signal to the lodging industry. This arrangement enables the Company to provide free-to-guest, digital satellite-delivered cable television programming to a broader segment of the lodging industry than can be cost-effectively served with traditional C-band satellite systems. Since February 1997, the Company has been testing an Internet browser at a hotel property that enables the hotel guest to access and navigate the World Wide Web 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. MULTI-FAMILY RESIDENTIAL SERVICES. The Company views the MDU market as attractive due to: (i) the large market size; (ii) the portability to this market of the Company's B-LAN-SM- system architecture and operating expertise developed for the lodging market; (iii) the favorable regulatory environment available to operators such as ResNet who qualify as "private cable" operators under applicable federal regulations (including the absence of franchise requirements, "must-carry" obligations and rate regulations applicable 2 to traditional franchised cable operators); and (iv) the exclusive long-term contracts that have customarily been available in the MDU market. The Company believes it is well positioned to pursue the large MDU private cable market with its proprietary B-LAN-SM- system architecture and the ability to offer the DBS signals provided by TCI Satellite on a nationwide basis. The Company believes there are approximately 6 million multi-family residential units in the United States that are located in apartment complexes having more than 200 units, the Company's primary market, which represents a market more than three times as large as the Company's traditional lodging market. The Company believes that its proprietary B-LAN system architecture enables ResNet to offer a differentiated and cost effective solution for the video service needs of property owners and their tenants. In addition, the Company believes that its existing nationwide installation and field service organization enables ResNet to operate effectively throughout the United States wherever MDU contracts may be obtained, which the Company believes is a significant strategic advantage for ResNet over local satellite master antenna television ("SMATV") and franchised cable operators in addressing the needs of large multi-state property portfolios. ResNet's video service agreement with each property owner grants ResNet the exclusive right and access on a long-term basis to provide video services to tenants of the MDU complex, in return for which the owner receives a monthly commission based on revenues. These agreements generally prohibit the property owner from installing or marketing an alternative video system and prohibit the owner from allowing tenants to install an antenna, satellite or microwave dish on the exterior of the building. ResNet's private cable television system has the capacity to deliver over 100 channels, although the Company expects that the typical system will deliver 35 to 50 channels of basic and premium programming, depending principally upon the size of the property, the length of the contract and local competitive considerations. ResNet may elect to provide approximately 10 to 35 additional channels for scheduled pay-per-view, video on-demand, and other interactive services, such as Internet access. ResNet intends to tailor the programming lineup at each multi-family residential complex, based on the particular demographic profile of that complex. ResNet's private cable television system is based on the proprietary B-LAN-SM- system architecture deployed by the Company in the lodging market and will utilize the DBS signal provided by TCI Satellite nationwide. ResNet's access to TCI Satellite's digital Ku-band technology provides it with a more capable and cost-effective system than the C-band systems generally used by most SMATV cable operators. ResNet's private cable television system also utilizes addressable interdiction technology, enabling ResNet to remotely initiate, modify or terminate service, prevent signal theft and respond to many other service needs. In February 1996, ResNet entered into an agreement with GE Capital-ResCom, L.P. ("GE ResCom"), an affiliate of General Electric Co. and a provider of private telephony services to MDUs, pursuant to which GE ResCom was appointed the exclusive sales and marketing agent for ResNet in the MDU market. Pursuant to the terms of the agreement, ResNet was prohibited from selling, marketing or providing video services in the MDU market other than to customers obtained by GE ResCom. Subject to the terms of the agreement, GE ResCom was required to provide ResNet contracts for a minimum of 200,000 passings by January 31, 1998, including 70,000 passings by January 31, 1997, such contracts to have an average term of not less than ten years. At January 31, 1997, ResNet had contracts covering approximately 3,225 passings, less than the required benchmark under its agreement. Pursuant to the terms of ResNet's agreement with GE ResCom, ResNet will now be able to independently market and provide its services directly to large property portfolios, property management companies, and owners of MDU properties and pursue other available opportunities in the MDU market (whereas previously it had been restricted contractually from doing so). On March 6, 1997, in connection with a reevaluation of its business plan, GE ResCom entered into an agreement with Shared Technologies Fairchild, Inc. ("STF"), one of the nation's larger providers of private telephony services to commercial office buildings. GE ResCom has advised the Company that its revised 3 business plan calls for the formation of a new venture ("ResCom"), to be managed by STF, that will continue the business of GE ResCom and in which GE Capital and STF will hold significant equity interests. The restructuring of ResCom is subject to certain consents, including the successful transition of GE ResCom's portfolio of telephony contracts. There can be no assurance that ResCom will be successfully restructured or that, if restructured, that the Company and ResNet will be able to continue their contractual relationship with ResCom on terms similar to the existing video services agreement or otherwise on mutually acceptable terms. ResNet intends to grow its business by (i) taking over the management and control of the sales and marketing of its unique B-LAN-SM- solution and customer service capabilities to large multi-state MDU property portfolios, property owners and property managers, and (ii) considering selected acquisitions of private cable operations where the expected return on capital meets ResNet's investment criteria. 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. Interested persons may access additional information concerning the Company and ResNet through the Company's Web Site at: HTTP:// WWW.LODGENET.COM. BUSINESS STRATEGY The Company's business strategy is to: (i) continue to expand its lodging industry base of guest pay and free-to-guest rooms; (ii) expand into the MDU private cable television market; (iii) maximize the revenue generated per lodging room or residential unit served by exploiting new revenue opportunities; (iv) extend the application of the Company's proprietary B-LAN-SM- system architecture and operating expertise to new markets; and (v) enhance financial performance by increasing operating margins and reducing the average capital invested per new unit installed. EXPANDING THE COMPANY'S LODGING INDUSTRY FRANCHISE. The Company believes that there are substantial opportunities for continued domestic growth in an estimated pool of over 1.9 million rooms located in hotels having more than 100 rooms (from the approximately 3.4 million guest rooms industry-wide), of which the Company estimates approximately 500,000 are either served by the Company's competitors under contracts due to expire before the end of 1997 or are presently unserved by any movie system vendor. The Company's marketing plan is to capitalize on the strength of its innovative product offerings, deliverable by virtue of the high-speed, two-way digital communications design of its scalable proprietary B-LAN-SM- system architecture, together with its expertise in installation, programming, technical support and customer service. Internationally, the Company is expanding into selected countries in the Far East, South America, Central America and other regions through licensing agreements with established partners in these countries. Under these agreements, the Company generally sells equipment at cost plus an agreed markup and receives a royalty based on gross revenues. The Company believes there are additional opportunities to enter into international strategic alliances in other regions to exploit further the Company's proprietary B-LAN-SM- system architecture and multimedia capabilities. EXPANDING INTO THE MULTI-FAMILY RESIDENTIAL MARKET. The Company believes there are substantial opportunities to provide its services in the MDU market. The Company believes there are approximately 6 million multi-family residential units located in apartment complexes having more than 200 units, the Company's primary market. This represents a market that is more than three times the size of the Company's target lodging market. 4 MAXIMIZING REVENUE PER UNIT. In addition to increasing and expanding its installed customer base, the Company also seeks to maximize the revenue generated by each of its installed guest rooms and apartment units. In furtherance of this strategy, the Company intends in the lodging market to continue to install its interactive Guest Scheduled-SM- on-demand movie and network-based Super Nintendo-Registered Trademark- video game system in all new guest pay hotel rooms. From the Company's experience, rooms with this system 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. The Company's current installed guest pay base of over 400,000 rooms hosts more than 90 million guests each year (based on current average hotel occupancy and length-of-stay data). The Company believes there may be significant opportunities to generate revenues from third-party providers of content and services who would pay the Company for access to its valuable consumer base, as well as from usage fees charged to the guests who utilize such services. Since February 1997, the Company has been testing an Internet browser at a hotel property that enables the hotel guest to access and navigate the World Wide Web 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. The Company is reviewing other new services, such as advertiser-supported visitor information for specific cities, as well as "advertorials" and other "push media" strategies to deliver targeted product or service information directly to the consumer. The Company is evaluating these and other opportunities as well as appropriate business models that would enable the Company to maximize the return on its investment in these activities. EXPANDING INTO NEW MARKETS. The Company seeks to extend the application of its proprietary B-LAN-SM- system architecture, products and services to an increasingly broad range of property sizes and types. In addition to the mid-size hotel, international lodging and multi-family residential markets, other future potential markets may include hospitals, single-family residences, cruise ships and educational institutions, among others. ENHANCING FINANCIAL PERFORMANCE. Complementing the Company's growth objective is its ongoing goal to enhance financial performance. The Company seeks to increase its operating margins by reducing direct and overhead expenses, as measured on a percentage of revenue and on a per-installed unit basis. As a result of its efforts, the Company has experienced increasing EBITDA margins during the past three years as it has reduced per-room operating costs and leveraged its infrastructure over a larger base of installed rooms. Additionally, the Company will continue its program to reduce the average capital invested per new unit, thereby increasing its return on investment. As a result of engineering efforts to reduce the cost of its system, increased installation efficiencies and the ability of the Company to negotiate guest pay contracts under which hotels are sharing a greater percentage of the cost of installing televisions, the Company's average investment per new guest pay room decreased approximately 17% during 1996 from approximately $450 in 1995 to approximately $375 in 1996. STRATEGIC INITIATIVES The Company has recently implemented the following strategic initiatives to further its goal of creating a more diversified revenue base. EXPANSION INTO THE RESIDENTIAL MARKET. The Company believes it is well positioned with its proprietary B-LAN-SM- system architecture and nationwide field service organization to pursue the promising MDU private cable market, a potential market that is over three times larger than the Company's targeted lodging market. The Company believes its existing nationwide installation and field service organization enables ResNet to operate effectively throughout the United States wherever its sales force may obtain MDU contracts. For large multi-state MDU portfolios, this capability represents a significant strategic advantage over franchised cable operators which are limited to their designated service area and other private cable operators, the majority of which operate on a more limited regional or local basis. 5 On October 21, 1996, the Company and ResNet entered into agreements with TCI Satellite pursuant to which TCI Satellite acquired a 4.99% interest in ResNet for $5.4 million (the "Stock Payment") and agreed to provide ResNet with long-term access to a DBS signal on a nationwide basis. In addition, TCI Satellite agreed to advance ResNet up to $34.6 million to purchase certain DBS reception equipment pursuant to a subordinated convertible term loan agreement (the "TCI Convertible Note"). ResNet has delivered to TCI Satellite an initial purchase order for equipment in an amount equal to the Stock Payment. The TCI Convertible Note has a five year term (subject to a one year extension at the option of ResNet), is non-recourse to the Company and is payable solely in shares of ResNet's common stock. Subject to certain vesting provisions, the TCI Convertible Note is subject to mandatory conversion into up to an additional 32% interest in ResNet at such time as conversion is not restricted by Federal Communication Commission ("FCC") regulations (as described below). As part of the transaction, TCI Satellite was granted an option (the "TCI Option"), exercisable after three years, to acquire an additional 13.01% interest in ResNet for a purchase price equal to the fair market value of such shares at the time of exercise. ResNet and TCI Satellite also agreed to rights of first refusal on the sale of any interest in ResNet and to certain standstill provisions that, among other things, prohibit TCI Satellite from acquiring more than 10% of the Company's outstanding common stock or participating in any effort to influence or control the Company's management or Board of Directors. Under current interpretations of FCC regulations relating to restrictions on cross-ownership of franchised cable and SMATV operations, TCI Satellite may be prevented from holding 5% or more of ResNet's capital stock and consequently could not exercise the conversion and purchase rights under the TCI Convertible Note and the TCI Option. TCI Satellite is required to convert the loan into ResNet common stock at such time as conversion would not violate the aforementioned FCC restrictions. Upon the maturity date of the loan, if TCI Satellite has been prevented from converting the loan or exercising the option in full due to such FCC restrictions, the unconverted portion of the TCI Convertible Note and the TCI Option will be canceled and replaced with newly issued warrants to acquire a like number of ResNet shares. The exercise price of the warrants for the shares issuable upon conversion of the loan will be de minimis, because ResNet will already have received the funds pursuant to the loan, and the purchase price of the warrants for the option shares will be equivalent to the exercise price under such option agreement. PRIMESTAR AGREEMENT. In April 1996, the Company and PRIMESTAR entered into an agreement appointing the Company as the exclusive third party provider (other than the partners in PRIMESTAR and their affiliated distributors) of the PRIMESTAR DBS signal to the lodging industry. PRIMESTAR is a consortium of the nation's largest cable companies, including TCI, Time-Warner Cable, Comcast Cable, Continental Cablevision, Cox Cable Communications and GE-Americom Communications. The Company expects that the alliance, bringing together PRIMESTAR's digital satellite technology and the Company's programming and marketing expertise, will provide the Company with a technologically superior and more flexible service, and extend the market for free-to-guest systems to a much broader segment of the lodging industry than can be served cost-effectively with traditional C-band satellite systems. The Company markets the "PRIMESTAR by LodgeNet" service as a complement to its interactive guest pay systems and on a stand-alone basis to hotels not served by the Company's guest pay system. EXPANSION INTO MID-SIZE HOTEL MARKET. In addition to the large hotel market, which traditionally has been the segment subject to the most competition for guest pay services, the Company is now targeting mid-size hotels of 100 to 150 rooms as part of its marketing strategy. The Company believes that this market segment, which the Company estimates contains over 500,000 rooms, has not been broadly served by the guest pay industry because of certain diseconomies of scale resulting from the smaller average property size. In 1995, the Company redesigned and modified its B-LAN-SM- system architecture to permit the delivery of on-demand movies and network-based Super Nintendo video games more cost-effectively to mid-size hotels. The Company believes that its ability to deliver this full array of services (in contrast to competing systems that do not offer network-based video games and require the guest to take the extra 6 step of ordering the movie purchase by telephone) and the scalability of its system for mid-size hotels, were significant factors in the recent awarding by La Quinta Inns of its over 30,000-room account, Red Roof Inns of its over 27,000-room account and Budgetel Inns of its over 8,000-room account to the Company over other competitors. The Company believes that the mid-size hotel segment represents a large and attractive new market for the Company's services and expects that its scalable B-LAN-SM- system architecture will allow it to generate financial returns similar to those achieved by the Company in larger full-service hotels. "INTERNET AND OTHER INTERACTIVE SERVICES." The Company is continuing the development and implementation of Internet and other interactive services deliverable over the Company's B-LAN system, accessible by the hotel guest through the in-room television, designed to bring consumers together electronically with providers of merchandising and information services. The Company believes there may be significant opportunities to generate revenues from third-party providers of content and services who would pay the Company for access to its valuable consumer base, as well as from usage fees charged to the guests who utilize such services. The Company recently completed beta testing of an interactive, on-screen merchandising service at two hotels in New York City. Since February 1997, the Company has been testing an Internet browser at a hotel property that enables the hotel guest to access and navigate the World Wide Web 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. The Company is reviewing other new services, such as advertiser-supported visitor information for specific cities, as well as "advertorials" and other "push media" strategies to deliver targeted product or service information directly to the consumer. The Company is evaluating these and other opportunities as well as appropriate business models that would enable the Company to maximize the return on its investment in these activities. MARKETS AND CUSTOMERS LODGING MARKET. The lodging market in the United States comprises approximately 3.4 million hotel rooms. Guest pay services were introduced in the lodging market in the early 1970s and have since become a standard amenity offered by many hotels to their guests. Virtually all hotels offer free-to-guest services as well. In 1986, certain hotels began offering their guests limited interactive services and in 1991, on-demand movies became available. Guest pay services are attractive to hotel operators because they provide an additional amenity for their guests as well as incremental revenue. LARGE HOTEL MARKET. 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 ITT Sheraton, The Ritz-Carlton Hotel Company, 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 twelve months ended December 31, 1996. MID-SIZE HOTEL MARKET. The Company is also now targeting mid-size hotels of 100 to 150 rooms as part of its guest pay marketing strategy. The Company believes that this market segment, which the Company estimates contains over 500,000 rooms, has not been broadly served by the guest pay industry because of certain diseconomies of scale resulting from the smaller average property size. 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. The Company believes that the mid-size hotel segment represents a large and attractive new market for the Company's services and expects that its scalable B-LAN-SM- system architecture will allow it to generate financial returns similar to those achieved by the Company in the large hotel market. 7 FREE-TO-GUEST MARKET. Almost all of the approximately 3.4 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. Historically, only hotels with more than 100 rooms could generally justify the expense of buying or leasing the large C-band satellite dish required to receive satellite-delivered, free-to-guest services. Smaller hotels who wanted to offer free-to-guest services generally purchased the service from local cable operators. The Company's agreement with PRIMESTAR allows LodgeNet to provide digital satellite-delivered free-to-guest television programming on a cost-effective basis to hotels with as few as 50 rooms. MULTI-FAMILY RESIDENTIAL MARKET. The Company believes that there are substantial opportunities for growth in the multi-family residential market. The Company believes there are approximately 26,000 apartment complexes having more than 200 units, with an aggregate of approximately 6 million multi-family residential units, in the 70 largest metropolitan areas in the United States. This represents a market that is more than three times the size of the Company's target lodging market. The Company's agreement with TCI Satellite will facilitate the expansion into this market by providing ResNet with DBS equipment and access to a DBS signal nationwide. 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-SM- system architecture enables the Company to provide sophisticated interactive features such as on-demand movies, network-based Super Nintendo video games, and a variety of other interactive services, such as folio review, video checkout, in-room printers, guest surveying, advertising and merchandising services. 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-SM- interactive video-on-demand service, which is provided in approximately 90% of the Company's guest pay rooms, allows a guest to choose from an expanded menu of video selections and individually start the selected video at the guest's convenience rather than restricting the guest 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, 1996, the Company served over 400,000 guest pay rooms, of which nearly 359,000, or approximately 90%, featured the Company's interactive on-demand system. The Company's original scheduled guest pay service, which is provided in approximately 10% 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 and to monitor room availability. In May 1993, the Company entered into a seven-year non-exclusive license agreement with Nintendo to provide hotels with a network-based Super Nintendo-Registered Trademark- video game playing system. Pursuant to this agreement, Nintendo provides the Company with access to a minimum of ten popular Super Nintendo-Registered Trademark- video games, which selection of games is updated periodically, and the Company uses its proprietary high-speed B-LAN-SM- system architecture to allow guests to play the video games over the hotel's master antenna television system. Hotel guests are charged a fee based on the amount of time they play the video games. Presently, the Company charges $5.95 per hour of play. The Company had over 322,900 rooms installed with the Super Nintendo-Registered Trademark- system as of December 31, 1996. 8 The revenue generated from the guest pay service is 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 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 11.4% and an $8.95 movie price will generate an average of $21.71 of gross movie revenue per installed room per month, plus an average of $3.90 in additional gross revenues per month from video games and information services (assuming 30.4 days per month), resulting in total gross revenue per room per month of $25.61. Occupancy rates vary by property based on the property's competitive position within its marketplace and over time based on seasonal factors and 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. Currently, the Company's movie prices are generally $7.95 or $8.95. 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 approximately $375 to $400 per room. In addition to hotel commissions and royalties paid to movie studios, operating costs of the guest pay systems include preview tapes, tape duplication, taxes, freight, insurance, personal property taxes, maintenance and data line costs. The average cost to upgrade a room from the original scheduled guest pay system to the on-demand system is approximately $75 to $175 per room, depending on the size of the movie library installed in the hotel, whether video games are provided and the configuration of the headend computer and system hardware. 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, which are then distributed to guest rooms over the hotel's existing master antenna system. Traditionally, this service has required little capital expenditure by the Company, since the earth station equipment either was provided independently by the hotel or purchased or leased from the Company. 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. The Company generally charges $2.90 - $3.50 per room per month for each premium channel and $.15 - $.85 per room per month for each non-premium channel. 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. In April 1996, the Company and PRIMESTAR entered into an agreement to provide digital satellite-delivered basic and premium television services to the lodging industry. The alliance brings together PRIMESTAR's digital satellite technology and the Company's programming and marketing expertise, will enable the Company to offer the lodging industry a technologically superior and more flexible service, and will extend the market for free-to-guest services to a much broader segment of the lodging industry than can be served cost-effectively with traditional C-band satellite systems. Pursuant to the agreement with PRIMESTAR, the Company will pay PRIMESTAR a signal carriage fee for providing access to the PRIMESTAR-Registered Trademark- signal. The agreement with PRIMESTAR may be terminated by either party upon notice if certain cash flow targets are not met during any two consecutive years. The Company is responsible for the 9 installation and servicing of all equipment required by each lodging customer to receive the PRIMESTAR-Registered Trademark- digital satellite-delivered signal. Installations began in May 1996 and approximately 50,700 rooms at 329 hotel properties had been installed through December 31, 1996. The Company intends to sell or lease such equipment to its customers and is entitled to retain all revenues associated with the sale, lease, installation and service of all such PRIMESTAR-related equipment. MULTI-FAMILY RESIDENTIAL SERVICES. ResNet's multi-family residential private cable system has the capacity to deliver over 100 channels, although the typical system will deliver approximately 35 to 50 channels of programming. ResNet may elect to provide from approximately 10 to 35 additional channels for scheduled pay-per-view, video on-demand and other interactive services, such as Internet access. ResNet designs a specific programming lineup for each specific multi-family residential complex, based on the particular demographic profile of that complex. These systems include basic programming services, such as CNN, ESPN, WTBS, TNT, The Discovery Channel and The Weather Channel, premium programming, such as HBO and Showtime, plus additional channels which carry local off-air stations, an electronic programming guide, a preview channel, and a bulletin board channel. Delivery of private cable television services to multi-family residential complexes involves technology similar to that used in the Company's hotel systems. The hub of each multi-family residential system is a headend, which will gather basic and premium cable television programming from a variety of sources using a combination of the DBS signal provided by TCI Satellite and off-air antennae and then redistribute these signals throughout the apartment complex using the Company's proprietary B-LAN-SM- system architecture. The Company estimates that the average installed cost per unit passed for basic and premium cable television services will range from approximately $500 to $700. The Company estimates that the average cost per unit passed to add scheduled pay-per-view movies and/or video on-demand movies to the basic cable system will range from $30 to $155, depending on the system configuration and the size of the movie library installed. The foregoing estimates of installation costs are forward-looking in nature and actual costs could vary based on the factors discussed elsewhere herein. 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 five to seven 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, scheduled pay-per-view or 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 movie viewing charges from their guests and retain a commission, generally equal to 10% to 15% of the total guest pay revenue depending upon the size and profitability of the system. 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 7% of these contracts coming up for renewal before 1998. 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 10 negotiated by that chain's corporate management, 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. ResNet enters into long-term exclusive right-of-entry contracts with property owners and managers to provide cable television services to multi-family residential complexes. The lengths of term of such contracts generally run longer than those in the lodging industry. The form of agreement to be entered into with each multi-family residential property grants ResNet the right to provide cable television programming and other video services, such as video on-demand, merchandising, and access to the Internet. The property owner or manager typically receives a commission generally from 6% to 12% of subscriber revenues, depending upon the penetration rate at a particular property. 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 scalable proprietary B-LAN-SM- system architecture with commercially manufactured, readily available components and hardware such as video cassette players, modulators and computers. The Company's B-LAN-SM- system architecture utilizes the Company's proprietary high-speed, two-way digital communications design to process and respond to keystroke commands from the viewer very rapidly. This capability enables the Company to provide sophisticated interactive features such as network-based Super Nintendo video games and on-demand movies, and a variety of other interactive services such as folio review, video checkout, in-room printers supporting video checkout and other applications, guest surveying, advertising and shopping services. The Company recently completed beta testing of an interactive, on-screen merchandising service at two hotels in New York City. Since February 1997, the Company has been testing an Internet browser at a hotel property that enables the hotel guest to access and navigate the World Wide Web 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 the lodging industry, 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 Electronics 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. 11 ResNet's private cable television systems serving the multi-family residential market are based on the Company's scalable proprietary B-LAN-SM- system architecture developed for the lodging market. ResNet's private cable television system has the capacity to deliver over 100 channels, although ResNet expects that the typical system will deliver 35 to 50 channels of basic and premium programming, depending principally upon the size of the property, the length of the contract and local competitive considerations. ResNet may elect to provide from approximately 10 to 35 additional channels for scheduled pay-per-view, video on-demand and other interactive services, such as Internet access. ResNet's interactive cable television systems utilize the DBS signal provided by TCI Satellite, off-air and/or microwave receiving antennas and headend equipment which process and amplify the broadcast and cable television programming signals. These signals are then transmitted to subscribers at the property via the Company's B-LAN-SM- system architecture. The Company integrates addressable interdiction jamming technology within its proprietary system. Addressable interdiction enables the Company to control subscriber access to premium channels and other enhanced services through a computer located off-site. This capability eliminates the necessity of having to dispatch field personnel to a property to initiate, modify or terminate service and eliminates the costs associated with damage or loss of traditional set-top converters located in the subscriber's premises. As a result, the relatively high rate of subscriber turn-over in the multi-family residential market represents an additional revenue stream for the Company to be generated from "activation" and "new service" charges paid by subscribers. The Company designs its systems through its staff of approximately 85 software and hardware engineers and support personnel (as of December 31, 1996). 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 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 four United States patents, has received an official notice of allowance from the U.S. Patent and Trademark Office ("USPTO") of its decision to grant another patent to the Company, and has other applications for patents pending in the USPTO 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. SALES AND MARKETING. The Company focuses its sales and marketing strategies on acquiring new contracts from hotels and marketing the Company's guest pay, video game and other interactive services to the hotel guest. The Company's sales organization consisted of approximately 50 employees as of December 31, 1996, 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 has established a separate sales group responsible for sales and marketing of "PRIMESTAR by LodgeNet." 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 its Video Room Card-SM-, on-screen graphics and by in-room tent cards which contain movie and video game programming information that are placed near the television set and highlight the feature film selections of the month. In-room marketing 12 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 approximately 300 installation and service personnel in approximately 30 locations in the United States and Canada, as of December 31, 1996. 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 80% 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, Tech-Connect-SM-, 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. In the multi-family residential market, ResNet installation supervisors and support personnel oversee and coordinate installation crews comprised of experienced subcontractors. Initially, ResNet will utilize field service and component assembly resources developed by the Company for the lodging industry. PROGRAMMING. In the lodging market, 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, generally ranging from 35% to 50%, 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 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. The Company intends to tailor the programming lineup at each multi-family residential complex based on the particular demographic profile of that complex. Cable operators and multi-channel video programming distributors such as ResNet, with certain exceptions, are prohibited from carrying the signal of a commercial television broadcast station without the broadcaster's "retransmission" consent. ResNet believes it can obtain all necessary retransmission consents in its markets. 13 As part of its transaction with TCI Satellite, ResNet entered into a long-term signal availability agreement with TCI Satellite pursuant to which ResNet will be granted nationwide access to a DBS signal, such signal to be the same as that used by PRIMESTAR to transmit the PRIMESTAR-Registered Trademark- programming service (the "PRIMESTAR Signal") or the signal of a substantially comparable service. TCI Satellite is acting solely to make the DBS signal available to ResNet and is not acting as a distributor of any programming services to ResNet. ResNet must obtain its own rights, as described above, from the applicable programmers to receive and distribute such service. TCI Satellite has informed the Company that counsel for PRIMESTAR has advised TCI Satellite that its rights to distribute the PRIMESTAR Signal to private cable systems, such as ResNet, may conflict with the rights of PRIMESTAR under existing agreements between PRIMESTAR and TCI Satellite (or its affiliates). TCI Satellite has advised the Company that it believes that its transaction with ResNet and similar transactions are permitted under its agreements, and TCI Satellite has represented in its agreement with ResNet that it has all necessary rights to enter into and perform its obligations thereunder. If TCI Satellite were to lose its ability to make the PRIMESTAR Signal or a comparable signal available to ResNet, TCI Satellite is obligated to reimburse ResNet for its costs in obtaining a comparable digital signal from another source, including the cost of replacement equipment if the new digital signal is not compatible with ResNet's equipment. 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 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 video cassette players, modulators and amplifiers, that are available from multiple sources. 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 head-end 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. The Company believes that its anticipated growth can be accommodated through existing suppliers. COMPETITION LODGING MARKET. The Company is the second largest provider (by total number of rooms served) of interactive and cable television services to the lodging industry, currently serving over 516,000 installed hotel rooms. The Company competes on a national scale primarily with On Command Corporation ("OCC"), the successor corporation to the merger of SpectraVision, Inc. and On Command Video Corporation, and on a regional basis with certain other smaller entities. Based upon publicly available information, the Company estimates that OCC currently serves approximately 900,000 hotel rooms. The aforementioned merger combined two of the largest providers of cable television services in the lodging industry based on the aggregate number of rooms served. The Company historically competed against these two companies prior to the merger and believes that it will be able to compete in the same manner against the newly combined entity. 14 OCC and DirecTV, Inc. ("DirecTV") have entered into an agreement pursuant to which OCC will deliver free-to-guest television programming using DirecTV's DBS signal. The Company believes that its agreement with PRIMESTAR will allow it to provide comparable services to OCC on a competitive basis. 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. 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-SM- system architecture that enables the Company to deliver a broad range of interactive features and services such as on-demand movies and network-based Super Nintendo-Registered Trademark- 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-SM- 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 redesigned its system to permit the delivery of on-demand movies and network-based video games to mid-size hotels of 100 to 150 rooms, a market segment the Company believes has been historically underserved by guest pay providers. There can be no assurance that the Company will be successful in this market segment or 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. 15 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. The Company believes that its agreement with PRIMESTAR to deliver the PRIMESTAR DBS signal to the lodging industry will enable it to compete more effectively in the free-to-guest area and to extend this market segment to smaller sized properties that historically could not be cost-effectively served with the more expensive traditional C-band technology. 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. MULTI-FAMILY RESIDENTIAL MARKET. The provision of cable television services to the MDU market is highly competitive and competition is expected to increase. The Company anticipates that the primary competitors in each of its markets will include SMATV operators, wireless cable operators, DBS providers, as well as local franchised cable operators. The Company believes that the largest private cable competitors are OpTel, Inc., CablePlus and ICS Communications, Inc. However, the most substantial competitor for ResNet in each of its markets is expected to be the local franchised cable operator, most of whom have substantially greater resources than the Company and ResNet. Many of ResNet's competitors also have brand names that may be more recognizable to consumers than those of the Company and ResNet, and that may provide such competitors certain competitive advantages. Further, a growing number of companies have begun to market, or have announced plans to market, packages of services that are considerably more extensive than those currently offered by the Company. ResNet's success in this market will depend in large part upon its ability to secure a significant number of long-term exclusive right-of-entry contracts with property owners or managers. These contracts generally involve a revenue sharing arrangement with the property owner or manager. Certain of ResNet's competitors have significantly greater financial resources and may offer property owners and managers more lucrative financial arrangements than ResNet may be able or willing to offer. As residents of the high-quality MDUs that are targeted by the Company come to expect a wider selection of cable, interactive video and telecommunications services, property owners may be inclined to enter into ROE contracts with companies that can offer such a selection. Increasing competition among such providers for right of entry contracts could result in greater financial incentives being offered to property owners, thereby adversely affecting the financial return expected to be realized by ResNet from such contracts. The Company believes that ResNet's competitive advantages include (i) the broad range of features and services made possible by the Company's proprietary B-LAN-SM- system architecture, (ii) the Company's experience and capabilities in conducting nationwide installation and field service operations, and (iii) the availability of the DBS signal and DBS equipment provided by TCI Satellite at a lower cost than traditional C-band satellite signals and equipment. 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 16 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 numerous rulemakings that have and are still being undertaken by the FCC which will 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. It is premature to predict the effect of the Act on the cable and telecommunications industries in general or the Company in particular. 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 MDU complex 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. CABLE AND TELEPHONE WIRING. Although the majority of the states currently do not prohibit exclusive right-of-entry contracts, current trends at the state and federal levels, if they continue, may render the legality of such exclusivity provisions uncertain. Several states have enacted, and additional states are expected to enact, mandatory access statutes that require MDU owners to grant a cable franchisee access to its buildings in order to offer cable services to tenants that want to receive the franchisee's service. The FCC also has initiated rulemaking proceedings to consider, among other issues, whether to adopt uniform regulations governing cable and telephone inside wiring, and the appropriate treatment of inside wiring in MDUs. In addition, the FCC has initiated a rulemaking proceeding to determine whether to prohibit restrictions against the placement on rental property of devices designed for over-the-air reception of television broadcast signals, multichannel multipoint distribution services, or DBS services. The regulations that the FCC ultimately adopts could affect the Company's continued ability to enter into or enforce 17 exclusive contracts, as well as its access to inside wiring used to provide telephony and video programming services. SIGNAL CARRIAGE. Private cable operators, with certain exceptions, are prohibited from carrying the signal of a commercial television broadcast station without the broadcaster's "retransmission" consent. If the cable operator and the broadcaster fail to reach an agreement on terms and conditions for retransmission, the cable operator is prohibited from carrying the broadcaster's signal. Although there can be no assurance, the Company believes it has obtained and will continue to obtain all necessary retransmission consents in its markets. CROSS-OWNERSHIP. In order to encourage competition in the provision of video programming, the Cable Act generally prohibits a franchised cable operator not subject to "effective competition" from holding a license for a multichannel multipoint service or from offering SMATV service separate and apart from any franchised cable service, in any portion of the franchise area served by the cable operator's cable system. Under current interpretations of FCC rules and regulations implementing the foregoing provisions, TCI Satellite may be prevented from acquiring a 5% or greater interest in ResNet and consequently would be unable to exercise its conversion rights under the TCI Convertible Loan or the TCI Option. TCI Satellite is required to convert the TCI Convertible Loan into an equity interest in ResNet at such time as conversion would not violate the aforementioned FCC restriction. TCI Satellite has advised the Company that it may seek a formal interpretive letter or waiver by the FCC with respect to the acquisition of a further interest in ResNet. MICROWAVE LICENSING. Where appropriate the Company's or ResNet's systems may use 18 GHz microwave relays to link more than one hotel or MDU complex to a single headend without using public rights-of-way. The FCC has the power to issue, revoke, modify, and renew licenses within the radio frequency spectrum utilized by the Company or ResNet for microwave relays. The FCC also may approve changes in the ownership of such licenses. The Company and ResNet have obtained all necessary FCC authorizations to operate their microwave relays. There can be no assurance, however, that the Company and/or ResNet will continue to be able to retain or obtain such authorizations in the future or that existing authorizations will be renewed. CABLE ENTRY INTO TELECOMMUNICATIONS. The Act declares that no state or local laws or regulations may prohibit or have the effect of prohibiting the ability of any entity to provide any interstate or intrastate telecommunications service. States are authorized to impose "competitively neutral" requirements regarding universal service, public safety and welfare, service quality, and consumer protection. The Act further provides that the cable operators and affiliates providing telecommunications services are not required to obtain a separate franchise from the local franchising authority for such services. The Act prohibits local franchising authorities from requiring cable operators to provide telecommunications services or facilities as a condition of a grant of a franchise, franchise renewal, or franchise transfer, except that local franchising authorities can seek "institutional networks" as part of franchise negotiations. The law also provides that, when cable operators provide telecommunications services, local franchising authorities may require reasonable, competitively neutral compensation for management of the public rights-of-way. 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 18 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. COPYRIGHT LICENSING. Both private and franchise cable systems are subject to federal copyright licensing covering carriage of broadcast signals. In exchange for making semi-annual payments to a federal copyright royalty pool and meeting certain other obligations, cable operators obtain a blanket license to retransmit broadcast signals. Bills have been introduced in Congress over the past several years that would eliminate or modify the cable compulsory license. Without the compulsory license, cable operators such as the Company might need to negotiate rights from the copyright owners for each program carried on each broadcast station in the channel lineup. Such negotiated agreements could increase the cost to cable operators of carrying broadcast signals. The Cable Act's retransmission consent provisions expressly provide that retransmission consent agreements between the television stations and cable operators do not obviate the need for cable operators to obtain a copyright license for the programming carried on each broadcaster's signal. 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, 1996, the Company had 584 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 present headquarters and principal executive offices are located in Sioux Falls, South Dakota. This facility is leased from an unaffiliated third party pursuant to a lease which expires on July 31, 1997 (with month-to-month extensions thereafter, at the option of the Company), contains approximately 24,000 square feet, and houses the Company's executive, administrative and operational functions. The Company leases four additional facilities in Sioux Falls from unaffiliated third parties, including a warehouse and assembly facility (approximately 15,000 square feet) and three office facilities for administrative and support personnel (approximately 30,000 square feet in total). The Company also owns an office building in Sioux Falls containing approximately 8,000 square feet which previously served as the Company's headquarters and is currently used in the Company's operations. The Company leases ten facilities, in various other locations, from unaffiliated third parties. One, located in Dallas, Texas, is an office facility for sales and sales-support personnel. The remaining nine are 19 combination warehouse/office facilities for installation and service operations and are located in Atlanta, Georgia; Honolulu, Hawaii; Las Vegas, Nevada; Cleveland, Ohio; Buffalo, New York; Los Angeles and San Francisco, California; Tampa, Florida; and Toronto, Ontario, Canada. Each of these facilities occupies less than 3,500 square feet. In June 1996, the Company acquired an approximately 22.6 acre parcel of land in Sioux Falls for a purchase price of approximately $339,000 and in September 1996 entered into a contract for the construction of the Company's National Headquarters and Distribution Center. Construction of the approximately $15 million facility began in September 1996 and is expected to be completed in September 1997. The National Headquarters and Distribution Center will occupy approximately 228,500 square feet including approximately 116,500 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 National Headquarters and Distribution Center will allow the Company to consolidate all of its local operations into a single, multipurpose facility and is designed to enhance the operational efficiency and to facilitate any necessary future expansions 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. ITEM 3--LEGAL PROCEEDINGS On February 16, 1995, OCC filed a lawsuit in Federal District Court for the Northern District of California asserting patent infringement by the Company relating to its on-demand video system. The complaint requests an unspecified amount of damages and injunctive relief. The Company filed an answer and counterclaim to the lawsuit on April 17, 1995, denying the claims, asserting affirmative defenses and asserting a counterclaim for declaratory relief. The Company is currently engaged in litigation with respect to this matter and trial is expected to begin on September 29, 1997. Based on the advice of special patent counsel and technical experts retained by the Company, as well as the Company's independent analysis, the Company believes that the claims of infringement are unfounded. The Company has and will continue to vigorously defend itself in this matter. Patent litigation is especially complex, both as to factual allegations and the legal interpretation of patent claims, which makes such lawsuits difficult to assess with certainty. While the Company and its patent counsel believe that the Company has a number of defenses available which, if properly considered, would eliminate or minimize any liability for the Company, an unexpected unfavorable resolution, depending on the amount and timing, could adversely affect the Company. Although the outcome of any litigation cannot be predicted with certainty, the Company believes that the ultimate disposition of this matter will not have a material adverse effect on the Company's financial condition or results of operations. The Company is subject to other litigation arising in the ordinary course of business. As of the date hereof, the Company believes the resolution of such other litigation will not have a material adverse effect upon the Company's financial condition or results of operations. ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of the Company's security holders during the fourth quarter of the Company's fiscal year ended December 31, 1996. 20 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 12, 1997, there were outstanding 11,208,369 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, 1995............................................................. $ 9.25 $ 7.00 June 30, 1995.............................................................. $ 9.24 $ 6.63 September 30, 1995......................................................... $ 12.25 $ 8.50 December 31, 1995.......................................................... $ 13.00 $ 9.50 March 31, 1996............................................................. $ 14.25 $ 9.00 June 30, 1996.............................................................. $ 15.25 $ 11.50 September 30, 1996......................................................... $ 14.25 $ 9.75 December 31, 1996.......................................................... $ 18.00 $ 11.75
On March 12, 1997, the closing price of the Company's Common Stock, as reported by NASDAQ NMS was $14.25. Stockholders are urged to obtain current market quotations for the Company's Common Stock. As of March 12, 1997, there were 147 stockholders of record of the Company with approximately 95% of the shares held in "street name". The Company estimates that as of March 12, 1997 there were more than 3047 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 Revolving 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. 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 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 21 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 attached 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 share 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. 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 22 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 23 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. 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. 24 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, ------------------------------------------------------ 1992 1993 1994 1995 1996 --------- --------- --------- --------- ---------- STATEMENT OF OPERATIONS DATA: Revenues: Guest Pay............................................... $ 13,828 $ 21,471 $ 29,927 $ 50,758 $ 84,504 Free-to-guest........................................... 6,125 7,478 8,397 8,060 8,645 Other................................................... 4,098 2,363 2,070 4,395 4,572 --------- --------- --------- --------- ---------- Total revenues........................................ 24,051 31,312 40,394 63,213 97,721 Direct costs.............................................. 12,827 14,848 18,181 28,910 44,379 --------- --------- --------- --------- ---------- Gross profit.............................................. 11,224 16,464 22,213 34,303 53,342 Operating expenses........................................ 13,238 16,425 24,573 36,741 58,428 --------- --------- --------- --------- ---------- Operating income (loss)................................... (2,014) 39 (2,360) (2,438) (5,086) Interest expense.......................................... 1,783 2,096 966 4,522 8,243 --------- --------- --------- --------- ---------- Loss before income tax and extraordinary loss............. (3,797) (2,057) (3,326) (6,960) (13,329) Provision for income taxes................................ -- -- -- 66 28 --------- --------- --------- --------- ---------- Loss before extraordinary loss............................ (3,797) (2,057) (3,326) (7,026) (13,357) Extraordinary loss (1).................................... -- -- 1,324 -- 3,253 --------- --------- --------- --------- ---------- Net loss.................................................. (3,797) (2,057) (4,650) (7,026) (16,610) Cumulative preferred dividends............................ 1,872 1,557 -- -- -- --------- --------- --------- --------- ---------- Net loss attributable to Common Stock..................... $ (5,669) $ (3,614) $ (4,650) $ (7,026) $ (16,610) --------- --------- --------- --------- ---------- --------- --------- --------- --------- ---------- OTHER DATA: EBITDA (2)................................................ $ 3,471 $ 7,215 $ 9,301 $ 15,898 $ 24,729 EBITDA margin (2)......................................... 14.4% 23.0% 23.0% 25.1% 25.3% Capital expenditures...................................... $ 18,044 $ 14,311 $ 43,521 $ 51,497 $ 85,258 Depreciation and amortization............................. 5,486 7,176 11,661 18,336 29,815 Annualized EBITDA (3)..................................... 4,676 7,990 11,250 18,246 27,290 Ratio of earnings to fixed charges (4).................... -- -- -- -- -- Ratio of long-term debt to annualized EBITDA (3).......... 6.31x .75x 2.49x 3.15x 6.57x Ratio of EBITDA to interest expense (2)................... 1.95x 3.44x 9.63x 3.52x 3.00x OPERATING DATA: Guest Pay rooms served (5) On-demand............................................... 21,871 59,169 119,680 209,487 358,842 Scheduled............................................... 81,294 77,650 65,351 58,720 41,403 --------- --------- --------- --------- ---------- Total Guest Pay rooms................................. 103,165 136,819 185,031 268,207 400,245 --------- --------- --------- --------- ---------- --------- --------- --------- --------- ---------- Rooms with Super Nintendo-Registered Trademark- game systems (5)............................................. -- 225 69,806 163,879 322,903 Free-to-guest rooms served (5)............................ 176,651 191,893 220,534 249,779 294,882 Total rooms served (5) (6)................................ 227,697 267,171 314,184 388,088 516,348 Average monthly revenue per Guest Pay room: Movie revenue........................................... $ 13.00 $ 14.68 $ 15.03 $ 17.08 $ 18.38 Video game/information services......................... .27 .39 1.01 2.21 2.93 --------- --------- --------- --------- ---------- Total................................................. $ 13.27 $ 15.07 $ 16.04 $ 19.29 $ 21.31 --------- --------- --------- --------- ---------- --------- --------- --------- --------- ----------
25
AS OF DECEMBER 31, ------------------------------------------------------- 1992 1993 1994 1995 1996 --------- --------- --------- ---------- ---------- BALANCE SHEET DATA: Cash and cash equivalents............................. $ 92 $ 12,256 $ 4,302 $ 2,252 $ 86,177 Total assets.......................................... 42,238 64,300 88,265 125,507 279,768 Long-term debt........................................ 29,500 6,000 28,000 57,497 179,233 Redeemable preferred stock (7)........................ 13,519 -- -- -- -- Total stockholders' equity (deficit).................. (7,272) 52,665 47,942 42,726 75,552
- ------------------------ (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 $3.3 million. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere herein. (2) EBITDA means earnings before interest expense, income taxes, depreciation and amortization. EBITDA is not intended to represent an alternative to net income or cash flows from operating, financing or investing activities (as determined in accordance with generally accepted accounting principles) as a measure of performance. Rather, it is included herein because EBITDA is a widely accepted financial indicator used by certain investors and financial analysts to assess and compare companies on the basis of operating performance. Management believes that EBITDA provides an important additional perspective on the Company's operating results and the Company's ability to service its long-term debt and to fund the Company's continuing growth. (3) "Annualized EBITDA" represents the sum of the quarterly EBITDA for the two most recently completed fiscal quarters multiplied by two. (4) Earnings is defined as net loss before income taxes, extraordinary items and fixed charges, except where capitalized. Fixed charges is defined as the portion of rental expense under operating leases representing interest, and interest, including amortization of debt expense, whether expensed or capitalized. Earnings were insufficient to cover fixed charges for the years ended December 31 by the amounts indicated: 1992--$(3,797); 1993--$(2,057); 1994--$(3,326); 1995--$(6,690); and 1996-- $(13,329). (5) At end of year. (6) Total rooms served include those rooms receiving one or more of the Company's services. (7) Includes cumulative preferred dividends payable. 26 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 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 The Company provides video on-demand, network-based video games, cable television programming and other interactive entertainment and information services to the lodging and multi-family residential unit markets utilizing its proprietary B-LAN-TM- system architecture. LODGING SERVICES GUEST PAY SERVICES. The Company's Guest Pay services include Guest Scheduled-SM- on-demand movies, network-based Super Nintendo-Registered Trademark- video games and other interactive entertainment and information services for which the hotel guest pays on a per-view or per-play basis. The growth that the Company has experienced has principally resulted from its rapid expansion of guest pay-per-view 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:
1994 1995 1996 -------------------- -------------------- -------------------- ROOMS % ROOMS % ROOMS % --------- --------- --------- --------- --------- --------- Scheduled.......................... 65,351 35.3 58,720 21.9 41,403 10.3 On-demand.......................... 119,680 64.7 209,487 78.1 358,842 89.7 --------- --------- --------- --------- --------- --------- Total.......................... 185,031 100.0 268,207 100.0 400,245 100.0 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
27 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, 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, generally ranging from 35% to 50% of the Company's gross revenues derived from each picture, (ii) nominal one-time license fees paid for independent films, which are duplicated by the Company for distribution to its operating sites, (iii) license fees for video games and other services, and (iv) the commission retained by the hotel, generally 10% to 15% of gross revenues, depending on the services provided and other factors. 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. The Company also provides video games and interactive multimedia entertainment and information services through its guest pay systems. Services include folio review, video check-out and guest satisfaction surveys. 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. The following table sets forth the number of guest pay rooms with game systems installed as of December 31:
1994 1995 1996 --------- --------- --------- Super Nintendo-Registered Trademark- game systems rooms....... 69,806 163,879 322,903
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. For free-to-guest services the hotel pays the Company a fixed monthly charge per room for each programming channel provided. Such monthly charges range generally from $2.90 to $3.50 per room per month for premium channels and from $.15 to $.85 per room per month for non- premium channels. 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 ranges generally from 75% to 80% of revenues for such services, 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 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 will pay a fee to PRIMESTAR for access to the PRIMESTAR signal, which will enable 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:
1994 1995 1996 --------- --------- --------- Free-to-guest rooms.......................................... 220,534 249,779 294,882
RESIDENTIAL SERVICES In January 1996, the Company formed ResNet for the purpose of extending the Company's proprietary B-LAN-TM- system architecture and operational expertise into the Multi-family Residential Unit ("MDU") market. In February 1996, ResNet entered into an exclusive agreement with GE ResCom, an affiliate of General Electric Co. and a leading provider of private telephony services to the MDU market, under which GE ResCom's sales force will exclusively market ResNet's video and cable services to MDUs 28 nationwide. In October 1996, TCI Satellite, an affiliate of TCI, agreed to invest up to $40 million in ResNet in exchange for up to a 36.99% interest in ResNet and agreed to provide ResNet with long-term access to DBS signals for the MDU market on a nationwide basis. The Company believes that the MDU business has financial and technological requirements similar to those of the Company's lodging industry business. ResNet began installations of its first systems during the quarter ended September 30, 1996, but its operations did not have a material effect on the consolidated results of operations of the Company for 1996. RESULTS OF OPERATIONS--YEARS ENDED DECEMBER 31, 1996 AND 1995 REVENUE ANALYSIS The Company's total revenue for 1996 increased 54.6%, or $34.5 million, in comparison to 1995. The following table sets forth the components of the Company's revenue (in thousands) for the years ended December 31:
1996 1995 ---------------------- ---------------------- PERCENT OF PERCENT OF TOTAL TOTAL AMOUNT REVENUES AMOUNT REVENUES --------- ----------- --------- ----------- Guest Pay......................................... $ 84,504 86.5 $ 50,758 80.2 Free-to-guest..................................... 8,645 8.8 8,060 12.8 Other............................................. 4,572 4.7 4,395 7.0 --------- ----- --------- ----- Total......................................... $ 97,721 100.0 $ 63,213 100.0 --------- ----- --------- ----- --------- ----- --------- -----
GUEST PAY SERVICES. Guest Pay revenues increased 66.5%, or $33.7 million, in 1996 as compared to 1995. This increase is attributable to (i) a 50.7% increase in the average number of installed guest pay rooms, all of which were installed with the Company's on-demand technology, and (ii) a 10.5% 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:
1996 1995 --------- --------- Average monthly revenue per room: Movie revenue............................................................ $ 18.38 $ 17.08 Video game and information service revenue............................... 2.93 2.21 --------- --------- Total per Guest Pay room............................................... $ 21.31 $ 19.29 --------- --------- --------- --------- For all Guest Pay rooms: Movie buy rates.......................................................... 10.7% 10.1% Average movie price...................................................... $ 8.26 $ 8.28 Average hotel occupancy rate............................................. 69.4% 69.0% For on-demand Guest Pay rooms: Movie buy rates.......................................................... 11.4% 11.2% Average movie price...................................................... $ 8.28 $ 8.34 Average hotel occupancy rate............................................. 70.0% 69.8%
Average movie revenue per room, for all guest pay rooms, was favorably impacted by a combination of higher average buy rates and higher average occupancies, all in comparison to the comparable period in the previous year, and by the comparative increase in the proportion of on-demand rooms. It has been the Company's experience that buy rates are higher in rooms featuring the on-demand service than in those rooms with the scheduled service. The comparative increase in buy rates, for both all and on-demand guest 29 pay rooms, is attributed to a relatively more popular selection of newly-released major motion pictures in 1996 as compared to 1995. The slight decrease in average movie prices for both all and on-demand rooms between the comparative periods is the result of an increase in the proportion of limited service hotel rooms in the installed room base, in which rooms movie prices are generally $7.95. The Company's movie prices were generally $7.95 or $8.95 during the periods. Average video game and information service revenue per room, for all guest pay rooms, increased primarily as a result of the increase in the number of rooms with video game services installed. On a per-room basis, average monthly video game revenues were $2.26 and $1.70 during the years ended December 31, 1996 and 1995, respectively. FREE-TO-GUEST SERVICES. Free-to-guest revenues increased 7.3%, or $585,000, in 1996 as compared to 1995. The comparative increase in revenues resulted from the 18.1% increase in the number of installed free-to-guest rooms since December 31, 1995, which installed room increase mitigated a decline in per-room revenues resulting from a relatively lower proportion of rooms receiving premium services in the current period. OTHER. Revenue from other sources, such as the sale of televisions, system equipment, service parts and labor, and miscellaneous free-to-guest programming materials, increased by $177,000, or 4.0% in 1996 as compared to 1995, all of which increase was attributable to sales of systems and equipment to foreign licensees. 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 1995 --------- --------- Direct costs: Guest Pay............................................................. $ 34,283 $ 19,053 Free-to-guest......................................................... 6,482 6,117 Other................................................................. 3,614 3,740 --------- --------- $ 44,379 $ 28,910 --------- --------- --------- --------- Gross profit margin: Guest Pay............................................................. 59.4% 62.5% Free-to-guest......................................................... 25.0% 24.1% Other................................................................. 21.0% 14.9% Composite............................................................. 54.6% 54.3%
Guest Pay direct costs increased 79.9%, or $15.2 million, in 1996 as compared to 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 37.5% in 1995 to 40.6% in 1996. The relative increase in guest pay direct costs (as a percentage of revenue), in 1996 as compared to the prior year, reflects higher movie-related costs due to proportionately higher revenue from newly-released motion pictures and substantially increased video game revenue in the guest pay revenue mix, which increases were mitigated by a slight decrease in hotel commissions. Free-to-guest direct costs increased 6.0% to $6.5 million in 1996 from $6.1 million in the prior year. As a percentage of free-to-guest revenue, free-to-guest direct costs decreased to 75.0% in 1996 from 75.9% in the prior year. The slight decrease in free-to-guest direct costs (as a percentage of revenue) reflected the effect of price increases for certain programming. 30 Direct costs associated with other revenue decreased 3.4%, or $126,000, in 1996 as compared to the prior year. As a percentage of related revenues, such direct costs decreased to 79.0% of other revenue in 1996 versus 85.1% in 1995, reflecting the effect of increased system and equipment sales, which have slightly higher margins than the other sources of other revenue. The Company's overall gross profit increased 55.5%, or $19.0 million, to $53.3 million in 1996 on a 54.6% increase in revenues in comparison to the prior year. The Company's overall gross profit margin was 54.6% in 1996 and 54.3% 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 1995 ------------------------ ------------------------ PERCENT OF PERCENT OF TOTAL TOTAL AMOUNT REVENUES AMOUNT REVENUES --------- ------------- --------- ------------- Operating expenses: Guest Pay operations............................ $ 15,032 15.4% $ 9,767 15.5% Selling and marketing............................. 2,708 2.8% 1,871 3.0% General and administrative........................ 10,873 11.1% 6,767 10.7% Depreciation and amortization..................... 29,815 30.5% 18,336 29.0% --------- --- --------- --- Total operating expenses...................... $ 58,428 59.8% $ 36,741 58.2% --------- --- --------- --- --------- --- --------- ---
Guest Pay operations expenses increased 53.9%, or $5.3 million, in 1996 from $9.8 million in the previous year. Such increase is primarily attributable to the 50.7% increase in average installed Guest Pay rooms in 1996 as compared to 1995. Per average installed guest pay room, such expenses averaged $3.79 per month in 1996 as compared to $3.71 per month in 1995, primarily reflecting increased marketing, service and support costs and property taxes. Selling and marketing expenses increased 44.7%, or $837,000, in 1996 from $1.9 million in the prior year. This increase reflects the effect of additional sales and marketing personnel and increased promotional and marketing activities. As a percentage of revenue, such expenses represented 2.8% of revenue in 1996 as compared to 3.0% in the prior year. General and administrative expenses increased 60.7%, or $4.1 million, in 1996 from $6.8 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 and increased facilities-related expenses. As a percentage of revenue, general and administrative expenses represented 11.1% of total revenue in 1996 as compared to 10.7% in the year earlier period. Depreciation and amortization expenses increased 62.6% to $29.8 million in 1996 from $18.3 million in the prior year. This increase is directly attributable to the increases 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. OPERATING LOSS. The Company's operating loss, as a result of the factors previously discussed, increased to $5.1 million in 1996 from $2.4 million in 1995. INTEREST EXPENSE. Interest expense increased to $8.2 million in 1996 from $4.5 million in 1995 due to increases in long-term debt to fund the Company's continuing expansion of its businesses. Long-term debt increased from $57.5 million at December 31, 1995 to $179.2 million at December 31, 1996, reflecting the Company's issuance of $150 million principal amount of 10.25% Senior Notes during 1996. The average principal amount of long-term debt (excluding amounts outstanding under the revolving credit facility) 31 outstanding during 1996 was approximately $65.4 million (at a weighted average interest rate of approximately 10.0%) as compared to an average principal amount outstanding of approximately $40.6 million (at a weighted average interest rate of approximately 10.3%) during 1995. The weighted average amount outstanding under the revolving credit facility was approximately $9.4 million during 1996 as compared to approximately $2.1 million in 1995. EXTRAORDINARY LOSS. As a result of the early redemption of its 9.95% and 10.35% Senior Notes, the Company incurred a make-whole premium of approximately $2.8 million, and wrote off unamortized debt issuance costs related to the notes of approximately $0.4 million. NET LOSS. For the reasons previously discussed, the Company's net loss increased to $16.6 million in 1996 from a net loss of $7.0 million in the prior year. EBITDA. As a result of increasing revenues from guest pay services, and the other factors previously discussed, EBITDA ("Earnings Before Interest, Income Taxes and Depreciation and Amortization") increased 55.5% to $24.7 million in 1996 as compared to $15.9 million in 1995. EBITDA as a percentage of total revenue increased to 25.3% in 1996 as compared to 25.1% in 1995. 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 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, 1995 AND 1994 REVENUE ANALYSIS The Company's total revenues increased 56.5% in 1995 as compared to 1994. The following table sets forth the various components of the Company's total revenue (in thousands) for the years ended December 31:
1995 1994 ----------------------- ----------------------- PERCENT OF PERCENT OF TOTAL TOTAL AMOUNT REVENUES AMOUNT REVENUES --------- ------------ --------- ------------ Guest Pay......................................... $ 50,758 80.2% $ 29,927 74.1% Free-to-guest..................................... 8,060 12.8% 8,397 20.8% Other............................................. 4,395 7.0% 2,070 5.1% --------- ----- --------- ----- Total......................................... $ 63,213 100.0% $ 40,394 100.0% --------- ----- --------- ----- --------- ----- --------- -----
GUEST PAY SERVICES. Guest Pay revenues increased 69.6%, or $20.8 million, in 1995 as compared to 1994. This increase is attributable to (i) an approximate 41% increase in the average number of guest pay rooms installed during 1995 as compared to the prior year and (ii) increases in movie and video game and information service revenue on a per-room basis of 13.6% and 118.8%, respectively, both as compared to 1994. Higher average buy rates and higher average movie prices combined with higher average occupancy rates such that average monthly movie revenues increased on a per-room basis. Video game and information service revenues increased from approximately $1.9 million in 1994 to approximately $5.8 million in 1995, primarily as a result of the increase in the number of rooms with video game services 32 installed. The following table sets forth information with respect to guest pay rooms for the years ended December 31:
1995 1994 --------- --------- Average monthly revenue per room: Movie revenue............................................................ $ 17.08 $ 15.03 Video game and information service revenue............................... 2.21 1.01 --------- --------- Total per Guest Pay room............................................... $ 19.29 $ 16.04 --------- --------- --------- --------- For all Guest Pay rooms: Movie buy rates.......................................................... 10.1% 9.5% Average movie price...................................................... $ 8.28 $ 7.81 Average hotel occupancy rate............................................. 69.0% 68.7% For on-demand Guest Pay rooms: Movie buy rates.......................................................... 11.2% 11.1% Average movie price...................................................... $ 8.34 $ 7.90 Average hotel occupancy rate............................................. 69.8% 69.9%
FREE-TO-GUEST SERVICES. Free-to-guest revenues decreased 4.0%, or $337,000, in 1995 as compared to the prior year. The comparative decrease is primarily attributable to a relative decline in the proportion of free-to-guest rooms receiving premium services. OTHER. Revenue from other sources, such as the sale of televisions, system equipment, service parts and labor, and miscellaneous free-to-guest programming materials, increased by 112.3%, or $2.3 million, in 1995 as compared to 1994. This increase is directly attributable to increases in television sales between the periods. 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:
1995 1994 --------- --------- Direct costs: Guest Pay............................................................. $ 19,053 $ 10,050 Free-to-guest......................................................... 6,117 6,412 Other................................................................. 3,740 1,719 --------- --------- $ 28,910 $ 18,181 --------- --------- --------- --------- Gross profit margin: Guest Pay............................................................. 62.5% 66.4% Free-to-guest......................................................... 24.1% 23.6% Other................................................................. 14.9% 17.0% Composite............................................................. 54.3% 55.0%
Guest pay direct costs increased 89.6%, or $9.0 million, in 1995 as compared to 1994. 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, guest pay direct costs were 37.5% of related revenues versus 33.6% in 1994. The relative increase in guest pay direct costs (as a percentage of revenue) reflects higher movie-related costs due to proportionately higher revenue from newly-released motion pictures, substantially increased video game revenue in the guest pay revenue mix and increased hotel commissions, as compared to 1994. 33 Free-to-guest direct costs decreased 4.6%, or $295,000, in 1995 compared to the prior year, and such direct costs also decreased, as a percentage of free-to-guest revenues, to 75.9% in 1995 from 76.4% in the prior year, primarily due to a comparative decrease in the relative proportion of premium channels in the programming mix, as previously mentioned. Direct costs related to other revenue increased 117.6%, or $2.0 million, in 1995 as compared to 1994. This increase was directly attributable to the increased level of television sales discussed above. As a percentage of other revenue, direct costs increased to 85.1% in 1995 as compared to 83.0% in 1994 due to the relative increase in revenue from television sales, which have a lower margin than other components of the other revenue category. The Company's overall gross profit margin was 54.3% in 1995 as compared to 55.0% in 1994. The slight decrease is attributable to the lower guest pay gross profit margin, and to the effect of the increased sales of televisions in the other revenue category, both as previously discussed. OPERATING EXPENSES. The following table sets forth information in regard to the Company's operating expenses (in thousands) for the years ended December 31:
1995 1994 ------------------------ ------------------------ PERCENT OF PERCENT OF TOTAL TOTAL AMOUNT REVENUES AMOUNT REVENUES --------- ------------- --------- ------------- Operating expenses: Guest Pay operations...................................... $ 9,767 15.5% $ 7,244 17.9% Selling and marketing..................................... 1,871 3.0% 1,541 3.8% General and administrative................................ 6,767 10.7% 4,127 10.2% Depreciation and amortization............................. 18,336 29.0% 11,661 28.9% --------- --- --------- --- Total operating expenses................................ $ 36,741 58.2% $ 24,573 60.8% --------- --- --------- --- --------- --- --------- ---
Guest pay operations expense increased 34.8%, or $2.5 million, in 1995 as compared to the prior year. This increase was primarily attributable to the addition of 83,176 guest pay rooms since December 31, 1994. Per installed guest pay room, such expenses averaged $3.71 per month during 1995 as compared to $3.88 for 1994. Lower service and maintenance costs and lower administrative support costs combined to offset higher property taxes, all on a per-room basis. Selling and marketing expenses increased 21.4%, or $330,000, in 1995 as compared to 1994, reflecting an increase in marketing and promotional activities and the addition of sales and marketing personnel. Sales and marketing expenses represented 3.0% of revenues in 1995 as compared to 3.8% in the prior year. General and administrative expenses increased 64.0%, or $2.6 million, in 1995 as compared to the prior year, primarily reflecting increases in legal and personnel-related costs. As a percentage of revenues, general and administrative costs were 10.7% in 1995 as compared to 10.2% in 1994. Depreciation and amortization expenses increased 57.2%, or $6.7 million, in 1995 as compared to 1994. This increase directly reflects the effect of the approximate 45% increase in the number of installed guest pay rooms, as well as the effect of expenditures to upgrade previously installed rooms to provide video game and information services, and the associated software and other capitalized costs such as service vans and equipment, computers and office furniture, fixtures and other equipment related to the Company's continuing expansion. OPERATING LOSS. The Company's operating loss was $2.4 million in both 1995 and 1994. INTEREST EXPENSE. Interest expense increased 368.1%, or $3.6 million, in 1995 as compared to 1994. The increase is directly attributable to increased borrowing to fund the Company's continuing investments 34 in both newly-installed and upgraded rooms. The average amount of long-term debt outstanding during 1995, excluding amounts outstanding under the Company's then existing revolving credit facility, was approximately $40.6 million as compared to an average of approximately $12.4 million during 1994. The average amount outstanding under the revolving credit facility was approximately $2.1 million during 1995 as compared to approximately $1.9 million in 1994. NET LOSS. The Company's net loss increased to $7.0 million in 1995 from $4.6 million in 1994, as a result of the foregoing factors. EBITDA. EBITDA increased 70.9%, or $6.6 million, in 1995 as compared to 1994. EBITDA, as a percentage of total revenues, increased to 25.1% in 1995 as compared to 23.0% in 1994. 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 On September 15, 1994, the Company issued $28 million principal amount of 9.95% Senior Notes to three insurance companies in a private placement. On April 13, 1995, concurrently with certain amendments to the Note Purchase Agreement, the Company issued $5 million principal amount of 10.35% Senior Notes under such agreement in a private placement to certain holders of the 9.95% Senior Notes. As part of the transaction in which the Company issued its 10.25% Senior Notes (discussed further below) the Company redeemed the 9.95% and 10.35% Senior Notes in their entirety, which represented a use of proceeds of approximately $28.9 million in principal amount, plus accrued interest, and a make-whole premium of approximately $2.8 million. On August 9, 1995, the Company issued $20 million principal amount of its 11.5% Senior Subordinated Notes due July 15, 2005 (the 11.5% Senior Notes) to three insurance companies in a private placement. On October 4, 1995, the Company issued an additional $10 million principal amount of such 11.5% Senior Notes to the same purchasers and under identical terms and conditions. In connection with the issuance of its 10.25% Senior Notes, the Company and the holders of the 11.5% Senior Notes amended the terms of the 11.5% Senior Notes to provide that such notes rank pari passu with, and have the same covenants as, the 10.25% Senior Notes. The 11.5% Senior Notes are unsecured and bear interest at the fixed rate of 11.5%, payable semi-annually. Mandatory annual principal payments of $6 million commence July 15, 2001. Net proceeds of the August 9, 1995 issue of the 11.5% Senior Notes, net of original issue discount and issuance-related expenses, were approximately $18.1 million, and were used to (i) repay $10.0 million outstanding under the Company's then existing revolving facility and (ii) provide funding for capital expenditures to expand the Company's guest pay services business. The net proceeds from the October 4, 1995 issue of the 11.5% Senior Notes, net of original issue discount and issuance-related expenses, were approximately $9.2 million and provided additional capital to fund the expansion of the Company's guest pay services business. In connection with the December 19, 1996 issuance of its 10.25% Senior Notes, the Company repaid all of the outstanding borrowing under its then bank credit facility, approximately $20.4 million, and amended and restated such facility. The amended and restated bank credit facility (the "1997 Facility") provides for total lending commitments of $100.0 million (which can be increased to $175.0 million with the consent of NatWest Bank) and contains certain covenants, including the maintenance of certain financial ratios, limitations on the incurrence of additional indebtedness, limitations on the incurrence of certain liens, limitations on certain payments or distributions in respect of the common stock and 35 provisions for acceleration of principal repayment in certain circumstances. The 1997 Facility is secured by (i) a first priority security interest in all of the Company's and certain of its subsidiaries' tangible and intangible assets and (ii) a guarantee by ResNet of all amounts advanced to it by the Company. Amounts borrowed under the 1997 Facility bear interest at either (i) LIBOR plus from 1.25% to 2.00% or (ii) the greater of (a) the NatWest Bank prime rate plus from .25% to 1.00% or (b) the federal funds rate plus from .75% to 1.50%, depending on the Company's total leverage, as defined in the agreement. The banks' commitment under the 1997 Facility is subject to a scheduled reduction of 15% beginning in December 1998 and annually thereafter as follows: December 1999--20%; December 2000--20%; December 2001--20%; and December 2002--25%. On May 23, 1996, the Company sold 3,680,000 shares of the Company's Common Stock for net proceeds of approximately $44.6 million. Such proceeds were used to repay approximately $25.9 million of borrowings then outstanding under the Existing Credit Facility, and to provide working capital for the continuing expansion of the Company's lodging and residential business. On October 21, 1996, the Company and ResNet entered into agreements with TCI Satellite pursuant to which TCI Satellite acquired a 4.99% equity interest in ResNet for a purchase price of $5.4 million in cash (the "Stock Payment") and agreed to provide ResNet with long-term access to a DBS signal on a nationwide basis. In addition, TCI Satellite agreed to advance up to $34.6 million to ResNet during the five years ending October 21, 2001, under a convertible note agreement (the "TCI Convertible Note") to purchase DBS equipment. The TCI Convertible Note is subject to mandatory conversion into a maximum 32.0% equity interest in ResNet at such time as conversion is not restricted by FCC regulations. The TCI Convertible Note is unsecured, payable solely in shares of ResNet's common stock, non-recourse to the Company, and subordinated to all present and future borrowings by ResNet including any borrowings from the Company by ResNet. Interest accrues (generally at TCI's average borrowing rate) on amounts outstanding under the TCI Convertible Note, but such interest is not payable in cash (and does not increase the equity interest into which the TCI Convertible Note will be converted). On December 19, 1996, the Company issued $150 million, principal amount, of unsecured 10.25% Senior Notes (the Notes) in a private offering in accordance with Rule 144A of The Securities Act of 1933, as amended (the Securities Act). The proceeds of the Notes, which were issued at par, after placement fees and offering expenses, were approximately $143.2 million. Approximately $31.7 million of such proceeds was used to redeem the outstanding principal amounts of the 9.95% and 10.35% Senior Notes and to prepay all outstanding amounts under the Company's then revolving credit facility, both as previously discussed. The remaining proceeds, approximately $91.1 million, were invested in highly liquid, interest-bearing securities pending their use for funding capital expenditures to expand the Company's lodging and residential businesses. The Company has incurred operating and net losses due in large part to the depreciation, amortization and interest expenses related to the capital required to expand its lodging and residential businesses. The growth of the Company's business requires substantial indebtedness to finance expansion of its lodging and multi-family residential businesses. The Company expects that losses will increase as the Company implements its expansion strategy. Historically, cash flow from operations has not been sufficient to fund the cost of expanding the Company's business and to service existing indebtedness. Capital expenditures were approximately $85.3 million during 1996, and net cash provided by operating activities was approximately $9.5 million. Depending on the rate of growth of its lodging and residential businesses and other factors, the Company expects to incur capital expenditures of between approximately $90 to $125 million in 1997 and substantial amounts thereafter. 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; however, this is a forward-looking statement and there can be no assurance in this regard. In addition, the 1997 Facility limits the amount of 36 the Company's annual capital expenditures to a certain base amount plus the amounts of certain additional financing. The Company believes that the net proceeds from the 10.25% Senior Notes, the funds to be provided by TCI Satellite, its operating cash flows and borrowings permitted under the 1997 Facility will be sufficient to fund the Company's cash requirements for 12 to 18 months; however, this is a forward-looking statement and there can be no assurance in this regard. After such time, the Company may incur additional amounts of indebtedness. 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. EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS Financial Accounting Standards Board Statement No. 123, "Accounting for Stock-Based Compensation" ("Statement 123"), encourages, but does not require, a fair value-based method of accounting for employee stock options or similar equity instruments. It also allows an entity to elect to continue to measure compensation cost under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), but requires pro forma disclosures of net income and earnings per share as if the fair value method of accounting had been applied. The Company elected to continue to measure compensation cost in accordance with APB 25, and to comply with the pro forma disclosure requirements of Statement 123 as of January 1, 1996. Financial Accounting Standards Board Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" was adopted by the Company as of January 1, 1996. This statement was applied prospectively, and requires that impairment losses on long-lived assets be recognized when the book value of the asset exceeds its expected undiscounted cash flows. The adoption did not have a material impact on the Company's financial position or results of operations. 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. 37 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. 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. 38 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, 1996 included herein. (b) REPORTS ON FORM 8-K--The Company filed one report on Form 8-K, dated December 4, 1996, during the quarter ended December 31, 1996. (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 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 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 4.3 Form of Senior Notes (included in 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) 10.4 Office and Building Lease dated December 9, 1991, regarding principal office of the Company (1) 10.5 Agreement to Extend Lease dated November 6, 1996, regarding Office and Building Lease dated December 9, 1991 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) 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)
39 10.14 Amendment to Securities Purchase Agreement, dated as of December 19, 1996 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 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 11.1 Statement of computation of earnings per share 12.1 Statement of computation of ratios 21.1 Subsidiaries of the Company 27.1 Financial Data Schedule
- ------------------------ + Confidential Treatment has been requested with respect to certain portions of this agreement. (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. 40 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 17, 1997. LodgeNet Entertainment Corporation By: /s/ TIM C. FLYNN ------------------------------------ Tim C. Flynn, PRESIDENT AND CHIEF EXECUTIVE OFFICER 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/ TIM C. FLYNN President, Chief Executive ------------------------------------------- Officer and Director (Principal March 17, 1997 Tim C. Flynn Executive Officer) /s/ SCOTT C. PETERSEN ------------------------------------------- Executive Vice President, Chief March 17, 1997 Scott C. Petersen Operating Officer, and Director /s/ JEFFREY T. WEISNER Vice President--Finance, ------------------------------------------- (Principal Financial and March 17, 1997 Jeffrey T. Weisner Accounting Officer) /s/ DAVID AUSTAD ------------------------------------------- Director March 17, 1997 David Austad /s/ LAWRENCE FLINN, JR. ------------------------------------------- Director March 17, 1997 Lawrence Flinn, Jr. /s/ RICHARD R. HYLLAND ------------------------------------------- Director March 17, 1997 Richard R. Hylland /s/ R. F. LEYENDECKER ------------------------------------------- Director March 17, 1997 R. F. Leyendecker
41 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, 1995 and 1996............................................... F-3 Consolidated Statements of Operations for the years ended December 31, 1994, 1995 and 1996......................................................................... F-4 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1994, 1995 and 1996......................................................................... F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996......................................................................... F-6 Notes to Consolidated Financial Statements................................................................. F-7 INDEX TO FINANCIAL SCHEDULES Report of Independent Public Accountants on Schedule....................................................... F-20 Schedule II -- Valuation and Qualifying Accounts........................................................... F-21
F-1 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, 1995 and 1996, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of LodgeNet Entertainment Corporation and Subsidiaries as of December 31, 1995 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Minneapolis, Minnesota, February 28, 1997 F-2 LODGENET ENTERTAINMENT CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLAR AMOUNTS IN THOUSANDS)
DECEMBER 31, ---------------------- 1995 1996 ---------- ---------- ASSETS Current assets: Cash and cash equivalents............................................................... $ 2,252 $ 86,177 Accounts receivable, net of allowance for doubtful accounts............................. 12,150 18,428 Prepaid expenses and other.............................................................. 1,462 1,935 ---------- ---------- Total current assets.................................................................. 15,864 106,540 Property and equipment, net............................................................... 108,106 164,157 Debt issuance costs, net of accumulated amortization...................................... 1,537 8,509 Other assets, net......................................................................... -- 562 ---------- ---------- $ 125,507 $ 279,768 ---------- ---------- ---------- ---------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable........................................................................ $ 14,911 $ 16,775 Current maturities of long-term debt.................................................... 4,254 425 Accrued expenses........................................................................ 3,745 4,596 ---------- ---------- Total current liabilities............................................................. 22,910 21,796 Deferred revenue.......................................................................... 2,374 2,956 Long-term debt............................................................................ 57,497 179,233 Minority interest in consolidated subsidiary.............................................. -- 231 ---------- ---------- Total liabilities..................................................................... 82,781 204,216 ---------- ---------- Commitments and contingencies (Note 6) Stockholders' equity: Common stock, $.01 par value, 20,000,000 shares authorized; 7,352,113 and 11,125,369 shares outstanding at December 31, 1995 and 1996, respectively........................ 74 111 Additional paid-in capital.............................................................. 71,234 120,539 Accumulated deficit..................................................................... (28,582) (45,098) ---------- ---------- Total stockholders' equity............................................................ 42,726 75,552 ---------- ---------- $ 125,507 $ 279,768 ---------- ---------- ---------- ----------
The accompanying notes are an integral part of these consolidated balance sheets. F-3 LODGENET ENTERTAINMENT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLAR AMOUNTS, EXCEPT PER SHARE AMOUNTS, IN THOUSANDS)
YEARS ENDED DECEMBER 31, ---------------------------------- 1994 1995 1996 ---------- ---------- ---------- Revenues: Guest Pay................................................................ $ 29,927 $ 50,758 $ 84,504 Free-to-guest............................................................ 8,397 8,060 8,645 Other.................................................................... 2,070 4,395 4,572 ---------- ---------- ---------- Total revenues............................................................. 40,394 63,213 97,721 ---------- ---------- ---------- Direct costs: Guest Pay................................................................ 10,050 19,053 34,283 Free-to-guest............................................................ 6,412 6,117 6,482 Other.................................................................... 1,719 3,740 3,614 ---------- ---------- ---------- Total direct costs..................................................... 18,181 28,910 44,379 ---------- ---------- ---------- Gross profit............................................................... 22,213 34,303 53,342 ---------- ---------- ---------- Operating expenses: Guest Pay operations..................................................... 7,244 9,767 15,032 Selling and marketing.................................................... 1,541 1,871 2,708 General and administrative............................................... 4,127 6,767 10,873 Depreciation and amortization............................................ 11,661 18,336 29,815 ---------- ---------- ---------- Total operating expenses............................................... 24,573 36,741 58,428 ---------- ---------- ---------- Operating loss............................................................. (2,360) (2,438) (5,086) Interest expense, net...................................................... 966 4,522 8,243 ---------- ---------- ---------- Loss before income taxes and extraordinary loss............................ (3,326) (6,960) (13,329) Provision for income taxes................................................. -- 66 28 ---------- ---------- ---------- Loss before extraordinary loss............................................. (3,326) (7,026) (13,357) Extraordinary loss......................................................... 1,324 -- 3,253 ---------- ---------- ---------- Net loss................................................................... $ (4,650) $ (7,026) $ (16,610) ---------- ---------- ---------- ---------- ---------- ---------- Per common share: Loss before extraordinary loss........................................... $ (0.45) $ (0.95) $ (1.39) Extraordinary loss....................................................... (0.18) -- (0.34) ---------- ---------- ---------- Net loss attributable to common stock.................................... $ (0.63) $ (0.95) $ (1.73) ---------- ---------- ---------- ---------- ---------- ---------- Weighted average shares outstanding........................................ 7,326,748 7,382,471 9,624,226 ---------- ---------- ---------- ---------- ---------- ----------
The accompanying notes are an integral part of these consolidated financial statements. F-4 LODGENET ENTERTAINMENT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DOLLAR AMOUNTS IN THOUSANDS)
COMMON STOCK ADDITIONAL ------------------------- PAID-IN ACCUMULATED SHARES AMOUNT CAPITAL DEFICIT TOTAL ------------ ----------- ---------- ------------ ---------- Balance, December 31, 1993.......................... 7,274,248 $ 73 $ 69,468 $ (16,876) $ 52,665 Common stock option activity...................... 4,500 -- 24 -- 24 Net loss.......................................... -- -- -- (4,650) (4,650) Foreign currency translation adjustment........... -- -- -- (97) (97) ------------ ----- ---------- ------------ ---------- Balance, December 31, 1994.......................... 7,278,748 73 69,492 (21,623) 47,942 Common stock option activity...................... 73,365 1 62 -- 63 Warrants issued................................... -- -- 1,680 -- 1,680 Net loss.......................................... -- -- -- (7,026) (7,026) Foreign currency translation adjustment........... -- -- -- 67 67 ------------ ----- ---------- ------------ ---------- Balance, December 31, 1995.......................... 7,352,113 74 71,234 (28,582) 42,726 Issuance of common stock.......................... 3,680,000 36 44,599 -- 44,635 Common stock option activity...................... 93,256 1 34 -- 35 Net loss.......................................... -- -- -- (16,610) (16,610) Sale of interest in subsidiary.................... -- -- 4,672 -- 4,672 Foreign currency translation adjustment........... -- -- -- 94 94 ------------ ----- ---------- ------------ ---------- Balance, December 31, 1996.......................... 11,125,369 $ 111 $ 120,539 $ (45,098) $ 75,552 ------------ ----- ---------- ------------ ---------- ------------ ----- ---------- ------------ ----------
The accompanying notes are an integral part of these consolidated financial statements. F-5 LODGENET ENTERTAINMENT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLAR AMOUNTS IN THOUSANDS)
YEARS ENDED DECEMBER 31, -------------------------------- 1994 1995 1996 --------- --------- ---------- Operating activities: Net loss...................................................................... $ (4,650) $ (7,026) $ (16,610) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization............................................... 11,661 18,336 29,815 Non-cash portion of extraordinary loss...................................... 1,324 -- 434 Minority interest........................................................... -- -- (16) Change in operating assets and liabilities: Accounts receivable....................................................... (2,765) (3,541) (6,278) Prepaid expenses and other................................................ 139 (447) (473) Accounts payable.......................................................... 5,735 6,205 1,864 Accrued expenses and deferred revenue..................................... 505 1,857 1,433 Other..................................................................... -- -- (607) --------- --------- ---------- Net cash provided by operating activities....................................... 11,949 15,384 9,562 --------- --------- ---------- Investing activities: Property and equipment additions.............................................. (43,521) (51,497) (85,258) Proceeds from sale of interest in subsidiary.................................. -- -- 5,396 Proceeds from certificates of deposit......................................... 2,008 -- -- --------- --------- ---------- Net cash used for investing activities........................................ (41,513) (51,497) (79,862) --------- --------- ---------- Financing activities: Proceeds from long-term debt.................................................. 28,000 33,630 151,514 Debt issuance costs........................................................... (462) (1,348) (7,969) Stock issuance costs.......................................................... -- -- (477) Repayment of long-term debt................................................... (6,000) (89) (33,607) Borrowings under revolving credit facility.................................... 6,500 10,000 55,958 Repayments of revolving credit facility....................................... (6,500) (10,000) (55,958) Proceeds from issuance of common stock........................................ -- -- 44,635 Proceeds from issuance of warrants to purchase common stock................... -- 1,680 -- Stock option activity......................................................... 14 63 35 --------- --------- ---------- Net cash provided by financing activities..................................... 21,552 33,936 154,131 --------- --------- ---------- Effect of exchange rates on cash.............................................. 58 127 94 --------- --------- ---------- Increase (decrease) in cash and cash equivalents.............................. (7,954) (2,050) 83,925 Cash and cash equivalents at beginning of period.............................. 12,256 4,302 2,252 --------- --------- ---------- Cash and cash equivalents at end of period.................................... $ 4,302 $ 2,252 $ 86,177 --------- --------- ---------- --------- --------- ---------- Supplemental cash flow information: Cash paid for interest........................................................ $ 836 $ 3,341 $ 7,870 --------- --------- ---------- --------- --------- ----------
The accompanying notes are an integral part of these consolidated financial statements. F-6 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 satellite-delivered, free-to-guest programming, interactive games and multimedia entertainment, and guest information systems to the lodging industry, primarily in the United States and Canada. Through its majority-owned subsidiary, ResNet Communications, Inc. ("ResNet"), the Company installs and operates private cable television systems in multi-family residential properties nationwide. The operations of ResNet were not material to the consolidated results of operations for 1996. The Company's operating performance and outlook are strongly influenced by such factors as overall occupancy levels and economic conditions in the lodging industry, the number of lodging rooms equipped with the Company's systems, the popularity and availability of programming, and competitive factors. The rapid growth of the Company's businesses has and is expected to continue to require 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 for 1997, the Company will likely, 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 Communications, Inc., which is majority-owned by the Company. All significant inter-company accounts and transactions have been eliminated in consolidation. 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. CASH AND CASH EQUIVALENTS--Cash and cash equivalents are comprised of demand deposits and temporary investments in highly liquid securities having original maturities of 90 days or less. PROPERTY AND EQUIPMENT--Property and equipment is stated at cost, including certain payroll costs related to the installation of new systems. Repairs and maintenance costs, which do not significantly extend the useful lives of the respective assets, are charged to operations as incurred. Depreciation of guest pay and free-to-guest systems begins when such systems are installed and activated. Depreciation on other equipment begins when such equipment is placed in service. For financial reporting purposes, the F-7 LODGENET ENTERTAINMENT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Company does not assume a salvage value for any equipment, and depreciation and amortization are computed using the straight-line method over the following estimated useful lives of the assets:
YEARS --------- Building............................................................................ 19 Guest Pay systems: System components................................................................. 5 to 7 In-room equipment................................................................. 3 to 5 Cable television equipment.......................................................... 3 to 10 Free-to-guest systems............................................................... 5 Other equipment..................................................................... 5
PRODUCT DEVELOPMENT--The Company has capitalized certain costs of developing software and other components of its guest pay and residential systems. The capitalization of these costs begins when a system's technological and commercial feasibility has been established and ends when such systems are available for use in guest pay or residential properties. Capitalized costs are reported at the lower of unamortized costs or net realizable value, and are amortized over the system's estimated useful life. Guest pay system development costs capitalized were $936,000, $1,480,000 and $1,616,000 during the years ended December 31, 1994, 1995 and 1996, respectively. Amortization of such costs was $344,000, $455,000 and $599,000 for the years ended December 31, 1994, 1995 and 1996, respectively. 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 $462,000, $1,348,000 and $7,969,000 of debt issuance costs during the years ended December 31, 1994, 1995 and 1996, respectively. Amortization of such costs was $203,000 in 1994, excluding $1,324,000 which was reflected as an extraordinary loss resulting from the early termination of a bank credit facility during 1994 (see Note 10); $260,000 in 1995; and $564,000 in 1996, excluding $434,000 included in an extraordinary loss resulting from the early redemption of the Company's 9.95% and 10.35% Senior Notes (see Note 10). Accumulated amortization was $13,000, $273,000 and $1,271,000 at December 31, 1994, 1995 and 1996, respectively. LOSS PER SHARE COMPUTATION--The net loss per common share was computed using the weighted average shares outstanding during the periods and, when applicable, outstanding warrants and options. REVENUE RECOGNITION--Revenues and related costs are recognized when the 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. At December 31, 1994, 1995 and 1996 the Company had recorded deferred revenues, relating to such agreements, of $1,654,000, $1,579,000 and $1,835,000, respectively. Such amounts represent reductions of programming costs in future years and are included in deferred revenues. 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. F-8 LODGENET ENTERTAINMENT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 as much as 10% of total revenue in any period presented in the accompanying consolidated statements of operations. The allowance for doubtful accounts was $410,000 and $785,000 at December 31, 1995 and 1996, respectively. The provision for doubtful accounts was $226,000 in 1994, $343,000 in 1995, and $922,000 in 1996. INCOME TAXES--The Company accounts for income taxes under the liability method, in accordance with the requirements of Statement of Financial Accounting Standards 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. 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. STOCK-BASED COMPENSATION--The Company measures compensation costs associated with its stock option plans in accordance with Accounting Principles Board Opinion No. 25, as permitted by Statement of Financial Accounting Standards No. 123. The effect of fair value based measurement of such costs on net loss and net loss per share, in accordance with Statement of Financial Accounting Standards No. 123, is disclosed on a pro forma basis. RECENTLY ISSUED ACCOUNTING STANDARDS--Financial Accounting Standards Board Statement No. 121, "Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to Be Disposed Of" was adopted by the Company on January 1, 1996. The adoption did not have a material impact on the Company's financial position or results of operations. RECLASSIFICATIONS--Certain items in the consolidated financial statements have been reclassified to conform to 1996 classifications. Such reclassifications had no effect on previously reported consolidated statements of operations or stockholders' equity. F-9 LODGENET ENTERTAINMENT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 3--PROPERTY AND EQUIPMENT, NET Property and equipment was comprised as follows at (in thousands of dollars):
DECEMBER 31, ---------------------- 1995 1996 ---------- ---------- Land, building and equipment.......................................... $ 8,976 $ 15,914 Free-to-guest equipment............................................... 5,068 7,369 Cable television equipment............................................ -- 5,291 Guest pay systems: Installed........................................................... 119,354 173,607 System components................................................... 13,468 23,290 Software costs...................................................... 4,649 6,266 Building construction in progress..................................... -- 2,528 ---------- ---------- Total............................................................. 151,515 234,265 Less--depreciation and amortization................................... (43,409) (70,108) ---------- ---------- Property and equipment, net........................................... $ 108,106 $ 164,157 ---------- ---------- ---------- ----------
NOTE 4--LONG-TERM DEBT Long-term debt was comprised as follows at (in thousands of dollars):
DECEMBER 31, ---------------------- 1995 1996 ---------- ---------- Unsecured Senior Notes due December 15, 2006 10.25% interest payable semi-annually............................... $ -- $ 150,000 Unsecured Senior Notes repaid in 1996: 9.95% interest payable quarterly.................................... 28,000 -- 10.35% interest payable quarterly................................... 5,000 -- Unsecured Senior Notes due July 15, 2005: 11.5% interest payable semi-annually................................ 30,000 30,000 Less--unamortized discount.......................................... (1,599) (1,384) Other................................................................. 350 1,042 ---------- ---------- 61,751 179,658 Less current maturities............................................... (4,254) (425) ---------- ---------- $ 57,497 $ 179,233 ---------- ---------- ---------- ----------
Long-term debt has the following scheduled principal maturities for the years ended December 31 (in thousands of dollars): 1997--$425; 1998--$380; 1999--$221; 2000--$16; 2001--$6,000; thereafter-- $172,616. 10.25% SENIOR NOTES--On December 19, 1996, the Company issued $150 million, principal amount, of unsecured 10.25% Senior Notes (the "Notes") in a private offering. The proceeds of the Notes, which were issued at par, after placement fees and offering expenses, were approximately $143.2 million. Approximately $31.7 million of such proceeds were used to redeem the outstanding principal amounts of the 9.95% and 10.35% Senior Notes, $24.5 million and $4.4 million, respectively, plus a make-whole premium, F-10 LODGENET ENTERTAINMENT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 4--LONG-TERM DEBT (CONTINUED) resulting from their early redemption, of approximately $2.8 million. Approximately $20.4 million of the proceeds was used to prepay all outstanding amounts under the Company's revolving credit facility. The remaining proceeds of approximately $91.1 million, were invested in highly liquid, interest-bearing securities pending their use for funding capital expenditures to expand the Company's businesses. The Notes were issued to qualified institutional buyers or other accredited investors pursuant to a registration rights agreement under which the Company is obligated to either (i) consummate an exchange offer pursuant to an effective registration statement or (ii) cause resales of the Notes to be registered pursuant to an effective shelf registration. If one such registration event does not occur within 180 days of the initial sale, the interest rate on the Notes will increase by 0.5% per year, and if one such registration event does not occur within nine months of the initial sale the interest rate on the Notes will increase by an additional 0.5% per year. The 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 Notes contain covenants which 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. The 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 Notes with the proceeds of one or more public equity offerings. 9.95% AND 10.35% SENIOR NOTES--On September 15, 1994, the Company sold $28 million principal amount of 9.95% Senior Notes in a private transaction with three insurance companies. The 9.95% Senior Notes were issued at par and mature on August 1, 2003. Proceeds from the sale of the 9.95% Senior Notes, after issuance expenses, were approximately $27.6 million and such proceeds were used to repay previous borrowings and to provide approximately $15.1 million of capital for the continuing growth of the Company's guest pay services business. On April 13, 1995, the Company and the holders of the Company's 9.95% Senior Notes amended the Note Purchase Agreement governing such 9.95% Senior Notes and concurrently the Company issued $5 million principal amount of 10.35% Senior Notes, under the Note Purchase Agreement, in a private placement to certain holders of the Company's 9.95% Senior Notes. Proceeds from the issue, after issuance related expenses, were approximately $4.9 million, and were used to repay previous borrowings and for expansion of the Company's guest pay services business. The 9.95% and 10.35% Senior Notes were redeemed as part of the refinancing in which the 10.25% Senior Notes were issued in 1996. 11.5% SENIOR NOTES--During 1995, the Company issued $30 million principal amount of 11.5% Senior Subordinated Notes due July 15, 2005 (the "Subordinated Notes") to three insurance companies in two separate private placements. Mandatory annual principal payments of $6 million commence July 15, 2001. Proceeds from the issuance of the Subordinated Notes, net of original issue discount and issuance-related expenses, were approximately $27.3 million and were used (i) to repay previous borrowings and (ii) to provide funding for capital expenditures to expand the Company's guest pay services business. The Company issued a total of 480,000 warrants (see Note 9) to purchase common stock of the Company in F-11 LODGENET ENTERTAINMENT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 4--LONG-TERM DEBT (CONTINUED) connection with the issuance of the Subordinated Notes and the value of the warrants, $1.68 million, was recorded in stockholders' equity and shown as a discount on the Subordinated Notes. As part of the refinancing transaction in which the 10.25% Senior Notes were issued, the holders of the Subordinated Notes adopted the covenants and ranking of the 10.25% Senior Notes. At December 31, 1995 and 1996, the estimated fair value of the 11.5% Senior Notes was approximately $31.5 and $29.2 million, respectively. The fair value of the 10.25% Senior Notes at December 31, 1996 approximated their carrying value. NOTE 5--REVOLVING CREDIT FACILITY On December 19, 1996 the Company amended and restated its revolving credit facility with National Westminster Bank Plc, as Agent ("NatWest"), to provide for an increase in the total lending commitments under the facility from $60 million to $100 million. The amended facility is secured by (i) a first priority security interest in all of the Company's and certain of its subsidiaries tangible and intangible assets, and (ii) a guarantee by ResNet of all amounts advanced to it by the Company. Amounts outstanding under the amended facility bear interest at either (i) LIBOR (London Inter Bank Offered Rate) plus from 1.25% to 2.00% or (ii) the greater of (a) the NatWest Prime Rate plus from .25% to 1.00% or (b) the federal funds rate plus from .75% to 1.50%; depending on the Company's total leverage, as defined in the agreement. At December 31, 1996, the applicable interest rate on the amended facility would have been 9.875%. The commitment under the amended facility may be increased to $175 million, subject to the consent of NatWest, but is subject to a scheduled reduction of 15% beginning in December 1998 and annually thereafter as follows: December 1999--20%; December 2000--20%; December 2001--20%; and December 2002--25%. The amended facility provides for the issuance of Letters of Credit, subject to customary terms and conditions; and includes terms and conditions which require the maintenance of certain financial ratios, limit the incurrence of additional indebtedness, limit the incurrence of certain liens, limit certain payments or distributions in respect of the Common Stock, and provide for acceleration of principal repayment in certain circumstances. As of December 31, 1996, the Company had outstanding Standby Letters of Credit of $1.2 million, there were no amounts outstanding under the amended facility, and the Company was in compliance with all covenants, terms and conditions of the amended facility. NOTE 6--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. 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 F-12 LODGENET ENTERTAINMENT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 6--COMMITMENTS AND CONTINGENCIES (CONTINUED) operating cash flows, as defined in the agreement, with PRIMESTAR Partners, L.P. The Agreement has an initial term of 15 years and includes various restrictions, including default and termination provisions. PURCHASE COMMITMENTS--In connection with the agreements in which the Company sold an equity interest in ResNet to TCI Satellite (see Note 11), the Company agreed to purchase $5.4 million of satellite receiving equipment from TCI Satellite. The Company has other 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, 1996 require future minimum lease payments, as follows (in thousands of dollars): 1997--$339; 1998-- $135; 1999--$119; 2000 and thereafter--$132. LITIGATION--On February 16, 1995, On Command Corporation filed a lawsuit in Federal District Court for the Northern District of California asserting patent infringement by the Company relating to its on-demand video system. The complaint requests an unspecified amount of damages and injunctive relief. The Company filed an answer and counterclaim to the lawsuit on April 17, 1995, denying the claims, asserting affirmative defenses and asserting a counterclaim for declaratory relief. The Company is currently engaged in litigation with respect to this matter and trial is expected to begin on September 29, 1997. Based on the advice of special patent counsel and technical experts retained by the Company, as well as the Company's independent analysis, the Company believes that the claims of infringement are unfounded. The Company has and will continue to vigorously defend itself in this matter. Patent litigation is especially complex, both as to the factual allegations and the legal interpretation of patent claim language, which makes such lawsuits difficult to assess with certainty. While the Company and its patent counsel believe that the Company has a number of defenses available which, if properly considered, would eliminate or minimize any liability for the Company, an unexpected unfavorable resolution, depending on the amount and timing, could adversely affect the Company. Although the outcome of any litigation cannot be predicted with certainty, the Company believes that the ultimate disposition of this matter will not have a material adverse effect on the Company's financial position or results of operations. 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. CONSTRUCTION COMMITMENTS--In June 1996, the Company acquired approximately 22.6 acres of land in Sioux Falls, South Dakota for approximately $339,000; and in September 1996, entered into a contract for construction of a National Headquarters and Distribution Center. Approximately $2.5 million had been expended under the construction contract as of December 31, 1996. The completed cost of the new facility is estimated to be approximately $15.0 million, and the new facility is expected to be ready for occupancy during the third quarter of 1997. NOTE 7--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, 1995 and 1996. 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. F-13 LODGENET ENTERTAINMENT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 7--STOCKHOLDERS' EQUITY (CONTINUED) COMMON STOCK--On May 23, 1996, the Company sold 3,200,000 shares of common stock at $13.00 per share in a public offering. On June 10, 1996 the Company sold an additional 480,000 shares of common stock, representing the underwriters' exercise of their over-allotment option in accordance with the underwriting agreement. Net proceeds from these issuances, after underwriters' commissions and other offering-related expenses, were approximately $44.6 million. Such proceeds were used to repay borrowings under the Company's revolving credit facility, approximately $25.9 million, and to provide capital for the expansion of the Company's lodging and residential businesses. NOTE 8--STOCK OPTION PLANS The Company has stock options plans which provide for the granting of up to 1,926,792 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, 1996 and outstanding options expire through 2006. The following is a summary of the stock option activity for the years ending December 31:
1995 1996 ----------------------- ----------------------- WEIGHTED WEIGHTED AVERAGE AVERAGE NUMBER OF EXERCISE NUMBER OF EXERCISE SHARES PRICE SHARES PRICE ---------- ----------- ---------- ----------- Beginning of year.................................................. 1,058,291 $ 2.30 1,318,426 $ 4.21 Granted............................................................ 336,000 $ 9.40 239,000 $ 12.66 Exercised.......................................................... (73,365) $ 0.35 (93,256) $ 0.62 Forfeited or canceled.............................................. (2,500) $ 8.85 (12,500) $ 8.51 ---------- ---------- End of year........................................................ 1,318,426 $ 4.21 1,451,670 $ 5.79 ---------- ---------- ---------- ---------- Exercisable at end of year......................................... 894,010 $ 1.64 907,671 $ 2.66 ---------- ---------- ---------- ----------
The following is a summary of stock options outstanding as of December 31, 1996:
OUTSTANDING OPTIONS EXERCISABLE OPTIONS ---------------------------------------- ---------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE REMAINING TERM EXERCISE EXERCISE PRICE RANGE NUMBER IN YEARS PRICE NUMBER PRICE - ------------------ ---------- --------------- ----------- --------- ----------- $0.23 to $0.46 513,649 6.8 $ 0.38 513,649 $ 0.38 $2.77 to $3.23 244,522 6.6 $ 2.90 244,522 $ 2.90 $7.00 to $9.55 220,999 8.0 $ 8.29 80,250 $ 8.68 $10.78 to $14.75 472,500 9.0 $ 12.00 69,250 $ 11.75 ---------- --------- 1,451,670 7.6 $ 5.79 907,671 $ 2.66 ---------- --------- ---------- ---------
F-14 LODGENET ENTERTAINMENT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 8--STOCK OPTION PLANS (CONTINUED) The weighted average "fair value" of options granted during the year ended December 31 was as follows:
1995 1996 --------- --------- Weighted average fair value per option granted............................... $ 4.47 $ 6.01 --------- --------- --------- ---------
The "fair value" of each option granted was estimated as of the grant date using the Black-Scholes option valuation model. The following assumptions were made in estimating fair value: (i) dividend yield-- none, (ii) weighted average risk-free interest rate--6.4%, (iii) weighted average expected life--5.0 years, and (iv) weighted average expected volatility--44.0%. The Company accounts for its stock option compensation plans in accordance with Accounting Principles Board Opinion No. 25. Accordingly, because the Company's stock option plans are fixed plans, no compensation cost has been charged to operations for any period presented. Had compensation cost been determined in accordance with Statement of Financial Accounting Standards No. 123, net loss before extraordinary loss and net loss would have been 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):
YEAR ENDED DECEMBER 31, --------------------- 1995 1996 --------- ---------- Pro Forma: Loss before extraordinary loss............................................................ $ (8,526) $ (14,794) Net loss.................................................................................. (8,526) (18,047) Per common share: Loss before extraordinary loss............................................................ $ (1.15) $ (1.54) Net loss.................................................................................. (1.15) (1.88)
NOTE 9--WARRANTS In connection with the Company's initial public offering in 1993, the Company issued warrants to purchase 75,000 shares of common stock of the Company to the underwriters. The exercise price of such warrants is $16.20 and the warrants expire on October 14, 1998. In connection with the 1995 issuance of the 11.5% Senior Notes (see Note 4), 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. F-15 LODGENET ENTERTAINMENT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 10--EXTRAORDINARY LOSS In connection with the issuance of its unsecured, 9.95% Senior Notes during 1994, the Company terminated its then bank credit facility, which had been secured by all of the Company's assets. As a consequence of the early termination of this facility, the Company wrote off related, unamortized debt issuance costs of $1,324,000. 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 11--SALE OF EQUITY INTEREST IN SUBSIDIARY On October 21, 1996, the Company and its subsidiary, ResNet, entered into agreements with TCI Satellite Entertainment, Inc. ("TCI Satellite") under which ResNet sold a 4.99% equity interest in ResNet to TCI Satellite 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. Pursuant to a signal carriage agreement, TCI Satellite has agreed to provide ResNet with nationwide access to certain satellite programming signals. In addition to the aforementioned cash investment, TCI Satellite agreed to advance up to $34.6 million to ResNet during the five year period ending October 21, 2001, under a convertible note agreement (the "Convertible Note"). The Convertible Note matures on October 21, 2001, subject to a one-year extension at the election of ResNet, and on that date is subject to mandatory conversion into a maximum 32.0% equity interest in ResNet. The Convertible Note is unsecured, is not subject to prepayment, has no recourse to the Company, and is subordinated to all present and future borrowings by the Company to the extent that the proceeds thereof are advanced to ResNet. Further, the Convertible Note is subordinated to inter-company loans or advances to ResNet by the Company. Interest accrues (generally at TCI Satellite's average borrowing rate) on amounts outstanding under the Convertible Note, but such interest is not paid in cash and does not increase the equity interest into which the Convertible Note will be mandatorily converted. Such interest accrues only until maturity or such time as the balance of outstanding principal and accrued interest is $34.6 million, whichever is sooner. The proceeds of the Convertible Note will be distributed in satellite receiving equipment from TCI Satellite. The Company, ResNet and TCI Satellite have agreed that all amounts advanced by the Company to ResNet shall be in accordance with an inter-company promissory note, which shall bear interest In connection with the aforementioned agreements, the Company has granted TCI Satellite an option to acquire an additional 13.01% equity interest in ResNet, first exercisable 60 days following October 21, 1999. Such option is to be exercised in exchange for an additional cash investment in ResNet based on ResNet's then fair market value. Such option will expire, subject to certain limitations, coincident with the maturity of the Convertible Note. LIQUIDATION PREFERENCE--The Company, ResNet and TCI Satellite have agreed that in the event of a sale of ResNet, or a sale of substantially all of the assets of ResNet, that (i) repayment of any inter-company loans or advances by the Company to ResNet shall have preference to any other distribution, (ii) that after repayment of such advances, that TCI Satellite shall be entitled to a preferential return of its F-16 LODGENET ENTERTAINMENT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 11--SALE OF EQUITY INTEREST IN SUBSIDIARY (CONTINUED) aggregate investment in ResNet and (iii) that after the repayment of amounts in accordance with items (i) and (ii), that any further distribution shall be determined on a per-share basis. NOTE 12--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, 1996, the Company had net operating loss carry-forwards in excess of $54 million for Federal income tax purposes. Such carry-forwards expire through 2011, 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, --------------------- 1995 1996 --------- ---------- Deferred tax liabilities: Tax over book depreciation........................................... $ 3,777 $ 9,899 Deferred tax assets: Net operating loss carry-forwards.................................... 9,939 18,502 Deferred programming................................................. 540 624 Other................................................................ 345 1,135 --------- ---------- 10,824 20,261 Valuation allowance.................................................. (7,047) (10,362) --------- ---------- 3,777 9,899 --------- ---------- 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 13--ACCRUED EXPENSES Accrued expenses were comprised as follows at (in thousands of dollars):
DECEMBER 31, -------------------- 1995 1996 --------- --------- Accrued taxes.............................................................. $ 702 $ 523 Accrued compensation....................................................... 1,277 1,953 Accrued interest........................................................... 1,748 2,120 Other...................................................................... 18 -- --------- --------- $ 3,745 $ 4,596 --------- --------- --------- ---------
F-17 LODGENET ENTERTAINMENT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 14--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 1995: Total revenue.............................................. $ 13,392 $ 14,581 $ 17,414 $ 17,826 Gross profit............................................... 7,222 8,023 9,484 9,574 Loss before extraordinary loss............................. (1,480) (1,443) (1,292) (2,811) Net loss................................................... (1,480) (1,443) (1,292) (2,811) Per common share (1): Loss before extraordinary loss........................... $ (0.20) $ (0.19) $ (0.17) $ (0.38) Net loss................................................. (0.20) (0.19) (0.17) (0.38) For 1996: Total revenue.............................................. $ 20,368 $ 23,202 $ 27,116 $ 27,035 Gross profit............................................... 11,254 12,780 14,425 14,883 Loss before extraordinary loss............................. (2,873) (3,395) (1,857) (5,232) Net loss................................................... (2,873) (3,395) (1,857) (8,485) Per common share (1): Loss before extraordinary loss........................... $ (0.39) $ (0.38) $ (0.17) $ (.47) Net loss (2)............................................. (0.39) (0.38) (0.17) (.76)
- ------------------------ (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, 1996 included an extraordinary loss of approximately $3.3 million relating to the early retirement of debt (see Note 10). NOTE 15--EVENT SUBSEQUENT TO DECEMBER 31, 1996 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, par value $.01, 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 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 F-18 LODGENET ENTERTAINMENT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 15--EVENT SUBSEQUENT TO DECEMBER 31, 1996 (CONTINUED) 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. F-19 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 28, 1997. 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 28, 1997 F-20 LODGENET ENTERTAINMENT CORPORATION AND SUBSIDIARIES SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS (DOLLAR AMOUNTS IN THOUSANDS)
COLUMN C -------------------------- COLUMN B ADDITIONS ----------- -------------------------- COLUMN D COLUMN E COLUMN A BALANCE CHARGED TO CHARGED TO ------------- ----------- - ---------------------------------------------------- BEGINNING COSTS AND OTHER DEDUCTIONS BALANCE END CLASSIFICATION OF PERIOD EXPENSES EXPENSES (NOTE 1) OF PERIOD - ---------------------------------------------------- ----------- ------------- ----------- ------------- ----------- Year Ended December 31, 1994: Allowance for Doubtful Accounts................... $ 179 $ 226 $ -- $ 177 $ 228 ----- ----- ----------- ----- ----- ----- ----- ----------- ----- ----- Year Ended December 31, 1995: Allowance for Doubtful Accounts................... $ 228 $ 343 $ -- $ 161 $ 410 ----- ----- ----------- ----- ----- ----- ----- ----------- ----- ----- Year Ended December 31, 1996: Allowance for Doubtful Accounts................... $ 410 $ 922 $ -- $ 547 $ 785 ----- ----- ----------- ----- ----- ----- ----- ----------- ----- -----
- ------------------------ (1) All deductions from reserves were for the purposes for which such reserves were created. F-21 EX-3.1 2 EXHIBIT 3.1 CERTIFICATE OF INCORPORATION CERTIFICATE OF DESIGNATION OF SERIES A PARTICIPATING PREFERRED STOCK OF LODGENET ENTERTAINMENT CORPORATION We, Tim C. Flynn, the Chief Executive Officer, and Eric R. Jacobsen, the Secretary, of LodgeNet Entertainment Corporation, a corporation organized and existing under the General Corporation Law of the State of Delaware, DO HEREBY CERTIFY: That pursuant to the authority conferred upon the Board of Directors by the Certificate of Incorporation of the Corporation, the said Board of Directors on February 28, 1997, adopted the following resolution creating a series of 200,000 shares of Preferred Stock designated as Series A Participating Preferred Stock: RESOLVED, that pursuant to the authority vested in the Board of Directors of the Corporation in accordance with the provisions of its Certificate of Incorporation, a series of Preferred Stock of the Corporation be and it hereby is created, and that the designation and amount thereof and the powers, preferences and relative, participating, optional and other special rights of the shares of such series, and the qualifications, limitations or restrictions thereof are as follows: 1. DESIGNATION AND AMOUNT. The shares of such series shall be designated as "Series A Participating Preferred Stock," par value $.01 per share, and the number of shares constituting such series shall be 200,000. Such number of shares may be increased or decreased by resolution of the Board of Directors; provided, that no decrease shall reduce the number of shares of Series A Participating Preferred Stock to a number less than that of the shares then outstanding plus the number of shares issuable upon exercise of outstanding rights, options or warrants or upon conversion of outstanding securities issued by the Corporation. 2. DIVIDENDS AND DISTRIBUTIONS. (A) Subject to the prior and superior rights of the holders of any shares of any series of Preferred Stock ranking prior and superior to the shares of Series A Participating Preferred Stock with respect to dividends, the holders of shares of Series A Participating Preferred Stock in preference to the holders of shares of Common Stock, par value $.01 per share (the "Common Stock"), of the Corporation and any other junior stock, shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the first day of March, June, September and December in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series A Participating Preferred Stock in an amount per share (rounded to the nearest cent) equal to the greater of (a) $25.00, or (b) subject to the provision for adjustment hereinafter set forth, 1,000 times the aggregate per share amount of all cash dividends, and 1,000 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock, since the immediately preceding Quarterly Dividend Payment Date, or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series A Participating Preferred Stock. In the event the Corporation shall at any time after the close of business on March 10, 1997 (the "Rights Declaration Date") (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, by reclassification or otherwise, then in each such case the amount to which holders of shares of Series A Participating Preferred Stock were entitled immediately prior to such event under clause (b) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) The Corporation shall declare a dividend or distribution on the Series A Participating Preferred Stock as provided in paragraph (A) above immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock); provided that, in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $25.00 per share on the Series A Participating Preferred Stock shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date. (C) Dividends shall begin to accrue and be cumulative on outstanding shares of Series A Participating Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares of Series A Participating Preferred Stock unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly -2- Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series A Participating Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series A Participating Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series A Participating Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be no more than 30 days prior to the date fixed for the payment thereof. 3. VOTING RIGHTS. The holders of shares of Series A Participating Preferred Stock shall have the following voting rights: (A) Subject to the provision for adjustment hereinafter set forth, each share of Series A Participating Preferred Stock shall entitle the holder thereof to 1,000 votes on all matters submitted to a vote of the stockholders of the Corporation. In the event the Corporation shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock into a greater number of shares, or (iii) combine the outstanding Common Stock into a smaller number of shares, by reclassification or otherwise, then in each such case the number of votes per share to which holders of shares of Series A Participating Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock outstanding immediately prior to such event. (B) Except as otherwise provided herein, in the Certificate of Incorporation or by law, the holders of shares of Series A Participating Preferred Stock and the holders of shares of Common Stock and any other capital stock of the Corporation having general voting rights shall vote together as one class on all matters submitted to a vote of stockholders of the Corporation. (C) (i) If at any time dividends on any Series A Participating Preferred Stock shall be in arrears in an amount equal to six quarterly dividends thereon, the holders of the Series A Participating Preferred Stock, -3- voting as a separate series from all other series of Preferred Stock and classes of capital stock, shall be entitled to elect two members of the Board of Directors in addition to any Directors elected by any other series, class or classes of securities and the authorized number of Directors will automatically be increased by two. Promptly thereafter, the Board of Directors of this Corporation shall, as soon as may be practicable, call a special meeting of holders of Series A Participating Preferred Stock for the purpose of electing such members of the Board of Directors. Said special meeting shall in any event be held within 45 days of the occurrence of such arrearage. (ii) During any period when the holders of Series A Participating Preferred Stock, voting as a separate series, shall be entitled and shall have exercised their right to elect two Directors, then and during such time as such right continues (a) the then authorized number of Directors shall be increased by two, and the holders of Series A Participating Preferred Stock, voting as a separate series, shall be entitled to elect the additional Directors so provided for, and (b) each such additional Director shall not be a member of any existing class of the Board of Directors, but shall serve until the next annual meeting of stockholders for the election of Directors, or until his or her successor shall be elected and shall qualify, or until his or her right to hold such office terminates pursuant to the provisions of this Section 3(C). (iii) A Director elected pursuant to the terms hereof may be removed with or without cause by the holders of Series A Participating Preferred Stock entitled to vote in an election of such Director. (iv) If, during any interval between annual meetings of stockholders for the election of Directors and while the holders of Series A Participating Preferred Stock shall be entitled to elect two Directors, there are fewer than two such Directors in office by reason of resignation, death or removal, then, promptly thereafter, the Board of Directors shall call a special meeting of the holders of Series A Participating Preferred Stock for the purpose of filling such vacancy(ies) and such vacancy(ies) shall be filled at such special meeting. Such special meeting shall in any event be held within 45 days of the occurrence of any such vacancy(ies). (v) At such time as the arrearage is fully cured, and all dividends accumulated and unpaid on any shares of Series A Participating Preferred Stock outstanding are paid, and, in addition thereto, at least one regular -4- dividend has been paid subsequent to curing such arrearage, the term of office of any Director elected pursuant to this Section 3(C), or his or her successor, shall automatically terminate, and the authorized number of Directors shall automatically decrease by two, and the rights of the holders of the shares of the Series A Participating Preferred Stock to vote as provided in this Section 3(C) shall cease, subject to renewal from time to time upon the same terms and conditions. (D) Except as set forth herein or as otherwise provided by law, holders of Series A Participating Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock and any other capital stock of the Corporation having general voting rights as set forth herein) for taking any corporate action. 4. CERTAIN RESTRICTIONS. (A) Whenever quarterly dividends or other dividends or distributions payable on the Series A Participating Preferred Stock as provided in Section 2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series A Participating Preferred Stock outstanding shall have been paid in full, the Corporation shall not (i) declare or pay dividends on, make any other distributions on, or redeem or purchase or otherwise acquire for consideration any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Participating Preferred Stock; (ii) declare or pay dividends on or make any other distributions on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Participating Preferred Stock except dividends paid ratably on the Series A Participating Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; (iii) redeem or purchase or otherwise acquire for consideration shares of any stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Participating Preferred Stock provided that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such parity stock in exchange for shares of any stock of the Corporation ranking junior (either as to dividends or -5- upon dissolution, liquidation or winding up) to the Series A Participating Preferred Stock; or (iv) purchase or otherwise acquire for consideration any shares of Series A Participating Preferred Stock or any shares of stock ranking on a parity with the Series A Participating Preferred Stock except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. (B) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under paragraph (A) of this Section 4, purchase or otherwise acquire such shares at such time and in such manner. 5. REACQUIRED SHARES. Any shares of Series A Participating Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and canceled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock to be created by resolution or resolutions of the Board of Directors, subject to the conditions and restrictions on issuance set forth herein. 6. LIQUIDATION, DISSOLUTION OR WINDING UP. (A) Upon any liquidation (voluntary or otherwise), dissolution or winding up of the Corporation, no distribution shall be made to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Participating Preferred Stock unless, prior thereto, the holders of shares of Series A Participating Preferred Stock shall have received per share, the greater of $1,000.00 or 1,000 times the payment made per share of Common Stock, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment (the "Series A Liquidation Preference"). Following the payment of the full amount of the Series A Liquidation Preference, no additional distributions shall be made to the holders of shares of Series A Participating Preferred Stock unless, prior thereto, the holders of shares of Common Stock shall have received an amount per share (the "Common Adjustment") equal to the quotient obtained by dividing (i) the Series A Liquidation Preference by (ii) 1,000 (as appropriately adjusted as set forth in subparagraph (C) below to reflect such events as stock splits, stock dividends and -6- recapitalization with respect to the Common Stock) (such number in clause (ii), the "Adjustment Number"). Following the payment of the full amount of the Series A Liquidation Preference and the Common Adjustment in respect of all outstanding shares of Series A Participating Preferred Stock and Common Stock, respectively, holders of Series A Participating Preferred Stock and holders of shares of Common Stock shall receive their ratable and proportionate share of the remaining assets to be distributed in the ratio of the Adjustment Number to 1 with respect to such Preferred Stock and Common Stock, on a per share basis, respectively. (B) In the event there are not sufficient assets available to permit payment in full of the Series A Liquidation Preference and the liquidation preferences of all other series of Preferred Stock, if any, which rank on a parity with the Series A Participating Preferred Stock then such remaining assets shall be distributed ratably to the holders of such parity shares in proportion to their respective liquidation preferences. In the event there are not sufficient assets available to permit payment in full of the Common Adjustment, then such remaining assets shall be distributed ratably to the holders of Common Stock. (C) In the event the Corporation shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, by reclassification or otherwise, then in each such case the Adjustment Number in effect immediately prior to such event shall be adjusted by multiplying such Adjustment Number by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. 7. CONSOLIDATION, MERGER, ETC. In case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case the shares of Series A Participating Preferred Stock shall at the same time be similarly exchanged or changed in an amount per share (subject to the provision for adjustment hereinafter set forth) equal to 1,000 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Corporation shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series A Participating Preferred Stock shall be adjusted by multiplying such amount by a fraction the numerator -7- of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that are outstanding immediately prior to such event. 8. REDEMPTION. The shares of Series A Participating Preferred Stock shall not be redeemable. 9. RANKING. The Series A Participating Preferred Stock shall rank junior to all other series of the Corporation's Preferred Stock as to the payment of dividends and the distribution of assets, unless the terms of any such series shall provide otherwise. 10. AMENDMENT. The Certificate of Incorporation and the By-Laws of the Corporation shall not be further amended in any manner which would materially alter or change the powers, preferences or special rights of the Series A Participating Preferred Stock so as to affect them adversely without the affirmative vote of the holders of at least 66-2/3% of the outstanding shares of Series A Participating Preferred Stock voting separately as a class. 11. FRACTIONAL SHARES. Series A Participating Preferred Stock may be issued in fractions of a share which shall entitle the holder, in proportion to such holder's fractional shares, to exercise voting rights, receive dividends, participate in distributions and to have the benefit of all other rights of holders of Series A Participating Preferred Stock. IN WITNESS WHEREOF, we have executed and subscribed this Certificate and do affirm the foregoing as true under the penalties of perjury as of the 5th day of March 1997. /s/ Tim C. Flynn ------------------------------------- Tim C. Flynn, Chief Executive Officer Attest: /s/ Eric R. Jacobsen ------------------------------------- Eric R. Jacobsen, Secretary -8- STATE OF DELAWARE SECRETARY OF STATE DIVISION OF CORPORATIONS FILED 09:01 AM 10/08/1993 932815155 - 2346943 THIS PLAN AND AGREEMENT OF MERGER (this "Agreement"), dated October 7, 1993, entered into by and between LodgeNet Entertainment Corporation, a South Dakota corporation ("LEC"), and LNet, Inc., a Delaware corporation ("LNET"), said corporations being hereinafter sometimes referred to collectively as the "Constituent Corporations," WITNESSETH: WHEREAS, LEC is a corporation duly organized and existing under the laws of the State of South Dakota; WHEREAS, LNET is a corporation duly organized and existing under the laws of the State of Delaware; WHEREAS, on the date of this Agreement, Lec has the authority to issue 250,000 shares of common stock, par value $0.01 per share ("LEC Common Stock"), and 20,000 shares of preferred stock, par value $100 per share ("LEC Preferred Stock"), issuable in one or more series, consisting of 15,000 shares authorized to be issued as Series A Preferred Stock ("LEC Series A") and 3,800 shares authorized to be issued as Series B Convertible Preferred Stock ("LEC Series B") and 1,200 for which no series as yet has been designated, of which 40,972 shares of the LEC Common Stock, and 16,725 shares of LEC Preferred Stock, consisting of 12,925 shares of LEC Series A and 3,800 shares of LEC Series B, are issued and outstanding; WHEREAS, on the date of this Agreement, LNET has the authority to issue 100 shares of common stock, par value $0.01 per share (the "LNET Common Stock"), and 100 shares of preferred stock, par value $0.01 per share, of which 100 shares of LNET Common Stock are issued and outstanding and owned by LEC; WHEREAS, the respective Boards of Directors of the Constituent Corporations have determined that it is advisable and in the best interests of each such corporation and its stockholders to effect the reincorporation of LEC in the State of Delaware by merging LEC into LNET upon the terms and conditions herein provided; and WHEREAS, the respective Boards of Directors of the Constituent Corporations have approved this Agreement and have directed that this Agreement be submitted to a vote of their respective stockholders; NOW THEREFORE, in consideration of the mutual agreements and covenants set forth herein, the Constituent Corporations hereby agree as follows: 1. Merger. LEC and LNET shall be merged into a single corporation in accordance with the laws of the States of South Dakota and Delaware by merging LEC with and into LNET, with LNET being the corporation surviving the merger (the "Merger"). LNET, as such surviving corporation, is hereinafter sometimes referred to as the "Surviving Corporation." This Agreement shall be submitted to the stockholders of each of the Constituent Corporations as provided by law, and upon the approval or adoption thereof by the stockholders of each of the Constituent Corporations in accordance with the laws of the States of South Dakota and Delaware, respectively, the Merger provided for herein shall become effective (the "Effective Time") upon the execution and filing of such documents and the doing of such acts and things as shall be required for accomplishing the Merger under the laws of the States of South Dakota and Delaware. 2. Amendment and Restatement of Certificate of Incorporation of LNET. To change the name of the Surviving Corporation to "LodgeNet Entertainment Corporation," to increase the authorized shares of stock of the Surviving Corporation and to make the other changes set forth therein, the certificate of incorporation of LNET is hereby amended and restated to read -2- as set forth in Exhibit A attached hereto, which is incorporated into this Agreement by this reference thereto. The certificate of incorporation of LNET, as so amended and restated, shall constitute the restated certificate of incorporation of the Surviving Corporation until further amended in the manner provided by law. The restated certificate of incorporation set forth in said Exhibit A attached hereto may be certified separate and apart from this Agreement as the restated certificate of incorporation of the Surviving Corporation. 3. Succession. At the Effective Time, by virtue of the Merger, LNET shall succeed to LEC in the manner of, and as more fully set forth in, Section 259 of the General Corporation Law of the State of Delaware. 4. Stock and Stock Certificates. 4.1 Stock. At the Effective Time, by virtue of the Merger: (a) Each share of LEC common stock outstanding immediately prior thereto shall be changed and converted into 21.654 fully paid and nonassessable shares of common stock of the Surviving Corporation, except that no fractional shares of common stock of the Surviving Corporation shall be issued and in lieu thereof the Surviving Corporation shall pay to any holder of LEC common stock who otherwise would be entitled to a fractional share of common stock of the Surviving Corporation as a result of the Merger the cash equivalent of such fractional share, based on an assumed cash value of $11.00 per whole share; (b) Each share of the LEC Series A outstanding immediately prior thereto shall be changed and converted into an entitlement to a cash payment of $1,000 per share, plus all dividends -3- accrued to the Effective Time but previously unpaid, with such payment to be made by the Surviving Corporation upon delivery to it for cancellation of the certificates for the shares of LEC Series A to be paid for in each case, duly endorsed to the Surviving Corporation; (c) Each share of the LEC Series B outstanding immediately prior thereto shall be changed and converted into 598.33467 fully paid and nonassessable shares of common stock of the Surviving Corporation, except that no fractional shares of common stock of the Surviving Corporation shall be issued and in lieu thereof the Surviving Corporation shall pay to each holder of shares of LEC Series B who otherwise would be entitled to a fractional share of common stock of the Surviving Corporation as a result of the Merger the cash equivalent of such fractional share, based on an assumed cash value of $11.00 per whole share; and (d) Each share of LNET Common Stock outstanding immediately prior thereto shall be canceled and retired and resume the action of subordinated but unissued shares of common stock of the Surviving Corporation, and no shares of common stock of the Surviving Corporation or other securities of, or payment by, the Surviving Corporation shall be issued or made in respect thereof. 4.2 Stock Certificates. After the Effective Time, all of the outstanding certificates which immediately prior to that time represented shares of stock of LEC shall be deemed for all purposes to evidence ownership of the class and number of shares of stock of the -4- Surviving Corporation and/or an entitlement to payment into which such shares of stock of LEC were changed and converted under the provisions of Section 4.1 above and the registered owner of any such outstanding stock certificate shall, until such certificate shall have been surrendered for transfer or cancellation or otherwise accounted for to the Surviving Corporation or its transfer agent, have and be entitled to exercise precisely the same rights with respect to, and to receive any dividends and other distributions upon, the shares of stock of the Surviving Corporation evidenced thereby as such owner would if it held certificates issued by the Surviving Corporation to represent such shares of stock of the Surviving Corporation. 5. Stock Options and Employee Benefit Plans. 5.1. Stock Options. At the Effective Time and by virtue of the Merger, the Surviving Corporation will assume and continue all of the outstanding options to purchase LEC Common Stock granted by LEC prior to the date of this Agreement, consisting of the options set forth in Exhibit B attached hereto, except that the shares subject to such option shall be converted into shares of common stock of the Surviving Corporation as set forth in such Exhibit B with the price per share of common stock of the Surviving Corporation under such stock options changed to be as set forth in such Exhibit B. 5.2. Employee Benefit Plans. At the Effective Time and by virtue of the Merger, the Surviving Corporation will assume all obligations of LEC under any and all employee benefit plans of LEC in effect immediately prior to the Effective Time with respect to which employee rights or accrued benefits existed immediately prior to the Effective Time. As of the Effective Time, reference to LEC in any and all such plans shall be deemed changed to refer to the Surviving Corporation. -5- 6. Bylaws; Corporate Offices. 6.1. Bylaws. The bylaws of LNET in effect immediately prior to the Effective Time shall continue in full force and effect as the bylaws of the Surviving Corporation, without change until such bylaws are duly amended in accordance with the provisions thereof and applicable law. 6.2 Directors. The directors of LNET immediately prior to the Effective Time shall continue as the directors of the Surviving Corporation for terms of office that expire according to the terms of the restated certificate of incorporation of the Surviving Corporation and its bylaws. 6.3. Officers. The officers of LNET immediately prior to the Effective Time shall continue as the officers of the Surviving Corporation in accordance with the provisions of the bylaws of the Corporation. 7. General. 7.1. Further Assurances. From time to time, as and when required by the Surviving Corporation or by its successors or assigns, there shall be executed and delivered on behalf of LEC such deeds and other instruments, and there shall be taken or caused to be taken by it such further and other action, as shall be appropriate or necessary in order to vest, perfect or confirm, of record or otherwise, in the Surviving Corporation the title to and possession of all the property, interests, assets, rights, privileges, immunities, powers, franchises, and authority of LEC and otherwise to carry out the purposes of this Agreement, and the officers and directors of the Surviving Corporation are fully authorized in the name and on behalf of LEC or otherwise to take any and all such action and to execute and deliver any and all such deeds and other instruments. 7.2. Amendment. At any time before approval hereof by the stockholders of either of the Constituent Corporations, this Agreement may be amended, modified or -6- supplemented by written agreement of the parties thereto in any manner as may be determined in the judgment of the respective Boards of Directors of LNET and LEC to be necessary, desirable or expedient in order to clarify the intention of the parties hereto or to effect or facilitate the purpose and intent of this Agreement; provided, however, that this Agreement may be amended, modified or supplemented after it has been approved by the stockholders of the Constituent Corporations only to the extent permitted by South Dakota law and by Delaware law. 7.3. Abandonment. At any time before the Effective Time, this Agreement may be terminated and the Merger may be abandoned by the majority vote of the entire Board of Directors of either LEC or LNET, or both, notwithstanding the approval of this Agreement by the stockholders of each such corporation, if circumstances arise which, in the judgment of the Board of Directors of either corporation, make such abandonment in the best interest of either corporation and its stockholders. 7.4. Governing Law. This Agreement shall in all respects be construed, interpreted and enforced in accordance with and governed by the laws of the State of Delaware and, so far as applicable, the merger provisions of the South Dakota Business Corporation Act. 7.5. Counterparts. In order to facilitate the filing and recording of this Agreement, the same may be executed in any number of counterparts, each of which shall be deemed to be an original. -7- IN WITNESS WHEREOF, this Agreement, having first been duly approved by resolution duly adopted by the Boards of Directors of LEC and LNET, is hereby executed on behalf of each such corporation by their respective officers thereunto duly authorized. LODGENET ENTERTAINMENT CORPORATION By /s/ STEPHEN D. TRUCKENMILLER -------------------------------- Its Vice President ------------------------------- (Corporate Seal) ATTEST: /s/ JAMES T. NICHOLS - ------------------------------------- James T. Nichols, Assistant Secretary LNET, INC. By /s/ STEVEN D. TRUCKENMILLER -------------------------------- Its Vice President ------------------------------- (Corporate Seal) ATTEST: /s/ JAMES T. NICHOLS - ------------------------------------- James T. Nichols, Assistant Secretary -8- CERTIFICATE OF ASSISTANT SECRETARY OF LODGENET ENTERTAINMENT CORPORATION The undersigned, being the Assistant Secretary of LodgeNet Entertainment Corporation, does hereby certify that the holders of all of the outstanding stock of said corporation dispensed with a meeting and vote of stockholders, and all of the stockholders entitled to vote consented in writing, pursuant to the provisions of Section 228 of the General Corporation Law of the State of Delaware, to the adoption of the foregoing Plan and Agreement of Merger. Dated October 7, 1993. /s/ JAMES T. NICHOLS ------------------------------------- James T. Nichols, Assistant Secretary of LodgeNet Entertainment Corporation -9- CERTIFICATE OF ASSISTANT SECRETARY OF LNET, INC. The undersigned, being the Assistant Secretary of LNet, Inc., does hereby certify that the sole stockholder of said corporation dispensed with a meeting and vote of the sole stockholder, and the sole stockholder consented in writing, pursuant to the provisions of Section 228 of the General Corporation Law of the State of Delaware, to the adoption of the foregoing Plan and Agreement of Merger. Dated October 7, 1993. /s/ JAMES T. NICHOLS ------------------------------------- James T. Nichols, Assistant Secretary of LNet, Inc. -10- EXHIBIT A RESTATED CERTIFICATE OF INCORPORATION OF LNET, INC. LNet, Inc., a corporation organized and existing under the laws of the State of Delaware (the "Corporation"), hereby certifies as follows: 1. The present name of the Corporation is LNet, Inc. 2. The date of filing the Corporation's original Certificate of Incorporation with the Secretary of State of the State of Delaware is August 10, 1993. 3. The text of the Certificate of Incorporation of the Corporation is hereby amended and restated to read as follows: FIRST. The name of the corporation is LodgeNet Entertainment Corporation (the "Corporation"). SECOND. The address of the Corporation's registered office in the State of Delaware is 1209 Orange Street, in the City of Wilmington, County of New Castle. The name of its registered agent at such address is The Corporation Trust Company. THIRD. The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware ("DGCL"). FOURTH. The total number of shares of stock which the Corporation shall have authority to issue is 25,000,000 of which 20,000,000 shall be common stock, par value $0.01 per share (the "Common Stock"), and 5,000,000 shall be preferred stock, par value $0.01 per share (the "Preferred Stock"). The Preferred Stock may be issued from time to time in one or more series, each of which (a) shall consist of such number of shares and shall have such distinctive serial designation; (b) may have such voting powers, full or limited, or may be without voting powers; (c) may be subject to redemption at such time or times and at such prices; (d) may be entitled to receive dividends (which may be cumulative or noncumulative) at such rate or rates, on such conditions, and at such times, and payable in preference or in such relation to the dividends payable on any other class or classes or series of stock; (e) may have such rights upon the dissolution, or upon any distribution of the assets, of the Corporation; (f) may be made convertible into, or exchangeable for, shares of any other class or classes or of any other series of the same or any other class or classes of stock of the Corporation, at such price or prices or at such rates of exchange and with such adjustments; and (g) shall have such other relative, participating, optional or other special rights, qualifications, limitations and/or restrictions thereof, all as shall be stated and expressed in the resolution or resolutions providing for the issue of the particular series of such Preferred Stock from time to time adopted by the Board of Directors of the Corporation pursuant to authority so to do which is hereby vested in such Board. The Common Stock shall entitle the holders thereof to one vote per share on each proposition submitted to such holders for their vote thereon. The number of authorized shares of any class of stock of the Corporation, including without limitation the Preferred Stock and the Common Stock, may be increased or decreased by the affirmative vote of the holders of a majority of all of the stock of the Corporation entitled to vote, without regard to class. FIFTH. A. The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors (the "Board"). B. The Board shall consist of not less than three nor more than nine directors, with the exact number of directors to be fixed from time to time by or in the manner provided in the Corporation's bylaws. C. The Board shall be divided into three classes of directors, as nearly equal in number as possible, with the term of office of directors in the first class to expire at the annual election of directors of the Corporation in 1994, the term of office of directors of the second class to expire at the annual election of directors of the Corporation in 1995 and the term of office of directors of the third class to expire at the annual election of directors of the Corporation in 1996. At each annual election of directors of the Corporation, directors chosen to succeed those whose terms then expire shall be elected for a term of office expiring at the third succeeding annual election of directors of the Corporation occurring after their election. Notwithstanding the foregoing provisions of this Paragraph C, each director of the Corporation shall serve until his or her successor is duly elected and qualified or until his or her earlier death, resignation or removal. D. In the event of any increase or decrease in the authorized number of directors, the newly created or eliminated directorships resulting from such increase or decrease shall be apportioned by the Board among the three classes of directors so as to maintain such classes as nearly equal in number as possible. No decrease in the number of directors constituting the Board shall shorten the term of any incumbent director. E. Stockholders of the Corporation may effect the removal of a director from the Board only for cause. F. Notwithstanding the foregoing, whenever the holders of any one or more series of capital stock issued by the Corporation having a preference over the Common Stock as to dividends or upon liquidation shall have the right, voting separately by class or series, to elect directors at an annual or special meeting of stockholders, the election, term of office, filling of vacancies, terms of removal and other features of such directorships shall be governed by the resolution or 2 resolutions establishing such series adopted pursuant to Article FOURTH and such directors so elected shall not be divided into classes pursuant to this Article FIFTH or counted in the limits on the number of directors of the Corporation set forth in this Article FIFTH, unless expressly so provided by such resolution or resolutions. G. Advance notice of nominations for the election of directors and advance notice of other proposals for stockholder action shall be given in the manner set forth in the bylaws of the Corporation. SIXTH. In furtherance and not in limitation of the powers conferred by statute, the Board is expressly authorized: A. To adopt, alter, amend and repeal the bylaws of the Corporation (except insofar as the bylaws of the Corporation adopted by the stockholders of the Corporation shall otherwise provide); and B. To provide for the indemnification of directors, officers, employees and agents of the Corporation, and of persons who serve other enterprises in such or similar capacities at the request of the Corporation, in a manner and to the extent permitted by the DGCL or any other applicable law, as may from time to time be in effect. SEVENTH. A director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except that this provision does not eliminate or limit the liability of a director (a) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (b) for acts or conclusions not in good faith or which involve intentional misconduct or a knowing violation of law, (c) under Section 174 of the DGCL, or (d) for any transaction from which the director derived any improper personal benefit. If the DGCL is amended at any time to further eliminate or limit, or to authorize further elimination or limitation of, the personal liability of directors, then the personal liability of a director to the Corporation or its stockholders shall be eliminated or limited to the full extent permitted by the DGCL, as so amended. Any repeal or modification of this Article SEVENTH shall not adversely affect any right or protection of a director of the Corporation existing at the time of such repeal or modification. EIGHTH. Elections of directors of the Corporation need not be by written ballot unless the bylaws of the Corporation shall so provide. NINTH. Any action required or permitted to be taken by the holders of Common Stock of the Corporation must be taken at a duly called annual or special meeting of such holders and may not be taken by written consent of such holders. TENTH. The Corporation expressly elects to be governed by Section 203 of the DGCL. 3 ELEVENTH. Whenever a compromise or arrangement is proposed between the Corporation and its creditors or any class of them and/or between the Corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of the Corporation or of any creditor or stockholder thereof or on the application of any receiver or receivers appointed for the Corporation under the provisions of Section 219 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for the Corporation under the provisions of Section 279 of Title 8 of the Delaware Code, order a meeting of the creditors or class of creditors and/or of the stockholders or class of stockholders of the Corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of the Corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of the Corporation as consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders, of the Corporation, as the case may be, and also on the Corporation. TWELFTH. The Corporation reserves the right to amend its Certificate of Incorporation, and to thereby change or repeal any provision therein contained from time to time, in the manner prescribed at the time by statute, and all rights conferred upon stockholders by such Certificate of Incorporation are granted subject to this reservation, except that any amendment or repeal of Article NINTH of this Certificate of Incorporation, or of this Article, shall require the affirmative vote of the holders of at least 80% of the then outstanding voting stock of the Corporation. - - - - 4. This Restated Certificate of Incorporation was duly adopted in accordance with the provisions of sections 242 & 245 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, said LNET, INC. has caused this Restated Certificate of Incorporation to be signed by Steven Truckenmiller, its Vice President, and its corporate seal to be hereunto affixed and attested by James T. Nichols, its Assistant Secretary, this 7th day of October, 1993. LNET, INC. [Corporate Seal] By /s/ Steven D. Truckenmiller ----------------------------------- Vice President By /s/ James T. Nichols ------------------------------- Assistant Secretary 4 EX-4.1 3 EXHIBIT 4.1 REGISTRATION RIGHTS AGMT - -------------------------------------------------------------------------------- REGISTRATION RIGHTS AGREEMENT Dated December 16, 1996 between LODGENET ENTERTAINMENT CORPORATION and MORGAN STANLEY & CO. INCORPORATED NATWEST CAPITAL MARKETS LIMITED MONTGOMERY SECURITIES - -------------------------------------------------------------------------------- REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made and entered into December 16, 1996, between LODGENET ENTERTAINMENT CORPORATION, a Delaware corporation (the "Company"), and MORGAN STANLEY & CO. INCORPORATED, NATWEST CAPITAL MARKETS LIMITED and MONTGOMERY SECURITIES (collectively, the "Placement Agents"). This Agreement is made pursuant to the Placement Agreement dated the date hereof, between the Company and the Placement Agents (the "Placement Agreement"), which provides for the sale by the Company to the Placement Agents of an aggregate of $150,000,000 principal amount of the Company's 10 1/4% Senior Notes due 2006 (the "Securities"). In order to induce the Placement Agents to enter into the Placement Agreement, the Company has agreed to provide to the Placement Agents and their direct and indirect transferees the registration rights set forth in this Agreement. The execution of this Agreement is a condition to the closing under the Placement Agreement. In consideration of the foregoing, the parties hereto agree as follows: 1. DEFINITIONS. As used in this Agreement, the following capitalized defined terms shall have the following meanings: "1933 ACT" shall mean the Securities Act of 1933, as amended from time to time. "1934 ACT" shall mean the Securities Exchange Act of 1934, as amended from time to time. "CLOSING DATE" shall mean the Closing Date as defined in the Placement Agreement. "COMPANY" shall have the meaning set forth in the preamble to this Agreement and shall also include the Company's successors. "EXCHANGE OFFER" shall mean the exchange offer by the Company of Exchange Securities for Registrable Securities pursuant to Section 2(a) hereof. "EXCHANGE OFFER REGISTRATION" shall mean a registration under the 1933 Act effected pursuant to Section 2(a) hereof. 2 "EXCHANGE OFFER REGISTRATION STATEMENT" shall mean an exchange offer registration statement on Form S-4 (or, if applicable, on another appropriate form) and all amendments and supplements to such registration statement, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. "EXCHANGE SECURITIES" shall mean securities issued by the Company under the Indenture containing terms identical to the Securities (except that (i) interest thereon shall accrue from the last date on which interest was paid on the Securities or, if no such interest has been paid, from December 19, 1996 and (ii) the Exchange Securities will not contain restrictions on transfer) and to be offered to Holders of Securities in exchange for Securities pursuant to the Exchange Offer. "HOLDER" shall mean the Placement Agents, for so long as they own any Registrable Securities, and each of their successors, assigns and direct and indirect transferees who become registered owners of Registrable Securities under the Indenture; PROVIDED that for purposes of Sections 4 and 5 of this Agreement, the term "Holder" shall include Participating Broker-Dealers (as defined in Section 4(a)). "INDENTURE" shall mean the Indenture relating to the Securities to be dated as of December 19, 1996 between the Company and Marine Midland Bank, as trustee, and as the same may be amended from time to time in accordance with the terms thereof. "MAJORITY HOLDERS" shall mean the Holders of a majority of the aggregate principal amount of outstanding Registrable Securities; PROVIDED that whenever the consent or approval of Holders of a specified percentage of Registrable Securities is required hereunder, Registrable Securities held by the Company or any of its affiliates (as such term is defined in Rule 405 under the 1933 Act) (other than the Placement Agents or subsequent holders of Registrable Securities if such subsequent holders are deemed to be such affiliates solely by reason of their holding of such Registrable Securities) shall not be counted in determining whether such consent or approval was given by the Holders of such required percentage or amount. "PERSON" shall mean an individual, partnership, corporation, trust or unincorporated organization, or a government or agency or political subdivision thereof. "PLACEMENT AGENTS" shall have the meaning set forth in the preamble to this Agreement. "PLACEMENT AGREEMENT" shall have the meaning set forth in the preamble to this Agreement. 3 "PROSPECTUS" shall mean the prospectus included in a Registration Statement, including any preliminary prospectus, and any such prospectus as amended or supplemented by any prospectus supplement, including a prospectus supplement with respect to the terms of the offering of any portion of the Registrable Securities covered by a Shelf Registration Statement, and by all other amendments and supplements to such prospectus, and in each case including all material incorporated by reference therein. "REGISTRABLE SECURITIES" shall mean the Securities; PROVIDED, HOWEVER, that the Securities shall cease to be Registrable Securities (i) when a Registration Statement with respect to such Securities shall have been declared effective under the 1933 Act and such Securities shall have been exchanged or sold, as the case may be, pursuant to such Registration Statement, (ii) when such Securities have been sold to the public pursuant to Rule 144(k) (or any similar provision then in force, but not Rule 144A) under the 1933 Act or (iii) when such Securities shall have ceased to be outstanding. "REGISTRATION EXPENSES" shall mean any and all expenses incident to performance of or compliance by the Company with this Agreement, including without limitation: (i) all SEC, stock exchange or National Association of Securities Dealers, Inc. registration and filing fees, (ii) all fees and expenses incurred in connection with compliance with state securities or blue sky laws (including reasonable fees and disbursements of counsel for any underwriters or Holders in connection with blue sky qualification of any of the Exchange Securities or Registrable Securities), (iii) all expenses of any Persons in preparing or assisting in preparing, word processing, printing and distributing any Registration Statement, any Prospectus, any amendments or supplements thereto, any underwriting agreements, securities sales agreements and other documents relating to the performance of and compliance with this Agreement, (iv) all rating agency fees, (v) all fees and disbursements relating to the qualification of the Indenture under applicable securities laws, (vi) the fees and disbursements of the Trustee and its counsel, (vii) the fees and disbursements of counsel for the Company and, in the case of a Shelf Registration Statement, the fees and disbursements of one counsel for the Holders (which counsel shall be selected by the Majority Holders and which counsel may also be counsel for the Placement Agents) and (viii) the fees and disbursements of the independent public accountants of the Company, including the expenses of any special audits or "cold comfort" letters required by or incident to such performance and compliance, but excluding fees and expenses of counsel to the underwriters (other than fees and expenses set forth in clause (ii) above) or the Holders and underwriting discounts and commissions and transfer taxes, if any, relating to the sale or disposition of Registrable Securities by a Holder. 4 "REGISTRATION STATEMENT" shall mean any registration statement of the Company that covers any of the Exchange Securities or Registrable Securities pursuant to the provisions of this Agreement and all amendments and supplements to any such Registration Statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. "SEC" shall mean the Securities and Exchange Commission. "SHELF REGISTRATION" shall mean a registration effected pursuant to Section 2(b) hereof. "SHELF REGISTRATION STATEMENT" shall mean a "shelf" registration statement of the Company pursuant to the provisions of Section 2(b) of this Agreement which covers all of the Registrable Securities (but no other securities unless approved by the Holders whose Registrable Securities are covered by such Shelf Registration Statement) on an appropriate form under Rule 415 under the 1933 Act, or any similar rule that may be adopted by the SEC, and all amendments and supplements to such registration statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. "TRUSTEE" shall mean the trustee with respect to the Securities under the Indenture. "UNDERWRITTEN REGISTRATION" or "UNDERWRITTEN OFFERING" shall mean a registration in which Registrable Securities are sold to an Underwriter (as hereinafter defined) for reoffering to the public. 2. REGISTRATION UNDER THE 1933 ACT. (a) To the extent not prohibited by any applicable law or applicable interpretation of the Staff of the SEC, the Company shall use its best efforts to cause to be filed, no later than 90 days after the Closing Date an Exchange Offer Registration Statement covering the offer by the Company to the Holders to exchange all of the Registrable Securities for Exchange Securities and to have such Registration Statement remain effective until the closing of the Exchange Offer. The Company shall commence the Exchange Offer promptly after the Exchange Offer Registration Statement has been declared effective by the SEC and use its best efforts to have the Exchange Offer consummated not later than 60 days after such effective date. The Company shall commence the Exchange Offer by mailing the related exchange offer Prospectus and accompanying documents to each Holder stating, in addition to such other disclosures as are required by applicable law: 5 (i) that the Exchange Offer is being made pursuant to this Registration Rights Agreement and that all Registrable Securities validly tendered will be accepted for exchange; (ii) the dates of acceptance for exchange (which shall be a period of at least 20 business days from the date such notice is mailed) (the "Exchange Dates"); (iii) that any Registrable Security not tendered will remain outstanding and continue to accrue interest, but will not retain any rights under this Registration Rights Agreement; (iv) that Holders electing to have a Registrable Security exchanged pursuant to the Exchange Offer will be required to surrender such Registrable Security, together with the enclosed letters of transmittal, to the institution and at the address specified in the notice prior to the close of business on the last Exchange Date; and (v) that Holders will be entitled to withdraw their election, not later than the close of business on the last Exchange Date, by sending to the institution and at the address specified in the notice a telegram, telex, facsimile transmission or letter setting forth the name of such Holder, the principal amount of Registrable Securities delivered for exchange and a statement that such Holder is withdrawing his election to have such Securities exchanged. As soon as practicable after the last Exchange Date, the Company shall: (i) accept for exchange Registrable Securities or portions thereof tendered and not validly withdrawn pursuant to the Exchange Offer; and (ii) deliver, or cause to be delivered, to the Trustee for cancellation all Registrable Securities or portions thereof so accepted for exchange by the Company and issue, and cause the Trustee to promptly authenticate and mail to each Holder, an Exchange Security equal in principal amount to the principal amount of the Registrable Securities surrendered by such Holder. The Company shall use its best efforts to complete the Exchange Offer as provided above and shall comply with the applicable requirements of the 1933 Act, the 1934 Act and other applicable laws and regulations in connection with the Exchange Offer. The Exchange Offer shall not be subject to any conditions, other than that the Exchange Offer does not violate applicable law or any applicable interpretation of the Staff of the SEC. The Company shall inform the Placement Agents of the names and addresses of the Holders to whom the Exchange Offer is made, and the Placement Agents shall have the right, subject to applicable 6 law, to contact such Holders and otherwise facilitate the tender of Registrable Securities in the Exchange Offer. (b) In the event that (i) the Company determines that the Exchange Offer Registration provided for in Section 2(a) above is not available or may not be consummated as soon as practicable after the last Exchange Date because it would violate applicable law or the applicable interpretations of the Staff of the SEC, (ii) the Exchange Offer is not for any other reason consummated by September 19, 1997 or (iii) the Exchange Offer has been completed and in the opinion of counsel for the Placement Agents, with respect to any unsold allotments held by the Placement Agents, a Registration Statement must be filed and a Prospectus must be delivered by the Placement Agents in connection with any offering or sale of Registrable Securities, the Company shall use its best efforts to cause to be filed as soon as practicable after such determination, date or notice of such opinion of counsel is given to the Company, as the case may be, a Shelf Registration Statement providing for the sale by the Holders of all of the Registrable Securities and to have such Shelf Registration Statement declared effective by the SEC. In the event the Company is required to file a Shelf Registration Statement solely as a result of the matters referred to in clause (iii) of the preceding sentence, the Company shall file and use its best efforts have declared effective by the SEC both an Exchange Offer Registration Statement pursuant to Section 2(a) with respect to all Registrable Securities and a Shelf Registration Statement (which may be a combined Registration Statement with the Exchange Offer Registration Statement) with respect to offers and sales of Registrable Securities held by the Placement Agents after completion of the Exchange Offer. The Company agrees to use its best efforts to keep the Shelf Registration Statement continuously effective until the expiration of the period referred to in Rule 144(k) with respect to all Registrable Securities covered by the Shelf Registration Statement or such shorter period that will terminate when all of the Registrable Securities covered by the Shelf Registration Statement have been sold pursuant to the Shelf Registration Statement. The Company further agrees to supplement or amend the Shelf Registration Statement if required by the rules, regulations or instructions applicable to the registration form used by the Company for such Shelf Registration Statement or by the 1933 Act or by any other rules and regulations thereunder for shelf registration or if reasonably requested by a Holder with respect to information relating to such Holder, and to use its best efforts to cause any such amendment to become effective and such Shelf Registration Statement to become usable as soon as thereafter practicable. The Company agrees to furnish to the Holders of Registrable Securities copies of any such supplement or amendment promptly after its being used or filed with the SEC. (c) The Company shall pay all Registration Expenses in connection with the registration pursuant to Section 2(a) or Section 2(b). Each Holder shall pay all underwriting discounts and commissions and transfer taxes, if any, relating to the sale or disposition of such Holder's Registrable Securities pursuant to the Shelf Registration Statement. 7 (d) An Exchange Offer Registration Statement pursuant to Section 2(a) hereof or a Shelf Registration Statement pursuant to Section 2(b) hereof will not be deemed to have become effective unless it has been declared effective by the SEC; PROVIDED, HOWEVER, that, if, after it has been declared effective, the offering of Registrable Securities pursuant to a Shelf Registration Statement is interfered with by any stop order, injunction or other order or requirement of the SEC or any other governmental agency or court, such Registration Statement will be deemed not to have become effective during the period of such interference until the offering of Registrable Securities pursuant to such Registration Statement may legally resume. As provided for in the Indenture, in the event that the Exchange Offer is not consummated, and if a Shelf Registration Statement is required hereby, the Shelf Registration Statement is not declared effective (i) on or prior to June 19, 1997, the interest rate on the Securities (and the Exchange Securities) will increase by 0.5% per annum and (ii) on or prior to September 19, 1997, the interest rate on the Securities (and the Exchange Securities) will increase by an additional 0.5% per annum. Once the Exchange Offer is consummated and a Shelf Registration Statement is declared effective, if required hereby, the annual interest rate on the Securities shall be changed again to the original interest rate shown in the second paragraph of this Agreement. (e) Without limiting the remedies available to the Placement Agents and the Holders, the Company acknowledges that any failure by the Company to comply with its obligations under Section 2(a) and Section 2(b) hereof may result in material irreparable injury to the Placement Agents or the Holders for which there is no adequate remedy at law, that it will not be possible to measure damages for such injuries precisely and that, in the event of any such failure, the Placement Agents or any Holder may obtain such relief as may be required to specifically enforce the Company's obligations under Section 2(a) and Section 2(b) hereof. 3. REGISTRATION PROCEDURES. In connection with the obligations of the Company with respect to the Registration Statements pursuant to Section 2(a) and Section 2(b) hereof, the Company shall as expeditiously as possible: (a) prepare and file with the SEC a Registration Statement on the appropriate form under the 1933 Act, which form (x) shall be selected by the Company and (y) shall, in the case of a Shelf Registration, be available for the sale of the Registrable Securities by the selling Holders thereof and (z) shall comply as to form in all material respects with the requirements of the applicable form and include all financial statements required by the SEC to be filed therewith, and use its best efforts to cause such Registration Statement to become effective and remain effective in accordance with Section 2 hereof; 8 (b) prepare and file with the SEC such amendments and post-effective amendments to each Registration Statement as may be necessary to keep such Registration Statement effective for the applicable period and cause each Prospectus to be supplemented by any required prospectus supplement and, as so supplemented, to be filed pursuant to Rule 424 under the 1933 Act; to keep each Prospectus current during the period described under Section 4(3) and Rule 174 under the 1933 Act that is applicable to transactions by brokers or dealers with respect to the Registrable Securities or Exchange Securities; (c) in the case of a Shelf Registration, furnish to each Holder of Registrable Securities, to counsel for the Placement Agents, to counsel for the Holders and to each Underwriter of an Underwritten Offering of Registrable Securities, if any, without charge, as many copies of each Prospectus, including each preliminary Prospectus, and any amendment or supplement thereto and such other documents as such Holder or Underwriter may reasonably request, in order to facilitate the public sale or other disposition of the Registrable Securities; and the Company consents to the use of such Prospectus and any amendment or supplement thereto in accordance with applicable law by each of the selling Holders of Registrable Securities and any such Underwriters in connection with the offering and sale of the Registrable Securities covered by and in the manner described in such Prospectus or any amendment or supplement thereto in accordance with applicable law; (d) use its best efforts to register or qualify the Registrable Securities under all applicable state securities or "blue sky" laws of such jurisdictions as any Holder of Registrable Securities covered by a Registration Statement shall reasonably request in writing by the time the applicable Registration Statement is declared effective by the SEC, to cooperate with such Holders in connection with any filings required to be made with the National Association of Securities Dealers, Inc. and do any and all other acts and things which may be reasonably necessary or advisable to enable such Holder to consummate the disposition in each such jurisdiction of such Registrable Securities owned by such Holder; PROVIDED, HOWEVER, that the Company shall not be required to (i) qualify as a foreign corporation or as a dealer in securities in any jurisdiction where it would not otherwise be required to qualify but for this Section 3(d), (ii) file any general consent to service of process or (iii) subject itself to taxation in any such jurisdiction if it is not so subject; (e) in the case of a Shelf Registration, notify each Holder of Registrable Securities, counsel for the Holders and counsel for the Placement Agents promptly and, if requested by any such Holder or counsel, confirm such advice in writing (i) when a Registration Statement has become effective and when any post-effective amendment thereto has been filed and becomes effective, (ii) of any request by the 9 SEC or any state securities authority for amendments and supplements to a Registration Statement and Prospectus or for additional information after the Registration Statement has become effective, (iii) of the issuance by the SEC or any state securities authority of any stop order suspending the effectiveness of a Registration Statement or the initiation of any proceedings for that purpose, (iv) if, between the effective date of a Registration Statement and the closing of any sale of Registrable Securities covered thereby, the representations and warranties of the Company contained in any underwriting agreement, securities sales agreement or other similar agreement, if any, relating to the offering cease to be true and correct in all material respects or if the Company receives any notification with respect to the suspension of the qualification of the Registrable Securities for sale in any jurisdiction or the initiation of any proceeding for such purpose, (v) of the happening of any event during the period a Shelf Registration Statement is effective which makes any statement made in such Registration Statement or the related Prospectus untrue in any material respect or which requires the making of any changes in such Registration Statement or Prospectus in order to make the statements therein not misleading and (vi) of any determination by the Company that a post-effective amendment to a Registration Statement would be appropriate; (f) make every reasonable effort to obtain the withdrawal of any order suspending the effectiveness of a Registration Statement at the earliest possible moment and provide immediate notice to each Holder of the withdrawal of any such order; (g) in the case of a Shelf Registration, furnish to each Holder of Registrable Securities, without charge, at least one conformed copy of each Registration Statement and any post-effective amendment thereto (without documents incorporated therein by reference or exhibits thereto, unless requested); (h) in the case of a Shelf Registration, cooperate with the selling Holders of Registrable Securities to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be sold and not bearing any restrictive legends and enable such Registrable Securities to be in such denominations (consistent with the provisions of the Indenture) and registered in such names as the selling Holders may reasonably request at least one business day prior to the closing of any sale of Registrable Securities; (i) in the case of a Shelf Registration, upon the occurrence of any event contemplated by Section 3(e)(v) or (vi) hereof, use its best efforts to prepare and file with the SEC a supplement or post-effective amendment to a Registration Statement or the related Prospectus or any document incorporated therein by reference or file any other required document so that, as thereafter delivered to the purchasers of the 10 Registrable Securities, such Prospectus will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. The Company agrees to notify the Holders to suspend use of the Prospectus as promptly as practicable after the occurrence of such an event, and the Holders hereby agree to suspend use of the Prospectus upon receipt of such notice until the Company has amended or supplemented the Prospectus to correct such misstatement or omission; (j) a reasonable time prior to the filing of any Registration Statement, any Prospectus or any amendment to a Registration Statement or amendment or supplement to a Prospectus, provide copies of such document to the Placement Agents and their counsel (and, in the case of a Shelf Registration Statement, the Holders and their counsel) and make such of the representatives of the Company as shall be reasonably requested by the Placement Agents or their counsel (and, in the case of a Shelf Registration Statement, the Holders or their counsel) available for discussion of such document, and shall not at any time file or make any amendment to the Registration Statement, any Prospectus or any amendment of or supplement to a Registration Statement or a Prospectus, of which the Placement Agents and their counsel (and, in the case of a Shelf Registration Statement, the Holders and their counsel) shall not have previously been advised and furnished a copy or to which the Placement Agents or their counsel (and, in the case of a Shelf Registration Statement, the Holders or their counsel) shall object; (k) obtain a CUSIP number for all Exchange Securities or Registrable Securities, as the case may be, not later than the effective date of a Registration Statement; (l) cause the Indenture to be qualified under the Trust Indenture Act of 1939, as amended (the "TIA"), in connection with the registration of the Exchange Securities or Registrable Securities, as the case may be, cooperate with the Trustee and the Holders to effect such changes to the Indenture as may be required for the Indenture to be so qualified in accordance with the terms of the TIA and execute, and use its best efforts to cause the Trustee to execute, all documents as may be required to effect such changes and all other forms and documents required to be filed with the SEC to enable the Indenture to be so qualified in a timely manner; (m) in the case of a Shelf Registration, make available for inspection by a representative of the Holders of the Registrable Securities, any Underwriter participating in any disposition pursuant to such Shelf Registration Statement, and attorneys and accountants designated by the Holders, at reasonable times and in a reasonable manner, all financial and other records, pertinent documents and properties of the Company, and cause the respective officers, directors and employees of the 11 Company to supply all information reasonably requested by any such representative, Underwriter, attorney or accountant in connection with a Shelf Registration Statement; (n) if reasonably requested by any Holder of Registrable Securities covered by a Registration Statement, (i) promptly incorporate in a Prospectus supplement or post-effective amendment such information with respect to such Holder as such Holder reasonably requests to be included therein and (ii) make all required filings of such Prospectus supplement or such post-effective amendment as soon as the Company has received notification of the matters to be incorporated in such filing; and (o) in the case of a Shelf Registration, enter into such customary agreements and take all such other actions in connection therewith (including those requested by the Holders of a majority of the Registrable Securities being sold) in order to expedite or facilitate the disposition of such Registrable Securities including, but not limited to, an Underwritten Offering and in such connection, (i) to the extent possible, make such representations and warranties to the Holders and any Underwriters of such Registrable Securities with respect to the business of the Company and its subsidiaries, the Registration Statement, Prospectus and documents incorporated by reference or deemed incorporated by reference, if any, in each case, in form, substance and scope as are customarily made by issuers to underwriters in underwritten offerings and confirm the same if and when requested, (ii) obtain opinions of counsel to the Company (which counsel and opinions, in form, scope and substance, shall be reasonably satisfactory to the Holders and such Underwriters and their respective counsel) addressed to each selling Holder and Underwriter of Registrable Securities, covering the matters customarily covered in opinions requested in underwritten offerings, (iii) obtain "cold comfort" letters from the independent certified public accountants of the Company (and, if necessary, any other certified public accountant of any subsidiary of the Company, or of any business acquired by the Company for which financial statements and financial data are or are required to be included in the Registration Statement) addressed to each selling Holder and Underwriter of Registrable Securities, such letters to be in customary form and covering matters of the type customarily covered in "cold comfort" letters in connection with underwritten offerings, and (iv) deliver such documents and certificates as may be reasonably requested by the Holders of a majority in principal amount of the Registrable Securities being sold or the Underwriters, and which are customarily delivered in underwritten offerings, to evidence the continued validity of the representations and warranties of the Company made pursuant to clause (i) above and to evidence compliance with any customary conditions contained in an underwriting agreement. 12 In the case of a Shelf Registration Statement, the Company may require each Holder of Registrable Securities to furnish to the Company such information regarding the Holder and the proposed distribution by such Holder of such Registrable Securities as the Company may from time to time reasonably request in writing. No holder shall be entitled to use the Prospectus unless and until such Holder shall have furnished the information required by this Section 3(o) and all such other information required to be disclosed in order to make such information previously furnished to the Company by such Holder not materially misleading. The Company may exclude from any Shelf Registration Statement the Registrable Securities of any Holder who does not furnish such information. In the case of a Shelf Registration Statement, each Holder agrees that, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 3(e)(v) or (vi) hereof, such Holder will forthwith keep such notice confidential and discontinue disposition of Registrable Securities pursuant to a Registration Statement until such Holder's receipt of the copies of the supplemented or amended Prospectus contemplated by Section 3(i) hereof, and, if so directed by the Company, such Holder will deliver to the Company (at its expense) all copies in its possession, other than permanent file copies then in such Holder's possession, of the Prospectus covering such Registrable Securities current at the time of receipt of such notice. If the Company shall give any such notice to suspend the disposition of Registrable Securities pursuant to a Registration Statement, the Company shall extend the period during which the Registration Statement shall be maintained effective pursuant to this Agreement by the number of days during the period from and including the date of the giving of such notice to and including the date when the Holders shall have received copies of the supplemented or amended Prospectus necessary to resume such dispositions. The Company may give any such notice only twice during any 365 day period and any such suspensions may not exceed 45 days for each suspension and there may not be more than two suspensions in effect during any 365 day period. The Holders of Registrable Securities covered by a Shelf Registration Statement who desire to do so may sell such Registrable Securities in an Underwritten Offering. In any such Underwritten Offering, the investment banker or investment bankers and manager or managers (the "Underwriters") that will administer the offering will be selected by the Majority Holders of the Registrable Securities included in such offering. 4. PARTICIPATION OF BROKER-DEALERS IN EXCHANGE OFFER. (a) The Staff of the SEC has taken the position that any broker-dealer that receives Exchange Securities for its own account in the Exchange Offer in exchange for Securities that were acquired by such broker-dealer as a result of market-making or other trading activities (a "Participating Broker-Dealer"), may be deemed to be an "underwriter" within the meaning of the 1933 Act and must deliver a prospectus meeting the requirements of the 1933 Act in connection with any resale of such Exchange Securities. 13 The Company understands that it is the Staff's position that if the Prospectus contained in the Exchange Offer Registration Statement includes a plan of distribution containing a statement to the above effect and the means by which Participating Broker-Dealers may resell the Exchange Securities, without naming the Participating Broker-Dealers or specifying the amount of Exchange Securities owned by them, such Prospectus may be delivered by Participating Broker-Dealers to satisfy their prospectus delivery obligation under the 1933 Act in connection with resales of Exchange Securities for their own accounts, so long as the Prospectus otherwise meets the requirements of the 1933 Act. Each broker-dealer that receives Exchange Securities for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a Prospectus in connection with any resale of such Exchange Securities as long as required by law to do so. By so acknowledging and by delivering a Prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the 1933 Act. The Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of Exchange Securities received in exchange for Notes where such Exchange Securities were acquired for its own account by such broker-dealer as a result of market-making activities or other trading activities. (b) In light of the above, notwithstanding the other provisions of this Agreement, the Company agrees that the provisions of this Agreement as they relate to a Shelf Registration shall also apply to an Exchange Offer Registration to the extent, and with such reasonable modifications thereto as may be, reasonably requested by the Placement Agents or by one or more Participating Broker-Dealers, in each case as provided in clause (ii) below, in order to expedite or facilitate the disposition of any Exchange Securities by Participating Broker-Dealers consistent with the positions of the Staff recited in Section 4(a) above; PROVIDED that: (i) the Company shall not be required to amend or supplement the Prospectus contained in the Exchange Offer Registration Statement, as would otherwise be contemplated by Section 3(i), for a period exceeding 90 days after the last Exchange Date (as such period may be extended pursuant to the penultimate paragraph of Section 3 of this Agreement) and Participating Broker-Dealers shall not be authorized by the Company to deliver and shall not deliver such Prospectus after such period in connection with the resales contemplated by this Section 4; and (ii) the application of the Shelf Registration procedures set forth in Section 3 of this Agreement to an Exchange Offer Registration, to the extent not required by the positions of the Staff of the SEC or the 1933 Act and the rules and regulations thereunder, will be in conformity with the reasonable request to the Company by the Placement Agents or with the reasonable request in writing to the Company by one or more broker-dealers who certify to the Placement Agents and the Company in writing 14 that they anticipate that they will be Participating Broker-Dealers; and PROVIDED FURTHER that, in connection with such application of the Shelf Registration procedures set forth in Section 3 to an Exchange Offer Registration, the Company shall be obligated (x) to deal only with one entity representing the Participating Broker-Dealers, which shall be Morgan Stanley & Co. Incorporated unless it elects not to act as such representative, (y) to pay the fees and expenses of only one counsel representing the Participating Broker-Dealers, which shall be counsel to the Placement Agents unless such counsel elects not to so act and (z) to cause to be delivered only one, if any, "cold comfort" letter with respect to the Prospectus in the form existing on the last Exchange Date and with respect to each subsequent amendment or supplement, if any, effected during the period specified in clause (i) above. (c) The Placement Agents shall have no liability to the Company or any Holder with respect to any request that it may make pursuant to Section 4(b) above. 5. INDEMNIFICATION AND CONTRIBUTION. (a) The Company agrees to indemnify and hold harmless the Placement Agents, each Holder and each person, if any, who controls any Placement Agent or any Holder within the meaning of either Section 15 of the 1933 Act or Section 20 of the 1934 Act, or is under common control with, or is controlled by, any Placement Agent or any Holder, from and against all losses, claims, damages and liabilities (including, without limitation, any legal or other expenses reasonably incurred by the Placement Agent, any Holder or any such controlling or affiliated person in connection with defending or investigating any such action or claim) caused by any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement (or any amendment thereto) pursuant to which Exchange Securities or Registrable Securities were registered under the 1933 Act, including all documents incorporated therein by reference, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or caused by any untrue statement or alleged untrue statement of a material fact contained in any Prospectus (as amended or supplemented if the Company shall have furnished any amendments or supplements thereto), or caused by any omission or alleged omission to state therein a material fact necessary to make the statements therein in light of the circumstances under which they were made not misleading, except insofar as such losses, claims, damages or liabilities are caused by any such untrue statement or omission or alleged untrue statement or omission based upon information relating to the Placement Agents or any Holder furnished to the Company in writing by the Placement Agents or any selling Holder expressly for use therein; PROVIDED, HOWEVER, that the foregoing indemnity agreement with respect to any preliminary prospectus shall not inure to the benefit of any Placement Agent or any selling Holder from whom the person asserting any such losses, claims, damages or liabilities purchased securities, or any person controlling such Placement Agent or such selling Holder, 15 if a copy of the final prospectus (as then amended or supplemented if the Company shall have furnished any amendments or supplements thereto) was not sent or given by or on behalf of such Placement Agent or such selling Holder to such person, if required by law so to have been delivered, at or prior to the written confirmation of the sale of such securities to such person, and if the final prospectus (as so amended or supplemented) would have cured the defect giving rise to such losses, claims, damages or liabilities, unless such failure is the result of the failure of the Company to furnish copies of the final prospectus, any documents incorporated by reference therein and any supplements and amendments thereto as such Placement Agent or such selling Holder had reasonably requested. In connection with any Underwritten Offering permitted by Section 3, the Company will also indemnify the Underwriters, if any, selling brokers, dealers and similar securities industry professionals participating in the distribution, their officers and directors and each Person who controls such Persons (within the meaning of the Securities Act and the Exchange Act) to the same extent as provided above with respect to the indemnification of the Holders, if requested in connection with any Registration Statement. (b) Each Holder agrees, severally and not jointly, to indemnify and hold harmless the Company, the Placement Agents and the other selling Holders, and each of their respective directors, officers who sign the Registration Statement and each person, if any, who controls the Company, any Placement Agent and any other selling Holder within the meaning of either Section 15 of the 1933 Act or Section 20 of the 1934 Act to the same extent as the foregoing indemnity from the Company to the Placement Agents and the Holders, but only with reference to information relating to such Holder furnished to the Company in writing by such Holder expressly for use in any Registration Statement (or any amendment thereto) or any Prospectus (or any amendment or supplement thereto). (c) In case any proceeding (including any governmental investigation) shall be instituted involving any person in respect of which indemnity may be sought pursuant to either paragraph (a) or paragraph (b) above, such person (the "indemnified party") shall promptly notify the person against whom such indemnity may be sought (the "indemnifying party") in writing and the indemnifying party, upon request of the indemnified party, shall retain counsel reasonably satisfactory to the indemnified party to represent the indemnified party and any others the indemnifying party may designate in such proceeding and shall pay the fees and disbursements of such counsel related to such proceeding. The failure so to notify the indemnifying party: (i) will not relieve it from liability under paragraph (a) or (b) of this Section 5 unless and to the extent it did not otherwise learn of such action and such failure results in the forfeiture by the indemnifying party of substantial rights and defenses; and (ii) will not, in any event, relieve the indemnifying party from any obligations to any indemnified party other than the indemnification obligation provided in paragraph (a) or (b) of this Section 5. In any such proceeding, any indemnified party shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such indemnified party unless (i) the indemnifying party and the indemnified party shall have 16 mutually agreed to the retention of such counsel or (ii) the named parties to any such proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. Unless clause (ii) of the foregoing sentence is applicable, if any such action or proceeding is brought against any indemnified party and it notifies the indemnifying party of its commencement, the indemnifying party will be entitled to participate in, to the extent that it elects by delivering written notice to the indemnified party promptly after receiving notice of the commencement of the action or proceeding from the indemnified party, jointly with any other indemnifying party similarly notified, to assume the defense of the action or proceeding. It is understood that the indemnifying party shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for (a) the fees and expenses of more than one separate firm (in addition to any local counsel) for the Placement Agents and all persons, if any, who control any Placement Agent within the meaning of either Section 15 of the 1933 Act or Section 20 of the 1934 Act, (b) the fees and expenses of more than one separate firm (in addition to any local counsel) for the Company, its directors, its officers who sign the Registration Statement and each person, if any, who controls the Company within the meaning of either such Section and (c) the fees and expenses of more than one separate firm (in addition to any local counsel) for all Holders and all persons, if any, who control any Holders within the meaning of either such Section, and that all such fees and expenses shall be reimbursed as they are incurred. In such case involving the Placement Agents and persons who control the Placement Agent, such firm shall be designated in writing by Morgan Stanley & Co. Incorporated. In such case involving the Holders and such persons who control Holders, such firm shall be designated in writing by the Majority Holders. In all other cases, such firm shall be designated by the Company. The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent but, if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment. Notwithstanding the foregoing sentence, if at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel as contemplated by the second and third sentences of this paragraph, the indemnifying party agrees that it shall be liable for any settlement of any proceeding effected without its written consent if (i) such settlement is entered into more than 60 days after receipt by such indemnifying party of the aforesaid request and (ii) such indemnifying party shall not have reimbursed the indemnified party for such fees and expenses of counsel in accordance with such request prior to the date of such settlement. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened proceeding in respect of which such indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such proceeding. 17 (d) If the indemnification provided for in paragraph (a) or paragraph (b) of this Section 4 is unavailable to an indemnified party or insufficient in respect of any losses, claims, damages or liabilities, then each indemnifying party under such paragraph, in lieu of indemnifying such indemnified party thereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities in such proportion as is appropriate to reflect the relative fault of the indemnifying party or parties on the one hand and of the indemnified party or parties on the other hand in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative fault of the Company and the Holders shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or by the Holders and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Holders' respective obligations to contribute pursuant to this Section 5(d) are several in proportion to the respective number of Registrable Securities of such Holder that were registered pursuant to a Registration Statement. (e) The Company and each Holder agree that it would not be just or equitable if contribution pursuant to this Section 5 were determined by PRO RATA allocation or by any other method of allocation that does not take account of the equitable considerations referred to in paragraph (d) above. The amount paid or payable by an indemnified party as a result of the losses, claims, damages and liabilities referred to in paragraph (d) above shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 5, no Holder shall be required to indemnify or contribute any amount in excess of the amount by which the total price at which Registrable Securities were sold by such Holder exceeds the amount of any damages that such Holder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The remedies provided for in this Section 5 are not exclusive and shall not limit any rights or remedies which may otherwise be available to any indemnified party at law or in equity. The indemnity and contribution provisions contained in this Section 5 shall remain operative and in full force and effect regardless of (i) any termination of this Agreement, (ii) any investigation made by or on behalf of the Placement Agents, any Holder or any person controlling any Placement Agent or any Holder, or by or on behalf of the Company, its officers or directors or any person controlling the Company, (iii) acceptance of any of the Exchange Securities and (iv) any sale of Registrable Securities pursuant to a Shelf Registration Statement. 18 6. MISCELLANEOUS. (a) NO INCONSISTENT AGREEMENTS. The Company has not entered into, and on or after the date of this Agreement will not enter into, any agreement which is inconsistent with the rights granted to the Holders of Registrable Securities in this Agreement or otherwise conflicts with the provisions hereof. The rights granted to the Holders hereunder do not in any way conflict with and are not inconsistent with the rights granted to the holders of the Company's other issued and outstanding securities under any such agreements. (b) AMENDMENTS AND WAIVERS. The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given unless the Company has obtained the written consent of Holders of at least a majority in aggregate principal amount of the outstanding Registrable Securities affected by such amendment, modification, supplement, waiver or consent; PROVIDED, HOWEVER, that no amendment, modification, supplement, waiver or consents to any departure from the provisions of Section 5 hereof shall be effective as against any Holder of Registrable Securities unless consented to in writing by such Holder. (c) NOTICES. All notices and other communications provided for or permitted hereunder shall be made in writing by hand-delivery, registered first-class mail, telex, telecopier, or any courier guaranteeing overnight delivery (i) if to a Holder, at the most current address given by such Holder to the Company by means of a notice given in accordance with the provisions of this Section 6(c), which address initially is, with respect to the Placement Agents, the address set forth in the Placement Agreement; and (ii) if to the Company, initially at the Company's address set forth in the Placement Agreement and thereafter at such other address, notice of which is given in accordance with the provisions of this Section 6(c). All such notices and communications shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; five business days after received, if mailed; when answered back, if telexed; when receipt is acknowledged, if telecopied; and on the next business day if timely delivered to an air courier guaranteeing overnight delivery. Copies of all such notices, demands, or other communications shall be concurrently delivered by the person giving the same to the Trustee, at the address specified in the Indenture. 19 (d) SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of and be binding upon the successors, assigns and transferees of each of the parties, including, without limitation and without the need for an express assignment, subsequent Holders; PROVIDED that nothing herein shall be deemed to permit any assignment, transfer or other disposition of Registrable Securities in violation of the terms of the Placement Agreement. If any transferee of any Holder shall acquire Registrable Securities, in any manner, whether by operation of law or otherwise, such Registrable Securities shall be held subject to all of the terms of this Agreement, and by taking and holding such Registrable Securities such person shall be conclusively deemed to have agreed to be bound by and to perform all of the terms and provisions of this Agreement and such person shall be entitled to receive the benefits hereof. The Placement Agents (in their capacity as Placement Agents) shall have no liability or obligation to the Company with respect to any failure by a Holder to comply with, or any breach by any Holder of, any of the obligations of such Holder under this Agreement. (e) PURCHASES AND SALES OF NOTES. The Company shall not, and shall use its best efforts to cause its affiliates (as defined in Rule 405 under the 1933 Act) not to, purchase and then resell or otherwise transfer any Notes. (f) THIRD PARTY BENEFICIARY. The Holders shall be third party beneficiaries to the agreements made hereunder between the Company, on the one hand, and the Placement Agents, on the other hand, and shall have the right to enforce such agreements directly to the extent it deems such enforcement necessary or advisable to protect its rights or the rights of Holders hereunder. (g) COUNTERPARTS. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. (h) HEADINGS. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. (i) GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the internal laws of the State of New York. (j) SEVERABILITY. In the event that any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be affected or impaired thereby. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. LODGENET ENTERTAINMENT CORPORATION By /s/ Jeffrey T. Weisner -------------------------- Name: Jeffrey T. Weisner Title: Vice President - Finance, Treasurer Confirmed and accepted as of the date first above written: MORGAN STANLEY & CO. INCORPORATED NATWEST CAPITAL MARKETS LIMITED MONTGOMERY SECURITIES By Morgan Stanley & Co. Incorporated By /s/ John F. Abbot ---------------------------------- Name: John F. Abbot Title: Vice President EX-4.2 4 EXHIBIT 4.2 INDENTURE EXECUTION COPY - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- LODGENET ENTERTAINMENT CORPORATION, as Issuer and MARINE MIDLAND BANK, as Trustee ____________________ Indenture Dated as of December 19, 1996 ____________________ 10 1/4% Senior Notes due 2006 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CROSS-REFERENCE TABLE TIA Sections Indenture Sections - ------------ ------------------ Section 310(a)(1) . . . . . . . . . . . . . . . . . . 7.10 (a)(2). . . . . . . . . . . . . . . . . . . 7.10 (b) . . . . . . . . . . . . . . . . . . . . 7.08 Section 313(c). . . . . . . . . . . . . . . . . . . . 7.06; 10.02 Section 314(a). . . . . . . . . . . . . . . . . . . . 4.18; 10.02 (a)(4). . . . . . . . . . . . . . . . . . . 4.17; 10.02 (c)(1). . . . . . . . . . . . . . . . . . . 10.03 (c)(2). . . . . . . . . . . . . . . . . . . 10.03 (e) . . . . . . . . . . . . . . . . . . . . 10.04 Section 315(b). . . . . . . . . . . . . . . . . . . . 7.05; 10.02 Section 316(a)(1)(A). . . . . . . . . . . . . . . . . 6.05 (a)(1)(B) . . . . . . . . . . . . . . . . . 6.04 (b) . . . . . . . . . . . . . . . . . . . . 6.07 Section 317(a)(1) . . . . . . . . . . . . . . . . . . 6.08 (a)(2). . . . . . . . . . . . . . . . . . . 6.09 Section 318(a). . . . . . . . . . . . . . . . . . . . 10.01 (c) . . . . . . . . . . . . . . . . . . . . 10.01 Note: The Cross-Reference Table shall not for any purpose be deemed to be a part of the Indenture. TABLE OF CONTENTS Page ---- ARTICLE ONE DEFINITIONS AND INCORPORATION BY REFERENCE SECTION 1.01. Definitions.............................................. 1 SECTION 1.02. Incorporation by Reference of Trust Indenture Act........ 21 SECTION 1.03. Rules of Construction.................................... 21 ARTICLE TWO THE NOTES SECTION 2.01. Form and Dating.......................................... 22 SECTION 2.02. Restrictive Legends...................................... 23 SECTION 2.03. Execution, Authentication and Denominations.............. 25 SECTION 2.04. Registrar and Paying Agent............................... 26 SECTION 2.05. Paying Agent to Hold Money in Trust...................... 27 SECTION 2.06. Transfer and Exchange.................................... 27 SECTION 2.07. Book-Entry Provisions for Global Notes................... 28 SECTION 2.08. Special Transfer Provisions.............................. 30 SECTION 2.09. Replacement Notes........................................ 33 SECTION 2.10. Outstanding Notes........................................ 33 SECTION 2.11. Temporary Notes.......................................... 34 SECTION 2.12. Cancellation............................................. 34 SECTION 2.13. CUSIP Numbers............................................ 35 SECTION 2.14. Defaulted Interest....................................... 35 ARTICLE THREE REDEMPTION SECTION 3.01. Right of Redemption...................................... 35 SECTION 3.02. Notices to Trustee....................................... 36 SECTION 3.03. Selection of Notes to Be Redeemed........................ 36 SECTION 3.04. Notice of Redemption..................................... 36 SECTION 3.05. Effect of Notice of Redemption........................... 37 SECTION 3.06. Deposit of Redemption Price.............................. 37 SECTION 3.07. Payment of Notes Called for Redemption................... 38 SECTION 3.08. Notes Redeemed in Part................................... 38 _________________________ Note: The Table of Contents shall not for any purposes be deemed to be a part of the Indenture. ii ARTICLE FOUR COVENANTS SECTION 4.01. Payment of Notes......................................... 38 SECTION 4.02. Maintenance of Office or Agency.......................... 39 SECTION 4.03. Limitation on Indebtedness............................... 39 SECTION 4.04. Limitation on Restricted Payments........................ 41 SECTION 4.05. Limitation on Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries........................ 43 SECTION 4.06. Limitation on the Issuance and Sale of Capital Stock of Restricted Subsidiaries.................................. 44 SECTION 4.07. Limitation on Issuances of Guarantees by Restricted Subsidiaries............................................. 44 SECTION 4.08. Limitation on Transactions with Stockholders and Affiliates........................................... 45 SECTION 4.09. Limitation on Liens...................................... 46 SECTION 4.10. Limitation on Sale-Leaseback Transactions................ 46 SECTION 4.11. Limitation on Asset Sales................................ 47 SECTION 4.12. Repurchase of Notes upon a Change of Control............. 48 SECTION 4.13. Existence................................................ 48 SECTION 4.14. Payment of Taxes and Other Claims........................ 48 SECTION 4.15. Maintenance of Properties and Insurance.................. 48 SECTION 4.16. Notice of Defaults....................................... 49 SECTION 4.17. Compliance Certificates.................................. 49 SECTION 4.18. Commission Reports and Reports to Holders................ 50 SECTION 4.19. Waiver of Stay, Extension or Usury Laws.................. 50 ARTICLE FIVE SUCCESSOR CORPORATION SECTION 5.01. When Company May Merge, Etc.............................. 50 SECTION 5.02. Successor Substituted.................................... 51 ARTICLE SIX DEFAULT AND REMEDIES SECTION 6.01. Events of Default........................................ 51 SECTION 6.02. Acceleration............................................. 53 SECTION 6.03. Other Remedies........................................... 54 SECTION 6.04. Waiver of Past Defaults.................................. 54 SECTION 6.05. Control by Majority...................................... 54 SECTION 6.06. Limitation on Suits...................................... 54 SECTION 6.07. Rights of Holders to Receive Payment..................... 55 SECTION 6.08. Collection Suit by Trustee............................... 55 iii SECTION 6.09. Trustee May File Proofs of Claim......................... 56 SECTION 6.10. Priorities............................................... 56 SECTION 6.11. Undertaking for Costs.................................... 56 SECTION 6.12. Restoration of Rights and Remedies....................... 57 SECTION 6.13. Rights and Remedies Cumulative........................... 57 SECTION 6.14. Delay or Omission Not Waiver............................. 57 ARTICLE SEVEN TRUSTEE SECTION 7.01. General.................................................. 58 SECTION 7.02. Certain Rights of Trustee................................ 59 SECTION 7.03. Individual Rights of Trustee............................. 60 SECTION 7.04. Trustee's Disclaimer..................................... 60 SECTION 7.05. Notice of Default........................................ 60 SECTION 7.06. Reports by Trustee to Holders............................ 60 SECTION 7.07. Compensation and Indemnity............................... 60 SECTION 7.08. Replacement of Trustee................................... 61 SECTION 7.09. Successor Trustee by Merger, Etc......................... 62 SECTION 7.10. Eligibility.............................................. 62 SECTION 7.11. Money Held in Trust...................................... 62 SECTION 7.12. Withholding Taxes........................................ 63 ARTICLE EIGHT DISCHARGE OF INDENTURE SECTION 8.01. Termination of Company's Obligations..................... 63 SECTION 8.02. Defeasance and Discharge of Indenture.................... 64 SECTION 8.03. Defeasance of Certain Obligations........................ 66 SECTION 8.04. Application of Trust Money............................... 68 SECTION 8.05. Repayment to Company..................................... 68 SECTION 8.06. Reinstatement............................................ 68 ARTICLE NINE AMENDMENTS, SUPPLEMENTS AND WAIVERS SECTION 9.01. Without Consent of Holders............................... 69 SECTION 9.02. With Consent of Holders.................................. 69 SECTION 9.03. Revocation and Effect of Consent......................... 70 SECTION 9.04. Notation on or Exchange of Notes......................... 71 SECTION 9.05. Trustee to Sign Amendments, Etc.......................... 71 SECTION 9.06. Conformity with Trust Indenture Act...................... 71 iv ARTICLE TEN MISCELLANEOUS SECTION 10.01. Trust Indenture Act of 1939............................. 72 SECTION 10.02. Notices................................................. 72 SECTION 10.03. Certificate and Opinion as to Conditions Precedent...... 73 SECTION 10.04. Statements Required in Certificate or Opinion........... 73 SECTION 10.05. Rules by Trustee, Paying Agent or Registrar............. 73 SECTION 10.06. Payment Date Other Than a Business Day.................. 74 SECTION 10.07. Governing Law........................................... 74 SECTION 10.08. No Adverse Interpretation of Other Agreements........... 74 SECTION 10.09. No Recourse Against Others.............................. 74 SECTION 10.10. Successors.............................................. 74 SECTION 10.11. Duplicate Originals..................................... 74 SECTION 10.12. Separability............................................ 75 SECTION 10.13. Table of Contents, Headings, Etc........................ 75 EXHIBIT A Form of Note....................................................A-1 EXHIBIT B Form of Certificate.............................................B-1 EXHIBIT C Form of Certificate to be Delivered in Connection with Transfers Pursuant to Non-QIB Accredited Investors.......C-1 EXHIBIT D Form of Certificate to be Delivered in Connection with Transfers Pursuant to Regulation S.......................D-1 INDENTURE, dated as of December 19, 1996, between LODGENET ENTERTAINMENT CORPORATION, a Delaware corporation (the "COMPANY"), and MARINE MIDLAND BANK, a New York banking corporation and trust company, as Trustee (the "TRUSTEE"). RECITALS The Company has duly authorized the execution and delivery of this Indenture to provide for the issuance of up to $150,000,000 aggregate principal amount of the Company's 10 1/4% Senior Notes due 2006 (the "NOTES") issuable as provided in this Indenture. All things necessary to make this Indenture a valid agreement of the Company, in accordance with its terms, have been done, and the Company has done all things necessary to make the Notes, when executed by the Company and authenticated and delivered by the Trustee hereunder and duly issued by the Company, the valid obligations of the Company as hereinafter provided. This Indenture is subject to, and shall be governed by, the provisions of the Trust Indenture Act of 1939, that are required to be a part of and to govern indentures qualified under the Trust Indenture Act of 1939. AND THIS INDENTURE FURTHER WITNESSETH For and in consideration of the premises and the purchase of the Notes by the Holders thereof, it is mutually covenanted and agreed, for the equal and proportionate benefit of all Holders, the Company and the Trustee, as follows. ARTICLE ONE DEFINITIONS AND INCORPORATION BY REFERENCE SECTION 1.01. DEFINITIONS. "Acquired Indebtedness" means Indebtedness of a Person existing at the time such Person becomes a Restricted Subsidiary or assumed in connection with an Asset Acquisition by a Restricted Subsidiary and not Incurred in connection with, or in anticipation of, such Person becoming a Restricted Subsidiary or such Asset Acquisition; PROVIDED that Indebtedness of such Person which is redeemed, defeased, retired or otherwise repaid at the time of or immediately upon consummation of the transactions by which such Person becomes a Restricted Subsidiary or such Asset Acquisition shall not be Acquired Indebtedness. "Adjusted Consolidated Net Income" means, for any period, the aggregate net income (or loss) of the Company and its Restricted Subsidiaries for such period determined 2 in conformity with GAAP; PROVIDED that the following items shall be excluded in computing Adjusted Consolidated Net Income (without duplication): (i) the net income of any Person (other than net income attributable to a Restricted Subsidiary) in which any Person (other than the Company or any of its Restricted Subsidiaries) has a joint interest and the net income of any Unrestricted Subsidiary, except to the extent of the amount of dividends or other distributions actually paid to the Company or any of its Restricted Subsidiaries by such other Person or such Unrestricted Subsidiary during such period; (ii) solely for the purposes of calculating the amount of Restricted Payments that may be made pursuant to clause (C) of the first paragraph of Section 4.04 (and in such case, except to the extent includable pursuant to clause (i) above), the net income (or loss) of any Person accrued prior to the date it becomes a Restricted Subsidiary or is merged into or consolidated with the Company or any of its Restricted Subsidiaries or all or substantially all of the property and assets of such Person are acquired by the Company or any of its Restricted Subsidiaries; (iii) solely for the purposes of calculating the amount of Restricted Payments that may be made pursuant to clause (C) of the first paragraph of Section 4.04, the net income of any Restricted Subsidiary to the extent that the declaration or payment of dividends or similar distributions by such Restricted Subsidiary of such net income is not at the time permitted by the operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to such Restricted Subsidiary; (iv) any gains or losses (on an after-tax basis) attributable to Asset Sales; (v) except for purposes of calculating the amount of Restricted Payments that may be made pursuant to clause (C) of the first paragraph of Section 4.04, any amount paid or accrued as dividends on Preferred Stock of the Company or any Restricted Subsidiary owned by Persons other than the Company and any of its Restricted Subsidiaries; and (vi) all extraordinary gains and extraordinary losses. "Adjusted Consolidated Net Tangible Assets" means the total amount of assets of the Company and its Restricted Subsidiaries (less applicable depreciation, amortization and other valuation reserves), except to the extent resulting from write-ups of capital assets (excluding write-ups in connection with accounting for acquisitions in conformity with GAAP), after deducting therefrom (i) all current liabilities of the Company and its Restricted Subsidiaries (excluding intercompany items) and (ii) all goodwill, trade names, trademarks, patents, unamortized debt discount and expense and other like intangibles, all as set forth on the most recent quarterly or annual consolidated balance sheet of the Company and its Restricted Subsidiaries, prepared in conformity with GAAP and filed with the Commission pursuant to Section 4.18. "Affiliate" means, as applied to any Person, any other Person directly or indirectly controlling, controlled by, or under direct or indirect common control with, such Person. For purposes of this definition, "control" (including, with correlative meanings, the terms "controlling," "controlled by" and "under common control with"), as applied to any Person, means the possession, directly or indirectly, of the power to direct or cause the 3 direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise. "Agent" means any Registrar, Paying Agent, authenticating agent or co-Registrar. "Agent Members" has the meaning provided in Section 2.07(a). "Asset Acquisition" means (i) an investment by the Company or any of its Restricted Subsidiaries in any other Person pursuant to which such Person shall become a Restricted Subsidiary or shall be merged into or consolidated with the Company or any of its Restricted Subsidiaries; 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 or (ii) an acquisition by the Company or any of its Restricted Subsidiaries of the property and assets of any Person other than the Company or any of its Restricted Subsidiaries that constitute substantially all of a division or line of business of such Person; PROVIDED that the property and assets acquired are related, ancillary or complementary to the businesses of the Company and its Restricted Subsidiaries on the date of such acquisition. "Asset Disposition" means the sale or other disposition by the Company or any of its Restricted Subsidiaries (other than to the Company or another Restricted Subsidiary) of (i) all or substantially all of the Capital Stock of any Restricted Subsidiary of the Company or (ii) all or substantially all of the assets that constitute a division or line of business of the Company or any of its Restricted Subsidiaries. "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 or (c) issuances or sales of Common Stock of ResNet pursuant to the ResNet Transaction Documents. 4 "Average Life" means, at any date of determination with respect to any debt security, the quotient obtained by dividing (i) the sum of the products of (a) the number of years from such date of determination to the dates of each successive scheduled principal payment of such debt security and (b) the amount of such principal payment by (ii) the sum of all such principal payments. "Board of Directors" means the Board of Directors of the Company or any committee of such Board of Directors duly authorized to act under this Indenture. "Board Resolution" means a copy of a resolution, certified by the Secretary of the Company to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification, and delivered to the Trustee. "Business Day" means any day except a Saturday, Sunday or other day on which commercial banks in the City of New York, or in the city of the Corporate Trust Office of the Trustee, are authorized by law to close. "Capital Stock" means, with respect to any Person, any and all shares, interests, memberships, participations or other equivalents (however designated, whether voting or non-voting) in equity of such Person, whether now outstanding or issued after the Closing Date, including, without limitation, all Common Stock and Preferred Stock. "Capitalized Lease" means, as applied to any Person, any lease of any property (whether real, personal or mixed) of which the discounted present value of the rental obligations of such Person as lessee, in conformity with GAAP, is required to be capitalized on the balance sheet of such Person; and "Capitalized Lease Obligations" means the discounted present value of the rental obligations under such lease. "Change of Control" means such time as (i) (a) a "person" or "group" (within the meaning of Sections 13(d) or 14(d)(2) of the Exchange Act) other than the Permitted Holders becomes the ultimate "beneficial owner" (as defined in Rule 13d-3 of the Exchange Act) of Voting Stock representing more than 40% of the total voting power of the total Voting Stock of the Company on a fully diluted basis and (b) such person or group beneficially owns more Voting Stock than the Permitted Holders; or (ii) individuals who at the beginning of any 24 month period constitute the Board of Directors (together with any new directors whose election by the Board of Directors or whose nomination for election by the Company's stockholders was approved by a vote of at least two-thirds of the members of the Board of Directors then in office who either were members of the Board of Directors on the Closing Date or whose election or nomination for election was previously so approved) cease for any reason during such 24 month period to constitute a majority of the members of the Board of Directors then in office. 5 "Closing Date" means the date on which the Notes are originally issued under this Indenture. "Commission" means the Securities and Exchange Commission, as from time to time constituted, created under the Exchange Act or, if at any time after the execution of this instrument such Commission is not existing and performing the duties now assigned to it under the TIA, then the body performing such duties at such time. "Common Stock" means, with respect to any Person, any and all shares, interests, memberships, participations or other equivalents (however designated, whether voting or non-voting) of such Person's common stock, whether now outstanding or issued after the date of this Indenture, including, without limitation, all series and classes of such common stock. "Company" means the party named as such in the first paragraph of this Indenture until a successor replaces it pursuant to Article Five of this Indenture and thereafter means the successor. "Company Order" means a written request or order signed in the name of the Company (i) by its Chairman, a Vice Chairman, its President or a Vice President and (ii) by its Treasurer, an Assistant Treasurer, its Secretary or an Assistant Secretary and delivered to the Trustee; PROVIDED, HOWEVER, that such written request or order may be signed by any two of the officers or directors listed in clause (i) above in lieu of being signed by one of such officers or directors listed in such clause (i) and one of the officers listed in clause (ii) above. "Consolidated EBITDA" means, for any period, the sum of the amounts for such period of (i) Adjusted Consolidated Net Income, (ii) Consolidated Interest Expense, to the extent such amount was deducted in calculating Adjusted Consolidated Net Income, (iii) income taxes, to the extent such amount was deducted in calculating Adjusted Consolidated Net Income (other than income taxes (either positive or negative) attributable to extraordinary and non-recurring gains or losses or sales of assets), (iv) depreciation expense, to the extent such amount was deducted in calculating Adjusted Consolidated Net Income, (v) amortization expense, to the extent such amount was deducted in calculating Adjusted Consolidated Net Income, and (vi) all other non-cash items reducing Adjusted Consolidated Net Income (other than items that will require cash payments and for which an accrual or reserve is, or is required by GAAP to be, made), less all non-cash items increasing Adjusted Consolidated Net Income, all as determined on a consolidated basis for the Company and its Restricted Subsidiaries in conformity with GAAP; PROVIDED that, Consolidated EBITDA will not be reduced as a result of a minority interest in the net income of a Restricted Subsidiary except to the extent that dividends in cash or other distributions of cash, property, or other assets (other than dividends or distributions payable solely in shares of Capital Stock) are actually paid to the holders of such minority interest. 6 "Consolidated Fixed Charges" means, for any period, the aggregate amount of (i) interest in respect of Indebtedness (including, without limitation, amortization of original issue discount on any Indebtedness and the interest portion of any deferred payment obligation, calculated in accordance with the effective interest method of accounting; all commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing; the net costs associated with Interest Rate Agreements; and Indebtedness that is Guaranteed or secured by the Company or any of its Restricted Subsidiaries), (ii) all but the principal component of rentals in respect of Capitalized Lease Obligations paid, accrued or scheduled to be paid or to be accrued by the Company and its Restricted Subsidiaries during such period and (iii) one-third of rental expense attributable to all leases other than Capitalized Leases; EXCLUDING, HOWEVER, (i) any amount of such interest of any Restricted Subsidiary if the net income of such Restricted Subsidiary is excluded in the calculation of Adjusted Consolidated Net Income pursuant to clause (iii) of the definition thereof (but only in the same proportion as the net income of such Restricted Subsidiary is excluded from the calculation of Adjusted Consolidated Net Income pursuant to clause (iii) of the definition thereof) and (ii) any premiums, fees and expenses (and any amortization thereof) payable in connection with the offering of the Notes, all as determined on a consolidated basis (without taking into account Unrestricted Subsidiaries) in conformity with GAAP. "Consolidated Interest Expense" means, for any period, the aggregate amount of (i) interest in respect of Indebtedness (including, without limitation, amortization of original issue discount on any Indebtedness and the interest portion of any deferred payment obligation, calculated in accordance with the effective interest method of accounting; all commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing; the net costs associated with Interest Rate Agreements; and Indebtedness that is Guaranteed or secured by the Company or any of its Restricted Subsidiaries) and (ii) all but the principal component of rentals in respect of Capitalized Lease Obligations paid, accrued or scheduled to be paid or to be accrued by the Company and its Restricted Subsidiaries during such period; EXCLUDING, HOWEVER, (i) any amount of such interest of any Restricted Subsidiary if the net income of such Restricted Subsidiary is excluded in the calculation of Adjusted Consolidated Net Income pursuant to clause (iii) of the definition thereof (but only in the same proportion as the net income of such Restricted Subsidiary is excluded from the calculation of Adjusted Consolidated Net Income pursuant to clause (iii) of the definition thereof) and (ii) any premiums, fees and expenses (and any amortization thereof) payable in connection with the offering of the Notes, all as determined on a consolidated basis (without taking into account Unrestricted Subsidiaries) in conformity with GAAP. "Consolidated Leverage Ratio" means, on any Transaction Date, the ratio of (i) the aggregate amount of Indebtedness of the Company and its Restricted Subsidiaries on a consolidated basis as at such Transaction Date to (ii) the aggregate amount of Consolidated 7 EBITDA for the two most recent fiscal quarters prior to such Transaction Date for which financial statements of the Company have been filed with the Commission pursuant to Section 4.18 (such two fiscal quarter periods being the "Two Quarter Period"), multiplied by two; PROVIDED that (A) PRO FORMA effect shall be given to (x) any Indebtedness Incurred from the beginning of the Two Quarter Period through the Transaction Date (the "Reference Period"), to the extent such Indebtedness is outstanding on the Transaction Date and (y) any Indebtedness that was outstanding during such Reference Period but that is not outstanding or is to be repaid on the Transaction Date; (B) PRO FORMA effect shall be given to Asset Dispositions and Asset Acquisitions (including PRO FORMA effect to the application of proceeds of any Asset Disposition) that occur during such Reference Period; and (C) PRO FORMA effect shall be given to asset dispositions and asset acquisitions (including giving pro forma effect to the application of proceeds of any asset disposition) that have been made by any Person that has become a Restricted Subsidiary or has been merged with or into the Company or any Restricted Subsidiary during such Reference Period and that would have constituted Asset Dispositions or Asset Acquisitions had such transactions occurred when such Person was a Restricted Subsidiary as if such asset dispositions or asset acquisitions were Asset Dispositions or Asset Acquisitions that occurred on the first day of such Reference Period; provided that to the extent that clause (B) or (C) of this sentence requires that PRO FORMA effect be given to an Asset Acquisition or Asset Disposition, such PRO FORMA calculation shall be based upon the two full fiscal quarters immediately preceding the Transaction Date of the Person, or division or line of business of the Person, that is acquired or disposed of for which financial information is available, multiplied by two as provided in clause (i) above. "Corporate Trust Office" means the office of the Trustee at which the corporate trust business of the Trustee shall, at any particular time, be principally administered, which office is, at the date of this Indenture, located at 140 Broadway, New York, New York 10005, Attention: Corporate Trust Administration Department. "Currency Agreement" means any foreign exchange contract, currency swap agreement or other similar agreement or arrangement designed to protect the Company or any of its Restricted Subsidiaries against fluctuations in currency values to or under which the Company or any of its Restricted Subsidiaries is a party or a beneficiary on the date of this Indenture or becomes a party or a beneficiary thereafter. "Default" means any event that is, or after notice or passage of time or both would be, an Event of Default. "Depositary" shall mean The Depository Trust Company, its nominees, and their respective successors. "Event of Default" has the meaning provided in Section 6.01. 8 "Excess Proceeds" has the meaning provided in Section 4.11. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Exchange Notes" means any securities of the Company containing terms identical to the Notes (except that such Exchange Notes (i) shall be registered under the Securities Act and (ii) shall have an interest rate equal to 10 1/4% per annum, without provision for adjustment as provided in the fourth paragraph of Section 1 of the Notes) that are issued and exchanged for the Notes pursuant to the Registration Rights Agreement and this Indenture. "fair market value" means the price that would be paid in an arm's-length transaction between an informed and willing seller under no compulsion to sell and an informed and willing buyer under no compulsion to buy, as determined in good faith by the Board of Directors, whose determination shall be conclusive if evidenced by a Board Resolution. "GAAP" means generally accepted accounting principles in the United States of America as in effect as of the Closing Date, including, without limitation, those set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as approved by a significant segment of the accounting profession. All ratios and computations contained or referred to in this Indenture shall be computed in conformity with GAAP applied on a consistent basis, except that calculations made for purposes of determining compliance with the terms of the covenants and with other provisions of this Indenture shall be made without giving effect to (i) the amortization of any expenses incurred in connection with the offering of the Notes and (ii) except as otherwise provided, the amortization of any amounts required or permitted by Accounting Principles Board Opinion Nos. 16 and 17. "Global Notes" has the meaning provided in Section 2.01. "Guarantee" means any obligation, contingent or otherwise, of any Person directly or indirectly guaranteeing any Indebtedness or other obligation of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such Person (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or other obligation of such other Person (whether arising by virtue of partnership arrangements, or by agreements to keep-well, to purchase assets, goods, securities or services, to take-or-pay, or to maintain financial statement conditions or otherwise) or (ii) entered into for purposes of assuring in any other manner the obligee of such Indebtedness or other obligation of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part); PROVIDED that the 9 term "Guarantee" shall not include endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning. "Guaranteed Indebtedness" has the meaning provided in Section 4.07. "Holder" or "Securityholder" means the registered holder of any Note. "Incur" means, with respect to any Indebtedness, to incur, create, issue, assume, Guarantee or otherwise become liable for or with respect to, or become responsible for, the payment of, contingently or otherwise, such Indebtedness, including an "Incurrence" of Indebtedness by reason of a Person becoming a Restricted Subsidiary of the Company; PROVIDED that neither the accrual of interest nor the accretion of original issue discount shall be considered an Incurrence of Indebtedness. "Indebtedness" means, with respect to any Person at any date of determination (without duplication), (i) all indebtedness of such Person for borrowed money, (ii) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (iii) all obligations of such Person in respect of letters of credit or other similar instruments (including reimbursement obligations with respect thereto, but excluding obligations with respect to letters of credit (including trade letters of credit) securing obligations (other than obligations described in (i) or (ii) above or (v), (vi) or (vii) below) entered into in the ordinary course of business of such Person to the extent such letters of credit are not drawn upon or, if drawn upon, to the extent such drawing is reimbursed no later than the third Business Day following receipt by such Person of a demand for reimbursement), (iv) all obligations of such Person to pay the deferred and unpaid purchase price of property or services, which purchase price is due more than six months after the date of placing such property in service or taking delivery and title thereto or the completion of such services, except Trade Payables, (v) all obligations of such Person as lessee under Capitalized Leases, (vi) all Indebtedness of other Persons secured by a Lien on any asset of such Person, whether or not such Indebtedness is assumed by such Person; PROVIDED that the amount of such Indebtedness shall be the lesser of (A) the fair market value of such asset at such date of determination and (B) the amount of such Indebtedness, (vii) all Indebtedness of other Persons Guaranteed by such Person to the extent such Indebtedness is Guaranteed by such Person and (viii) to the extent not otherwise included in this definition, obligations under Currency Agreements and Interest Rate Agreements. The amount of Indebtedness of any Person at any date shall be the outstanding balance at such date of all unconditional obligations as described above and, with respect to contingent obligations, the maximum liability upon the occurrence of the contingency giving rise to the obligation, PROVIDED (A) that the amount outstanding at any time of any Indebtedness issued with original issue discount is the face amount of such Indebtedness less the unamortized portion of the original issue discount of such Indebtedness at the time of its issuance as determined in conformity with GAAP, (B) that Indebtedness shall not include any liability for federal, state, local or 10 other taxes and (C) that Indebtedness shall not include any obligations owed to TCI Satellite that do not provide for or permit payments in cash and that may only be repaid or satisfied through the issuance of Common Stock of ResNet. "Indenture" means this Indenture as originally executed or as it may be amended or supplemented from time to time by one or more indentures supplemental to this Indenture entered into pursuant to the applicable provisions of this Indenture. "Institutional Accredited Investor" means an institution that is an "accredited investor" as that term is defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act. "Interest Payment Date" means each semiannual interest payment date on June 15 and December 15 of each year, commencing June 15, 1997. "Interest Rate Agreement" means any interest rate protection agreement, interest rate future agreement, interest rate option agreement, interest rate swap agreement, interest rate cap agreement, interest rate collar agreement, interest rate hedge agreement or other similar agreement or arrangement designed to protect the Company or any of its Restricted Subsidiaries against fluctuations in interest rates to or under which the Company or any of its Restricted Subsidiaries is a party or a beneficiary on the date of this Indenture or becomes a party or a beneficiary hereafter. "Investment" in any Person means any direct or indirect advance, loan or other extension of credit (including, without limitation, by way of Guarantee or similar arrangement; but excluding advances to customers in the ordinary course of business that are, in conformity with GAAP, recorded as accounts receivable on the balance sheet of the Company or its Restricted Subsidiaries) or capital contribution to (by means of any transfer of cash or other property to others or any payment for property or services for the account or use of others), or any purchase or acquisition of Capital Stock, bonds, notes, debentures or other similar instruments issued by, such Person and shall include (i) the designation of a Restricted Subsidiary as an Unrestricted Subsidiary and (ii) the fair market value of the Capital Stock (or any other Investment), held by the Company or any of its Restricted Subsidiaries, of (or in) any Person that has ceased to be a Restricted Subsidiary, including without limitation, by reason of any transaction permitted by clause (iii) or clause (iv) of Section 4.06. For purposes of the definition of "Unrestricted Subsidiary" set forth herein and Section 4.04, (i) "Investment" shall include the fair market value of the assets (net of liabilities (other than liabilities to the Company or any of its Subsidiaries)) of any Restricted Subsidiary at the time that such Restricted Subsidiary is designated an Unrestricted Subsidiary, (ii) the fair market value of the assets (net of liabilities (other than liabilities to the Company or any of its Subsidiaries)) of any Unrestricted Subsidiary at the time that such Unrestricted Subsidiary is designated a Restricted Subsidiary shall be considered a reduction 11 in outstanding Investments and (iii) any property transferred to or from an Unrestricted Subsidiary shall be valued at its fair market value at the time of such transfer. "Lien" means any mortgage, pledge, security interest, encumbrance, lien or charge of any kind (including, without limitation, any conditional sale or other title retention agreement or lease in the nature thereof or any agreement to give any security interest). "Moody's" means Moody's Investors Service, Inc. and its successors. "Net Cash Proceeds" means, (a) with respect to any Asset Sale, the proceeds of such Asset Sale in the form of cash or cash equivalents, including payments in respect of deferred payment obligations (to the extent corresponding to the principal, but not interest, component thereof) when received in the form of cash or cash equivalents (except to the extent such obligations are financed or sold with recourse to the Company or any Restricted Subsidiary) and proceeds from the conversion of other property received when converted to cash or cash equivalents, net of (i) brokerage commissions and other fees and expenses (including fees and expenses of counsel and investment bankers) related to such Asset Sale, (ii) provisions for all taxes (whether or not such taxes will actually be paid or are payable) as a result of such Asset Sale without regard to the consolidated results of operations of the Company and its Restricted Subsidiaries, taken as a whole, (iii) payments made to repay Indebtedness or any other obligation outstanding at the time of such Asset Sale that either (A) is secured by a Lien on the property or assets sold or (B) is required to be paid as a result of such sale and (iv) appropriate amounts to be provided by the Company or any Restricted Subsidiary of the Company as a reserve against any liabilities associated with such Asset Sale, including, without limitation, pension and other post-employment benefit liabilities, liabilities related to environmental matters and liabilities under any indemnification obligations associated with such Asset Sale, all as determined in conformity with GAAP and (b) with respect to any issuance or sale of Capital Stock, the proceeds of such issuance or sale in the form of cash or cash equivalents, including payments in respect of deferred payment obligations (to the extent corresponding to the principal, but not interest, component thereof) when received in the form of cash or cash equivalents (except to the extent such obligations are financed or sold with recourse to the Company or any Restricted Subsidiary of the Company) and proceeds from the conversion of other property received when converted to cash or cash equivalents, net of attorney's fees, accountants' fees, underwriters' or placement agents' fees, discounts or commissions and brokerage, consultant and other fees incurred in connection with such issuance or sale and net of taxes paid or payable as a result thereof. "New Credit Facility" means the credit agreement dated as of December 19, 1996 among the Company, its Subsidiaries named therein, the lenders named therein and National Westminster Bank Plc, as agent, together with all other agreements, instruments and documents executed or delivered pursuant thereto or in connection therewith, in each case as 12 such agreements, instruments or documents may be amended, supplemented, extended, renewed, replaced or otherwise modified from time to time (including increases in the principal amount thereof); PROVIDED that, with respect to any agreement providing for the refinancing of Indebtedness under the New Credit Facility, such agreement shall be the New Credit Facility under the Indenture only if a notice to that effect is delivered by the Company to the Trustee and there shall be at any time only one instrument that is (together with the aforementioned related agreements, instruments and documents) the New Credit Facility under the Indenture. "Notes" means any of the securities, as defined in the first paragraph of the recitals hereof, that are authenticated and delivered under this Indenture. For all purposes of this Indenture, the term "Notes" shall include any Exchange Notes to be issued and exchanged for any Notes pursuant to the Registration Rights Agreement and this Indenture and, for purposes of this Indenture, all Notes and Exchange Notes shall vote together as one series of Notes under this Indenture. "Non-U.S. Person" means a person who is not a U.S. person, as defined in Regulation S. "Offer to Purchase" means an offer to purchase Notes by the Company from the Holders commenced by mailing a notice to the Trustee and each Holder stating: (i) the covenant of this Indenture pursuant to which the offer is being made and that all Notes validly tendered will be accepted for payment on a pro rata basis; (ii) the purchase price and the date of purchase (which shall be a Business Day no earlier than 30 days nor later than 60 days from the date such notice is mailed) (the "Payment Date"); (iii) that any Note not tendered will continue to accrue interest pursuant to its terms; (iv) that, unless the Company defaults in the payment of the purchase price, any Note accepted for payment pursuant to the Offer to Purchase shall cease to accrue interest on and after the Payment Date; (v) that Holders electing to have a Note purchased pursuant to the Offer to Purchase will be required to surrender the Note, together with the form entitled "Option of the Holder to Elect Purchase" on the reverse side of the Note completed, to the Paying Agent at the address specified in the notice prior to the close of business on the Business Day immediately preceding the Payment Date; (vi) that Holders will be entitled to withdraw their election if the Paying Agent receives, not later than the close of business on the third Business Day immediately preceding the Payment Date, a telegram, facsimile transmission or letter setting forth the name of such Holder, the principal amount of Notes delivered for purchase and a statement that such Holder is withdrawing his election to have such Notes purchased; and (vii) that Holders whose Notes are being purchased only in part will be issued new Notes equal in principal amount to the unpurchased portion of the Notes surrendered; PROVIDED that each Note purchased and each new Note issued shall be in a principal amount of $1,000 or integral multiples thereof. On the Payment Date, the Company shall (i) accept for payment on a pro rata basis Notes or portions thereof tendered pursuant to an Offer to Purchase; 13 (ii) deposit with the Paying Agent money sufficient to pay the purchase price of all Notes or portions thereof so accepted; and (iii) deliver, or cause to be delivered, to the Trustee all Notes or portions thereof so accepted together with an Officers' Certificate specifying the Notes or portions thereof accepted for payment by the Company. The Paying Agent shall promptly mail to the Holders of Notes so accepted payment in an amount equal to the purchase price, and the Company shall issue, and the Trustee shall promptly authenticate and mail to such Holders, a new Note equal in principal amount to any unpurchased portion of the Note surrendered; PROVIDED that each Note purchased and each new Note issued shall be in a principal amount of $1,000 or integral multiples thereof. The Company will publicly announce the results of an Offer to Purchase as soon as practicable after the Payment Date. The Trustee shall act as the Paying Agent for an Offer to Purchase. The Company will comply with Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable, in the event that the Company is required to repurchase Notes pursuant to an Offer to Purchase. "Officer" means, with respect to the Company, (i) the Chairman of the Board, the President, the Chief Operating Officer, any Vice President, the Chief Financial Officer, and (ii) the Treasurer or any Assistant Treasurer, or the Secretary or any Assistant Secretary. "Officers' Certificate" means a certificate signed by one Officer listed in clause (i) of the definition thereof and one Officer listed in clause (ii) of the definition thereof, which certificate shall comply with the provisions of Section 10.04 hereof. Any Officers' Certificate delivered pursuant to the first paragraph of Section 4.17 hereof shall be signed by the Chief Executive Officer, the Chief Operating Officer, the Chief Financial Officer or the Chief Accounting Officer of the Company. Each Officers' Certificate (other than certificates provided pursuant to TIA Section 314(a)(4)) shall include the statements provided for in TIA Section 314(e). "Offshore Global Note" has the meaning provided in Section 2.01. "Offshore Physical Notes" has the meaning provided in Section 2.01. "Opinion of Counsel" means a written opinion signed by legal counsel who may be an employee of or counsel to the Company, which opinion shall comply with Section 10.04 hereof. Each such Opinion of Counsel shall include the statements provided for in TIA Section 314(e). "Paying Agent" has the meaning provided in Section 2.04, except that, for the purposes of Article Eight, the Paying Agent shall not be the Company or a Subsidiary of the Company or an Affiliate of any of them. The term "Paying Agent" includes any additional Paying Agent. 14 "Permitted Holders" means, collectively, the executive officers of the Company and ResNet as of the Closing Date, any Restricted Subsidiary and trusts established under any employee stock ownership plan that is solely for the benefit of the employees of the Company and its Subsidiaries. "Permitted Investment" 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; and (iv) stock, obligations or securities received in satisfaction of judgments. "Permitted Liens" means (i) Liens for taxes, assessments, governmental charges or claims that are being contested in good faith by appropriate legal proceedings promptly instituted and diligently conducted and for which a reserve or other appropriate provision, if any, as shall be required in conformity with GAAP shall have been made; (ii) statutory and common law Liens of landlords and carriers, warehousemen, mechanics, suppliers, materialmen, repairmen or other similar Liens arising in the ordinary course of business and with respect to amounts not yet delinquent or being contested in good faith by appropriate legal proceedings promptly instituted and diligently conducted and for which a reserve or other appropriate provision, if any, as shall be required in conformity with GAAP shall have been made; (iii) Liens incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security; (iv) Liens incurred or deposits made to secure the performance of tenders, bids, leases, statutory or regulatory obligations, bankers' acceptances, surety and appeal bonds, government contracts, performance and return-of-money bonds and other obligations of a similar nature incurred in the ordinary course of business (exclusive of obligations for the payment of borrowed money); (v) easements, rights-of-way, municipal and zoning ordinances and similar charges, encumbrances, title defects or other irregularities that do not materially interfere with the ordinary course of business of the Company or any of its Restricted Subsidiaries; (vi) Liens (including extensions and renewals thereof) upon real or personal (whether tangible or intangible) property acquired after the Closing Date or associated with the Company's headquarter offices; PROVIDED that (a) such Lien is created solely for the purpose of securing Indebtedness Incurred, in accordance with Section 4.03, (1) to finance the cost (including the cost of improvement or construction) of the item of property or assets subject thereto and such Lien is created prior to, at the time of or within six months after the later of the acquisition, the completion of construction or the commencement of full operation of such property or (2) to refinance any Indebtedness previously so secured, (b) the principal amount of the Indebtedness secured by such Lien 15 does not exceed 100% of such cost and (c) any such Lien shall not extend to or cover any property or assets other than such item of property or assets and any improvements on such item; (vii) leases or subleases granted to others that do not materially interfere with the ordinary course of business of the Company and its Restricted Subsidiaries, taken as a whole; (viii) Liens encumbering property or assets under construction arising from progress or partial payments by a customer of the Company or its Restricted Subsidiaries relating to such property or assets; (ix) any interest or title of a lessor in the property subject to any Capitalized Lease or operating lease; (x) Liens arising from filing Uniform Commercial Code financing statements regarding leases; (xi) Liens on property of, or on shares of Capital Stock or Indebtedness of, any Person existing at the time such Person becomes, or becomes a part of, any Restricted Subsidiary; PROVIDED that such Liens do not extend to or cover any property or assets of the Company or any Restricted Subsidiary other than the property or assets acquired; (xii) Liens in favor of the Company or any Restricted Subsidiary; (xiii) Liens arising from the rendering of a final judgment or order against the Company or any Restricted Subsidiary of the Company that does not give rise to an Event of Default; (xiv) Liens securing reimbursement obligations with respect to letters of credit that encumber documents and other property relating to such letters of credit and the products and proceeds thereof; (xv) Liens in favor of customs and revenue authorities arising as a matter of law to secure payment of customs duties in connection with the importation of goods; (xvi) Liens encumbering customary initial deposits and margin deposits, and other Liens that are either within the general parameters customary in the industry and incurred in the ordinary course of business, in each case, securing Indebtedness under Interest Rate Agreements and Currency Agreements and forward contracts, options, future contracts, futures options or similar agreements or arrangements designed solely to protect the Company or any of its Restricted Subsidiaries from fluctuations in interest rates, currencies or the price of commodities; (xvii) Liens arising out of conditional sale, title retention, consignment or similar arrangements for the sale of goods entered into by the Company or any of its Restricted Subsidiaries in the ordinary course of business in accordance with the past practices of the Company and its Restricted Subsidiaries prior to the Closing Date; (xviii) Liens on or sales of receivables; and (xix) Liens securing Indebtedness in an amount not to exceed $5 million. "Person" means an individual, a corporation, a partnership, a limited liability company, an association, a trust or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. "Physical Notes" has the meaning provided in Section 2.01. "Preferred Stock" means, with respect to any Person, any and all shares, interests, participations or other equivalents (however designated, whether voting or non-voting) of such Person's preferred or preference stock, whether now outstanding or issued 16 after the date of this Indenture, including, without limitation, all series and classes of such preferred or preference stock. "principal" of a debt security, including the Notes, means the principal amount due on the Stated Maturity as shown on such debt security. "Private Placement Legend" means the legend initially set forth on the Notes in the form set forth in Section 2.02. "Public Equity Offering" means an underwritten primary public offering of Common Stock of the Company pursuant to an effective registration statement under the Securities Act. "QIB" means a "qualified institutional buyer" as defined in Rule 144A. "Redeemable Stock" means any class or series of Capital Stock of any Person that by its terms or otherwise is (i) required to be redeemed prior to the Stated Maturity of the Notes, (ii) redeemable at the option of the holder of such class or series of Capital Stock at any time prior to the Stated Maturity of the Notes or (iii) convertible into or exchangeable for Capital Stock referred to in clause (i) or (ii) above or Indebtedness having a scheduled maturity prior to the Stated Maturity of the Notes; PROVIDED that any Capital Stock that would not constitute Redeemable Stock but for provisions thereof giving holders thereof the right to require such Person to repurchase or redeem such Capital Stock upon the occurrence of an "asset sale" or "change of control" occurring prior to the Stated Maturity of the Notes shall not constitute Redeemable Stock if the "asset sale" or "change of control" provisions applicable to such Capital Stock are no more favorable to the holders of such Capital Stock than the provisions contained in Sections 4.11 and 4.12 and such Capital Stock specifically provides that such Person will not repurchase or redeem any such stock pursuant to such provision prior to the Company's repurchase of such Notes as are required to be repurchased pursuant to Sections 4.11 and 4.12. "Redemption Date" means, when used with respect to any Note to be redeemed, the date fixed for such redemption by or pursuant to this Indenture. "Redemption Price" means, when used with respect to any Note to be redeemed, the price at which such Note is to be redeemed pursuant to this Indenture. "Registrar" has the meaning provided in Section 2.04. "Registration Rights Agreement" means the Registration Rights Agreement, dated as of December 16, 1996, between the Company and Morgan Stanley & Co. 17 Incorporated, NatWest Capital Markets Limited and Montgomery Securities, and certain permitted assigns specified therein. "Registration Statement" means the Registration Statement as defined and described in the Registration Rights Agreement. "Regular Record Date" for the interest payable on any Interest Payment Date means the June 1 or December 1 (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. "Regulation D" means Regulation D under the Securities Act. "Regulation S" means Regulation S under the Securities Act. "ResNet" means ResNet Communications, Inc., a subsidiary of the Company, and its successors, including, without limitation, its successor to be formed upon reconstitution of ResNet as a Delaware limited liability company in connection with the recapitalization of ResNet contemplated by the ResNet Transaction Documents. "ResNet Transaction Documents" means the agreements among the Company, ResNet and TCI Satellite setting forth, among other things, the terms and conditions of TCI Satellite's investment in ResNet, as in effect on the Closing Date, and the agreements to be entered into by such parties on substantially equivalent terms to effect the reconstitution of ResNet as a Delaware limited liability company. "Responsible Officer", means any officer of the Trustee assigned by the Trustee to administer this Indenture and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of his or her knowledge of and familiarity with the particular subject. "Restricted Payments" has the meaning provided in Section 4.04. "Restricted Subsidiary" means any Subsidiary of the Company other than an Unrestricted Subsidiary. "Rule 144A" means Rule 144A under the Securities Act. "Securities Act" means the Securities Act of 1933, as amended. "Security Register" has the meaning provided in Section 2.04. 18 "Significant Subsidiary" means, at any date of determination, any Restricted Subsidiary that, together with its Subsidiaries, (i) for the most recent fiscal year of the Company, accounted for more than 10% of the consolidated revenues of the Company and its Restricted Subsidiaries or (ii) as of the end of such fiscal year, was the owner of more than 10% of the consolidated assets of the Company and its Restricted Subsidiaries, all as set forth on the most recently available consolidated financial statements of the Company for such fiscal year. "S&P" means Standard & Poor's Ratings Group and its successors. "Stated Maturity" means, (i) with respect to any debt security, the date specified in such debt security as the fixed date on which the final installment of principal of such debt security is due and payable and (ii) with respect to any scheduled installment of principal of or interest on any debt security, the date specified in such debt security as the fixed date on which such installment is due and payable. "Subsidiary" means, with respect to any Person, any corporation, association or other business entity of which more than 50% of the voting power of the outstanding Voting Stock is owned, directly or indirectly, by such Person and one or more other Subsidiaries of such Person. "Subsidiary Guarantee" has the meaning provided in Section 4.07. "TCI Satellite" means TCI Satellite MDU Entertainment, Inc., an affiliate of Tele-Communications, Inc., and its successors and assigns. "Temporary Cash Investment" means any of the following: (i) direct obligations of the United States of America or any agency thereof or obligations fully and unconditionally guaranteed by the United States of America or any agency thereof, (ii) time deposit accounts, certificates of deposit and money market deposits maturing within 180 days of the date of acquisition thereof issued by a bank or trust company which is organized under the laws of the United States of America, any state thereof or any foreign country recognized by the United States, and which bank or trust company has capital, surplus and undivided profits aggregating in excess of $50 million (or the foreign currency equivalent thereof) and has outstanding debt which is rated "A" (or such similar equivalent rating) or higher by at least one nationally recognized statistical rating organization (as defined in Rule 436 under the Securities Act) or any money-market fund sponsored by a registered broker dealer or mutual fund distributor, (iii) repurchase obligations with a term of not more than 30 days for underlying securities of the types described in clause (i) above entered into with a bank meeting the qualifications described in clause (ii) above, (iv) commercial paper, maturing not more than 90 days after the date of acquisition, issued by a corporation (other than an Affiliate of the Company) organized and in existence under the laws of the United States of 19 America, any state thereof or any foreign country recognized by the United States of America with a rating at the time as of which any investment therein is made of "P-1" (or higher) according to Moody's or "A-1" (or higher) according to S&P, and (v) securities with maturities of six months or less from the date of acquisition issued or fully and unconditionally guaranteed by any state, commonwealth or territory of the United States of America, or by any political subdivision or taxing authority thereof, and rated at least "A" by S&P or Moody's. "TIA" or "Trust Indenture Act" means the Trust Indenture Act of 1939, (15 U.S. Code Sections 77aaa-77bbb), as in effect on the date this Indenture was executed, except as provided in Section 9.06, provided that in the event the Trust Indenture Act of 1939 is amended after such date, "TIA" or "Trust Indenture Act" means, to the extent required by any such amendment, the Trust Indenture Act of 1939, as so amended. "Trade Payables" means, with respect to any Person, any accounts payable or any other indebtedness or monetary obligation to trade creditors created, assumed or Guaranteed by such Person or any of its Subsidiaries arising in the ordinary course of business in connection with the acquisition of goods or services. "Transaction Date" means with respect to the Incurrence of any Indebtedness by the Company or any of its Restricted Subsidiaries, the date such Indebtedness is to be Incurred and, with respect to any Restricted Payment, the date such Restricted Payment is to be made. "Trustee" means the party named as such in the first paragraph of this Indenture until a successor replaces it in accordance with the provisions of Article Seven of this Indenture and thereafter means such successor. "United States Bankruptcy Code" means the Bankruptcy Reform Act of 1978, as amended and as codified in Title 11 of the United States Code, as amended from time to time hereafter, or any successor federal bankruptcy law. "U.S. Global Note" has the meaning provided in Section 2.01. "U.S. Government Obligations" means securities that are (i) direct obligations of the United States of America for the payment of which its full faith and credit is pledged or (ii) obligations of a Person controlled or supervised by and acting as an agency or instrumentality of the United States of America the payment of which is unconditionally guaranteed as a full faith and credit obligation by the United States of America, which, in either case, are not callable or redeemable at the option of the issuer thereof at any time prior to the Stated Maturity of the Notes, and shall also include a depository receipt issued by a bank or trust company as custodian with respect to any such U.S. Government 20 Obligation or a specific payment of interest on or principal of any such U.S. Government Obligation held by such custodian for the account of the holder of a depository receipt; PROVIDED that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depository receipt from any amount received by the custodian in respect of the U.S. Government Obligation or the specific payment of interest on or principal of the U.S. Government Obligation evidenced by such depository receipt. "U.S. Physical Notes" has the meaning provided in Section 2.01. "Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at the time of determination shall be designated an Unrestricted Subsidiary by the Board of Directors in the manner provided below; and (ii) any Subsidiary of an Unrestricted Subsidiary. The Board of Directors may designate any Restricted Subsidiary (including any newly acquired or newly formed Subsidiary of the Company) to be an Unrestricted Subsidiary unless such Subsidiary owns any Capital Stock of, or owns or holds any Lien on any property of, the Company or any Restricted Subsidiary; PROVIDED that (A) any Guarantee by the Company or any Restricted Subsidiary of any Indebtedness of the Subsidiary being so designated shall be deemed an "Incurrence" of such Indebtedness and an "Investment" by the Company or such Restricted Subsidiary (or both, if applicable) at the time of such designation; (B) either (I) the Subsidiary to be so designated has total assets of $1,000 or less or (II) if such Subsidiary has assets greater than $1,000, such designation would be permitted under Section 4.04 and (C) if applicable, the Incurrence of Indebtedness and the Investment referred to in clause (A) of this proviso would be permitted under Sections 4.03 and 4.04. The Board of Directors may designate any Unrestricted Subsidiary to be a Restricted Subsidiary; PROVIDED that immediately after giving effect to such designation (x) the Company could Incur $1.00 of additional Indebtedness under the first paragraph of Section 4.03 and (y) no Default or Event of Default shall have occurred and be continuing. Any such designation by the Board of Directors shall be evidenced to the Trustee by promptly filing with the Trustee a copy of the Board Resolution giving effect to such designation and an Officers' Certificate certifying that such designation complied with the foregoing provisions. "Voting Stock" means with respect to any Person, Capital Stock of any class or kind ordinarily having the power to vote for the election of directors, managers or other voting members of the governing body of such Person. "Wholly Owned" means, with respect to any Subsidiary of any Person, the ownership of all of the outstanding Capital Stock of such Subsidiary (other than any director's qualifying shares or Investments by foreign nationals mandated by applicable law) by such Person or one or more Wholly Owned Subsidiaries of such Person. 21 SECTION 1.02. INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT. Whenever this Indenture refers to a provision of the TIA, the provision is incorporated by reference in and made a part of this Indenture. The following TIA terms used in this Indenture have the following meanings: "indenture securities" means the Notes; "indenture security holder" means a Holder or a Securityholder; "indenture to be qualified" means this Indenture; "indenture trustee" or "institutional trustee" means the Trustee; and "obligor" on the indenture securities means the Company or any other obligor on the Notes. All other TIA terms used in this Indenture that are defined by the TIA, defined by TIA reference to another statute or defined by a rule of the Commission and not otherwise defined herein have the meanings assigned to them therein. SECTION 1.03. RULES OF CONSTRUCTION. Unless the context otherwise requires: (i) a term has the meaning assigned to it; (ii) an accounting term not otherwise defined has the meaning assigned to it in accordance with GAAP; (iii) "or" is not exclusive; (iv) words in the singular include the plural, and words in the plural include the singular; (v) provisions apply to successive events and transactions; (vi) "herein," "hereof" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision; (vii) all ratios and computations based on GAAP contained in this Indenture shall be computed in accordance with the definition of GAAP set forth in Section 1.01; and 22 (viii) all references to Sections or Articles refer to Sections or Articles of this Indenture unless otherwise indicated. ARTICLE TWO THE NOTES SECTION 2.01. FORM AND DATING. The Notes and the Trustee's certificate of authentication shall be substantially in the form annexed hereto as Exhibit A. The Notes may have notations, legends or endorsements required by law, stock exchange agreements to which the Company is subject or usage. The Company shall approve the form of the Notes and any notation, legend or endorsement on the Notes. Each Note shall be dated the date of its authentication. The terms and provisions contained in the form of the Notes annexed hereto as Exhibit A shall constitute, and are hereby expressly made, a part of this Indenture. To the extent applicable, the Company and the Trustee, by their execution and delivery of this Indenture, expressly agree to such terms and provisions and to be bound thereby. Notes offered and sold in reliance on Rule 144A shall be issued initially in the form of a single permanent global Note in registered form, substantially in the form set forth in Exhibit A (the "U.S. GLOBAL NOTE"), deposited with the Trustee, as custodian for the Depositary, duly executed by the Company and authenticated by the Trustee as hereinafter provided. The aggregate principal amount of the U.S. Global Note may from time to time be increased or decreased by adjustments made on the records of the Trustee, as custodian for the Depositary or its nominee, as hereinafter provided. Notes offered and sold in offshore transactions in reliance on Regulation S shall be issued initially in the form of a single permanent global Note in registered form substantially in the form set forth in Exhibit A (the "OFFSHORE GLOBAL NOTE") deposited with the Trustee, as custodian for the Depositary, duly executed by the Company and authenticated by the Trustee as hereinafter provided. The aggregate principal amount of the Offshore Global Note may from time to time be increased or decreased by adjustments made on the records of the Trustee, as custodian for the Depositary or its nominee, as hereinafter provided. Notes offered and sold in reliance on Regulation D under the Securities Act shall be issued in the form of permanent certificated Notes in registered form in substantially the form set forth in Exhibit A (the "U.S. PHYSICAL NOTES"). Notes issued pursuant to Section 2.07 in exchange for interests in the Offshore Global Note shall be in the form of permanent certificated Notes in registered form substantially in the form set forth in Exhibit A (the "OFFSHORE PHYSICAL NOTES"). 23 The Offshore Physical Notes and U.S. Physical Notes are sometimes collectively herein referred to as the "PHYSICAL NOTES". The U.S. Global Note and the Offshore Global Note are sometimes referred to herein as the "GLOBAL NOTES". The definitive Notes shall be typed, printed, lithographed or engraved or produced by any combination of these methods or may be produced in any other manner permitted by the rules of any securities exchange on which the Notes may be listed, all as determined by the Officers executing such Notes, as evidenced by their execution of such Notes. SECTION 2.02. RESTRICTIVE LEGENDS. Unless and until a Note is exchanged for an Exchange Note in connection with an effective Registration Statement pursuant to the Registration Rights Agreement, (i) the U.S. Global Note and each U.S. Physical Note shall bear the legend, set forth below on the face thereof and (ii) the Offshore Physical Notes and the Offshore Global Note shall bear the legend set forth below on the face thereof until (a) at least 41 days after the Closing Date, (b) receipt by the Company and the Trustee of a certificate substantially in the form of Exhibit B hereto and (c) the Company shall have obtained a CUSIP or CINS number (if then generally in use) with respect to the unlegended Offshore Global Note or Offshore Physical Note, as the case may be. THIS NOTE HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE. BY ITS ACQUISITION HEREOF, THE HOLDER (1) REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) OR (B) IT IS AN INSTITUTIONAL "ACCREDITED INVESTOR" (AS DEFINED IN RULE 501(a)(1), (2), (3) OR (7) OF REGULATION D UNDER THE SECURITIES ACT) (AN "INSTITUTIONAL ACCREDITED INVESTOR") OR (C) IT IS NOT A U.S. PERSON AND IS ACQUIRING THIS NOTE IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH REGULATION S UNDER THE SECURITIES ACT, (2) AGREES THAT IT WILL NOT, WITHIN THE TIME PERIOD REFERRED TO IN RULE 144(k) UNDER THE SECURITIES ACT AS IN EFFECT ON THE TRANSFER OF THIS NOTE, RESELL OR OTHERWISE TRANSFER THIS NOTE EXCEPT (A) TO THE COMPANY OR ANY SUBSIDIARY THEREOF, (B) TO A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A UNDER THE SECURITIES ACT, (C) INSIDE THE UNITED STATES TO AN INSTITUTIONAL ACCREDITED INVESTOR THAT, PRIOR TO SUCH TRANSFER, FURNISHES TO THE TRUSTEE A SIGNED LETTER CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS RELATING TO THE RESTRICTIONS 24 ON TRANSFER OF THIS NOTE (THE FORM OF WHICH LETTER CAN BE OBTAINED FROM THE TRUSTEE) AND IF SUCH TRANSFER IS IN RESPECT OF AN AGGREGATE PRINCIPAL AMOUNT OF NOTES AT THE TIME OF TRANSFER OF LESS THAN $100,000, AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY THAT SUCH TRANSFER IS IN COMPLIANCE WITH THE SECURITIES ACT, (D) OUTSIDE THE UNITED STATES IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH RULE 904 UNDER THE SECURITIES ACT, (E) PURSUANT TO THE EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT (IF AVAILABLE) OR (F) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND (3) AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THIS NOTE IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. IN CONNECTION WITH ANY TRANSFER OF THIS NOTE WITHIN THE TIME PERIOD REFERRED TO ABOVE, THE HOLDER MUST CHECK THE APPROPRIATE BOX SET FORTH ON THE REVERSE HEREOF RELATING TO THE MANNER OF SUCH TRANSFER AND SUBMIT THIS CERTIFICATE TO THE TRUSTEE. IF THE PROPOSED TRANSFEREE IS AN INSTITUTIONAL ACCREDITED INVESTOR, THE HOLDER MUST, PRIOR TO SUCH TRANSFER, FURNISH TO THE TRUSTEE AND THE COMPANY SUCH CERTIFICATIONS, LEGAL OPINIONS OR OTHER INFORMATION AS EITHER OF THEM MAY REASONABLY REQUIRE TO CONFIRM THAT SUCH TRANSFER IS BEING MADE PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION", "UNITED STATES" AND "U.S. PERSON" HAVE THE MEANINGS GIVEN TO THEM BY REGULATION S UNDER THE SECURITIES ACT. THE INDENTURE CONTAINS A PROVISION REQUIRING THE TRUSTEE TO REFUSE TO REGISTER ANY TRANSFER OF THIS NOTE IN VIOLATION OF THE FOREGOING RESTRICTIONS. Each Global Note, whether or not an Exchange Note, shall also bear the following legend on the face thereof: UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY (AND ANY PAYMENT HEREON IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED 25 REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. TRANSFERS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF CEDE & CO. OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN SECTION 2.08 OF THE INDENTURE. SECTION 2.03. EXECUTION, AUTHENTICATION AND DENOMINATIONS. The Notes shall be executed by an Officer of the Company listed in clause (i) of the definition of Officer herein and attested by its Secretary, any Assistant Secretary, the Treasurer or any Assistant Treasurer. The signature of any of these Officers on the Notes may be by facsimile or manual signature in the name and on behalf of the Company. If an Officer whose signature is on a Note no longer holds that office at the time the Trustee or authenticating agent authenticates the Note, the Note shall be valid nevertheless. A Note shall not be valid until the Trustee or authenticating agent manually signs the certificate of authentication on the Note. The signature shall be conclusive evidence that the Note has been authenticated under this Indenture. The Trustee or an authenticating agent shall upon receipt of a Company Order authenticate for original issue Notes in the aggregate principal amount of up to $150,000,000 plus any Exchange Notes that may be issued pursuant to the Registration Rights Agreement; PROVIDED that the Trustee shall be entitled to receive, in addition to the documents required by Section 10.03 hereof, an Officers' Certificate and an Opinion of Counsel of the Company in connection with such authentication of Notes. The Opinion of Counsel shall state: (a) that the form and terms of such Notes have been established by or pursuant to a Board Resolution or an indenture supplemental hereto in conformity with the provisions of this Indenture; (b) that such supplemental indenture, if any, when executed and delivered by the Company and the Trustee, will constitute a valid and binding obligation of the Company; 26 (c) that such Notes, when authenticated and delivered by the Trustee and issued by the Company in the manner and subject to any conditions specified in such Opinion of Counsel, will constitute valid and binding obligations of the Company in accordance with their terms and will be entitled to the benefits of this Indenture, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and to general equity principles; and (d) that the Company has been duly incorporated in, and is a validly existing corporation in good standing under the laws of, the State of Delaware. Such Company Order shall specify the amount of Notes to be authenticated and the date on which the original issue of Notes is to be authenticated. The aggregate principal amount of Notes outstanding at any time may not exceed the amount set forth above except for Notes authenticated and delivered upon registration of transfer of, or in exchange for, or in lieu of, other Notes pursuant to Section 2.06, 2.09, 2.10 or 2.11. The Trustee may appoint an authenticating agent to authenticate Notes. An authenticating agent may authenticate Notes whenever the Trustee may do so. Each reference in this Indenture to authentication by the Trustee includes authentication by such authenticating agent. An authenticating agent has the same rights as an Agent to deal with the Company or an Affiliate of the Company. The Notes shall be issuable only in registered form without coupons and only in denominations of $1,000 in principal amount and any integral multiple of $1,000 in excess thereof. SECTION 2.04. REGISTRAR AND PAYING AGENT. The Company shall maintain an office or agency where Notes may be presented for registration of transfer or for exchange (the "REGISTRAR"), an office or agency where Notes may be presented for payment (the "PAYING AGENT") and an office or agency where notices and demands to or upon the Company in respect of the Notes and this Indenture may be served, which shall be in the Borough of Manhattan, The City of New York. The Company shall cause the Registrar to keep a register of the Notes and of their transfer and exchange (the "SECURITY REGISTER"). The Company may have one or more co-Registrars and one or more additional Paying Agents. The Company shall enter into an appropriate agency agreement with any agent not a party to this Indenture. The agreement shall implement the provisions of this Indenture that relate to such agent. The Company shall give prompt written notice to the Trustee of the name and address of any such agent and any change in the address of such agent. If the Company fails to maintain a Registrar, Paying Agent and/or agent for service of notices and 27 demands, the Trustee shall act as such Registrar, Paying Agent and/or agent for service of notices and demands. The Company may remove any agent upon written notice to such agent and the Trustee; PROVIDED that no such removal shall become effective until (i) the acceptance of an appointment by a successor agent to such agent as evidenced by an appropriate agency agreement entered into by the Company and such successor agent and delivered to the Trustee or (ii) notification to the Trustee that the Trustee shall serve as such agent until the appointment of a successor agent in accordance with clause (i) of this proviso. The Company, any Subsidiary of the Company, or any Affiliate of any of them may act as Paying Agent, Registrar or co-Registrar, and/or agent for service of notice and demands. The Company initially appoints the Trustee as Registrar, Paying Agent, authenticating agent and agent for service of notice and demands. If, at any time, the Trustee is not the Registrar, the Registrar shall make available to the Trustee on or before each Interest Payment Date and at such other times as the Trustee may reasonably request, the names and addresses of the Holders as they appear in the Security Register. SECTION 2.05. PAYING AGENT TO HOLD MONEY IN TRUST. Not later than each due date of the principal, premium, if any, and interest on any Notes, the Company shall deposit with the Paying Agent money in immediately available funds sufficient to pay such principal, premium, if any, and interest so becoming due. The Company shall require each Paying Agent other than the Trustee to agree in writing that such Paying Agent shall hold in trust for the benefit of the Holders or the Trustee all money held by the Paying Agent for the payment of principal of, premium, if any, and interest on the Notes (whether such money has been paid to it by the Company or any other obligor on the Notes), and such Paying Agent shall promptly notify the Trustee of any default by the Company (or any other obligor on the Notes) in making any such payment. The Company at any time may require a Paying Agent to pay all money held by it to the Trustee and account for any funds disbursed, and the Trustee may at any time during the continuance of any payment default, upon written request to a Paying Agent, require such Paying Agent to pay all money held by it to the Trustee and to account for any funds disbursed. Upon doing so, the Paying Agent shall have no further liability for the money so paid over to the Trustee. If the Company or any Subsidiary of the Company or any Affiliate of any of them acts as Paying Agent, it will, on or before each due date of any principal of, premium, if any, or interest on the Notes, segregate and hold in a separate trust fund for the benefit of the Holders a sum of money sufficient to pay such principal, premium, if any, or interest so becoming due until such sum of money shall be paid to such Holders or otherwise disposed of as provided in this Indenture, and will promptly notify the Trustee of its action or failure to act. SECTION 2.06. TRANSFER AND EXCHANGE. The Notes are issuable only in registered form. A Holder may surrender a Note for registration of transfer by written application to the Registrar stating the name of the proposed transferee and otherwise complying with the terms of this Indenture. No such transfer shall be effected until, and 28 such transferee shall succeed to the rights of a Holder only upon, final acceptance and registration of the transfer by the Registrar in the Security Register. Prior to the registration of any transfer by a Holder as provided herein, the Company, the Trustee, and any agent of the Company shall treat the person in whose name the Note is registered as the owner thereof for all purposes whether or not the Note shall be overdue, and neither the Company, the Trustee, nor any such agent shall be affected by notice to the contrary. Furthermore, any Holder of a U.S. Global Note shall, by acceptance of such U.S. Global Note, agree that registration of transfers of beneficial interests in such U.S. Global Note may be effected only through a book entry system maintained by the Holder of such U.S. Global Note (or its agent) and that ownership of a beneficial interest in the Note shall be required to be reflected in a book entry. When Notes are presented to the Registrar or a co-Registrar with a request to register the transfer or to exchange them for an equal principal amount of Notes of other authorized denominations (including an exchange of Notes for Exchange Notes), the Registrar shall register the transfer or make the exchange as requested if its requirements for such transactions are met; PROVIDED that no exchanges of Notes for Exchange Notes shall occur until a Registration Statement shall have been declared effective by the Commission and that any Notes that are exchanged for Exchange Notes shall be cancelled by the Trustee. To permit registrations of transfers and exchanges, the Company shall execute and the Trustee shall authenticate Notes at the Registrar's request. No service charge shall be made for any registration of transfer or exchange or redemption of the Notes, but the Company may require payment of a sum sufficient to cover any transfer tax or similar governmental charge payable in connection therewith (other than any such transfer taxes or other similar governmental charge payable upon exchanges pursuant to Section 2.11, 3.08 or 9.04). The Registrar shall not be required (i) to issue, register the transfer of or exchange any Note during a period beginning at the opening of business 15 days before the day of the mailing of a notice of redemption of Notes selected for redemption under Section 3.03 and ending at the close of business on the day of such mailing, or (ii) to register the transfer of or exchange any Note so selected for redemption in whole or in part, except the unredeemed portion of any Note being redeemed in part. SECTION 2.07. BOOK-ENTRY PROVISIONS FOR GLOBAL NOTES. (a) The U.S. Global Note and Offshore Global Note initially shall (i) be registered in the name of the Depositary for such Global Notes or the nominee of such Depositary, (ii) be delivered to the Trustee as custodian for such Depositary and (iii) bear legends as set forth in Section 2.02. Members of, or participants in, the Depositary ("AGENT MEMBERS") shall have no rights under this Indenture with respect to any Global Note held on their behalf by the Depositary, or the Trustee as its custodian, or under the Global Note, and the Depositary may be treated by the Company, the Trustee and any agent of the Company or the Trustee as the absolute owner of such Global Note for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Company, the Trustee or any agent of the 29 Company or the Trustee, from giving effect to any written certification, proxy or other authorization furnished by the Depositary or impair, as between the Depositary and its Agent Members, the operation of customary practices governing the exercise of the rights of a holder of any Note. (b) Transfers of a Global Note shall be limited to transfers of such Global Note in whole, but not in part, to the Depositary, its successors or their respective nominees. Interests of beneficial owners in a Global Note may be transferred in accordance with the rules and procedures of the Depositary and the provisions of Section 2.08. In addition, U.S. Physical Notes and Offshore Physical Notes shall be transferred to all beneficial owners in exchange for their beneficial interests in the U.S. Global Note or the Offshore Global Note, respectively, if (i) the Depositary notifies the Company that it is unwilling or unable to continue as Depositary for the U.S. Global Note or the Offshore Global Note, as the case may be, and a successor depositary is not appointed by the Company within 90 days of such notice or (ii) an Event of Default has occurred and is continuing and the Registrar has received a request to the foregoing effect from the Depositary. (c) Any beneficial interest in one of the Global Notes that is transferred to a Person who takes delivery in the form of an interest in the other Global Note will, upon transfer, cease to be an interest in such Global Note and become an interest in the other Global Note and, accordingly, will thereafter be subject to all transfer restrictions, if any, and other procedures applicable to beneficial interests in such other Global Note for as long as it remains such an interest. (d) In connection with any registration of transfer of a portion of the beneficial interests in a Global Note to beneficial owners pursuant to paragraph (b) of this Section, the Registrar shall reflect on its books and records the date and a decrease in the principal amount of such Global Note in an amount equal to the principal amount of the beneficial interest in such Global Note to be transferred, and the Company shall execute, and the Trustee shall authenticate and deliver, one or more Physical Notes of like tenor and amount. (e) In connection with the transfer of the entire U.S. Global Note or Offshore Global Note to beneficial owners pursuant to paragraph (b) of this Section, the U.S. Global Note or Offshore Global Note, as the case may be, shall be deemed to be surrendered to the Trustee for cancellation, and the Company shall execute, and the Trustee shall authenticate and deliver, to each beneficial owner identified by the Depositary in exchange for its beneficial interest in the U.S. Global Note or Offshore Global Note, as the case may be, an equal aggregate principal amount of U.S. Physical Notes or Offshore Physical Notes, as the case may be, of authorized denominations. 30 (f) Any U.S. Physical Note delivered in exchange for an interest in the U.S. Global Note pursuant to paragraph (b) or (d) of this Section shall, except as otherwise provided by paragraph (f) of Section 2.08, bear the legend regarding transfer restrictions applicable to the U.S. Physical Note set forth in Section 2.02. (g) Any Offshore Physical Note delivered in exchange for an interest in the Offshore Global Note pursuant to paragraph (b) of this Section shall, except as otherwise provided by paragraph (f) of Section 2.08, bear the legend regarding transfer restrictions applicable to the Offshore Physical Note set forth in Section 2.02. (h) The registered holder of a Global Note may grant proxies and otherwise authorize any person, including Agent Members and persons that may hold interests through Agent Members, to take any action which a Holder is entitled to take under this Indenture or the Notes. (i) QIBs that are beneficial owners of interests in a U.S. Global Note may receive Physical Notes (which shall bear the Private Placement Legend if required by Section 2.02) in accordance with the procedures of the Depositary. In connection with the execution, authentication and delivery of such Physical Notes, the Registrar shall reflect on its books and records a decrease in the principal amount of the relevant U.S. Global Note equal to the principal amount of such Physical Notes and the Company shall execute and the Trustee shall authenticate and deliver one or more Physical Notes having an equal aggregate principal amount. SECTION 2.08. SPECIAL TRANSFER PROVISIONS. Unless and until a Note is exchanged for an Exchange Note in connection with an effective Registration pursuant to the Registration Rights Agreement, the following provisions shall apply: (a) TRANSFERS TO NON-QIB INSTITUTIONAL ACCREDITED INVESTORS. The following provisions shall apply with respect to the registration of any proposed transfer of a Note to any Institutional Accredited Investor which is not a QIB (excluding Non-U.S. Persons): (i) The Registrar shall register the transfer of any Note, whether or not such Note bears the Private Placement Legend, if (x) the proposed transferor has delivered a certificate to the Registrar certifying that the requested transfer is after the time period referred to in Rule 144(k) under the Securities Act as in effect with respect to such transfer or (y) the proposed transferee has delivered to the Registrar (A) a certificate substantially in the form of Exhibit C hereto and (B) if the aggregate principal amount of the Notes being transferred is less than $100,000 at the time of such transfer, an opinion of counsel acceptable to the Company and the Trustee that such transfer is in compliance with the Securities Act. 31 (ii) If the proposed transferor is an Agent Member holding a beneficial interest in the U.S. Global Note, upon receipt by the Registrar of (x) the documents, if any, required by paragraph (i) and (y) instructions given in accordance with the Depositary's and the Registrar's procedures, the Registrar shall reflect on its books and records the date and a decrease in the principal amount of the U.S. Global Note in an amount equal to the principal amount of the beneficial interest in the U.S. Global Note to be transferred, and the Company shall execute, and the Trustee shall authenticate and deliver, one or more U.S. Physical Notes of like tenor and amount. (b) TRANSFERS TO QIBS. The following provisions shall apply with respect to the registration of any proposed transfer of a U.S. Physical Note or an interest in the U.S. Global Note to a QIB (excluding Non-U.S. Persons): (i) If the Note to be transferred consists of (x) U.S. Physical Notes, the Registrar shall register the transfer if such transfer is being made by a proposed transferor who has checked the box provided for on the form of Note stating, or has otherwise advised the Company and the Registrar in writing, that the sale has been made in compliance with the provisions of Rule 144A to a transferee who has signed the certification provided for on the form of Note stating, or has otherwise advised the Company and the Registrar in writing, that it is purchasing the Note for its own account or an account with respect to which it exercises sole investment discretion and that it and any such account is a QIB within the meaning of Rule 144A, and is aware that the sale to it is being made in reliance on Rule 144A and acknowledges that it has received such information regarding the Company as it has requested pursuant to Rule 144A or has determined not to request such information and that it is aware that the transferor is relying upon its foregoing representations in order to claim the exemption from registration provided by Rule 144A or (y) an interest in the U.S. Global Note, the transfer of such interest may be effected only through the book entry system maintained by the Depositary. (ii) If the proposed transferee is an Agent Member, and the Note to be transferred consists of U.S. Physical Notes, upon receipt by the Registrar of the documents referred to in clause (i) and instructions given in accordance with the Depositary's and the Registrar's procedures, the Registrar shall reflect on its books and records the date and an increase in the principal amount of the U.S. Global Note in an amount equal to the principal amount of the U.S. Physical Notes, to be transferred, and the Trustee shall cancel the U.S. Physical Note so transferred. (c) TRANSFERS OF INTERESTS IN THE OFFSHORE GLOBAL NOTE OR OFFSHORE PHYSICAL NOTES. The following provisions shall apply with respect to any transfer of interests in the Offshore Global Note or Offshore Physical Notes: 32 (i) prior to the removal of the Private Placement Legend from the Offshore Global Note or Offshore Physical Notes pursuant to Section 2.02, the Registrar shall refuse to register such transfer; and (ii) after such removal, the Registrar shall register the transfer of any such Note without requiring any additional certification. (d) Intentionally Omitted. (e) TRANSFERS TO NON-U.S. PERSONS AT ANY TIME. The following provisions shall apply with respect to any transfer of a Note to a Non-U.S. Person: (i) The Registrar shall register any proposed transfer to any Non- U.S. Person if the Note to be transferred is a U.S. Physical Note or an interest in the U.S. Global Note only upon receipt of a certificate substantially in the form of Exhibit D from the proposed transferor. (ii) (a) If the proposed Transferor is an Agent Member holding a beneficial interest in the U.S. Global Note, upon receipt by the Registrar of (x) the documents required by paragraph (i) and (y) instructions in accordance with the Depositary's and the Registrar's procedures, the Registrar shall reflect on its books and records the date and a decrease in the principal amount at maturity of the U.S. Global Note in an amount equal to the principal amount at maturity of the beneficial interest in the U.S. Global Note to be transferred, and (b) if the proposed transferee is an Agent Member, upon receipt by the Registrar of instructions given in accordance with the Depositary's and the Registrar's procedures, the Registrar shall reflect on its books and records the date and an increase in the principal amount at maturity of the Offshore Global Note in an amount equal to the principal amount at maturity of the U.S. Physical Notes or the U.S. Global Note, as the case may be, to be transferred, and the Trustee shall cancel the Physical Note, if any, so transferred or decrease the amount of the U.S. Global Note. (f) PRIVATE PLACEMENT LEGEND. Upon the transfer, exchange or replacement of Notes not bearing the Private Placement Legend, the Registrar shall deliver Notes that do not bear the Private Placement Legend. Upon the transfer, exchange or replacement of Notes bearing the Private Placement Legend, the Registrar shall deliver only Notes that bear the Private Placement Legend unless either (i) the circumstances contemplated by paragraphs (a)(i)(x) or (e)(ii) of this Section 2.08 exist or (ii) there is delivered to the Registrar an Opinion of Counsel reasonably satisfactory to the Company and the Trustee to the effect that neither such legend nor the related restrictions on transfer are required in order to maintain compliance with the provisions of the Securities Act. 33 (g) GENERAL. By its acceptance of any Note bearing the Private Placement Legend, each Holder of such a Note acknowledges the restrictions on transfer of such Note set forth in this Indenture and in the Private Placement Legend and agrees that it will transfer such Note only as provided in this Indenture. The Registrar shall not register a transfer of any Note unless such transfer complies with the restrictions on transfer of such Note set forth in this Indenture. In connection with any transfer of Notes, each Holder agrees by its acceptance of the Notes to furnish the Registrar or the Company such certifications, legal opinions or other information as either of them may reasonably require to confirm that such transfer is being made pursuant to an exemption from, or a transaction not subject to, the registration requirements of the Securities Act; PROVIDED that the Registrar shall not be required to determine (but may rely on a determination made by the Company with respect to) the sufficiency of any such certifications, legal opinions or other information. The Registrar shall retain copies of all letters, notices and other written communications received pursuant to Section 2.07 or this Section 2.08 for at least three years after receipt thereof. The Company shall have the right to inspect and make copies of all such letters, notices or other written communications at any reasonable time upon the giving of reasonable written notice to the Registrar. SECTION 2.09. REPLACEMENT NOTES. If a mutilated Note is surrendered to the Trustee or if the Holder claims that the Note has been lost, destroyed or wrongfully taken, the Company shall issue and the Trustee shall authenticate a replacement Note of like tenor and principal amount and bearing a number not contemporaneously outstanding; PROVIDED that the requirements of the second paragraph of Section 2.10 are met. If required by the Trustee or the Company, an indemnity bond must be furnished that is sufficient in the judgment of both the Trustee and the Company to protect the Company, the Trustee or any Agent from any loss that any of them may suffer if a Note is replaced. The Company may charge such Holder for its expenses and the expenses of the Trustee in replacing a Note. In case any such mutilated, lost, destroyed or wrongfully taken Note has become or is about to become due and payable, the Company in its discretion may pay such Note instead of issuing a new Note in replacement thereof. Every replacement Note is an additional obligation of the Company and shall be entitled to the benefits of this Indenture. SECTION 2.10. OUTSTANDING NOTES. Notes outstanding at any time are all Notes that have been authenticated by the Trustee except for those cancelled by it, those delivered to it for cancellation and those described in this Section 2.10 as not outstanding. If a Note is replaced pursuant to Section 2.09, it ceases to be outstanding unless and until the Trustee and the Company receive proof satisfactory to them that the replaced Note is held by a BONA FIDE purchaser. 34 If the Paying Agent (other than the Company or an Affiliate of the Company) holds on the maturity date money sufficient to pay Notes payable on that date, then on and after that date such Notes cease to be outstanding and interest on them shall cease to accrue. A Note does not cease to be outstanding because the Company or one of its Affiliates holds such Note, PROVIDED, HOWEVER, that, in determining whether the Holders of the requisite principal amount of the outstanding Notes have given any request, demand, authorization, direction, notice, consent or waiver hereunder, Notes owned by the Company or any other obligor upon the Notes or any Affiliate of the Company or of such other obligor shall be disregarded and deemed not to be outstanding, except that, in determining whether the Trustee shall be protected in relying upon any such request, demand, authorization, direction, notice, consent or waiver, only Notes which a Responsible Officer of the Trustee knows to be so owned shall be so disregarded. Notes so owned which have been pledged in good faith may be regarded as outstanding if the pledgee establishes to the satisfaction of the Trustee the pledgee's right so to act with respect to such Notes and that the pledgee is not the Company or any other obligor upon the Notes or any Affiliate of the Company or of such other obligor. SECTION 2.11. TEMPORARY NOTES. Until definitive Notes are ready for delivery, the Company may prepare and the Trustee shall authenticate temporary Notes. Temporary Notes shall be substantially in the form of definitive Notes but may have insertions, substitutions, omissions and other variations determined to be appropriate by the Officers executing the temporary Notes, as evidenced by their execution of such temporary Notes. If temporary Notes are issued, the Company will cause definitive Notes to be prepared without unreasonable delay. After the preparation of definitive Notes, the temporary Notes shall be exchangeable for definitive Notes upon surrender of the temporary Notes at the office or agency of the Company designated for such purpose pursuant to Section 4.02, without charge to the Holder. Upon surrender for cancellation of any one or more temporary Notes the Company shall execute and the Trustee shall authenticate and deliver in exchange therefor a like principal amount of definitive Notes of authorized denominations. Until so exchanged, the temporary Notes shall be entitled to the same benefits under this Indenture as definitive Notes. SECTION 2.12. CANCELLATION. The Company at any time may deliver to the Trustee for cancellation any Notes previously authenticated and delivered hereunder which the Company may have acquired in any manner whatsoever, and may deliver to the Trustee for cancellation any Notes previously authenticated hereunder which the Company has not issued and sold. The Registrar and the Paying Agent shall forward to the Trustee any Notes surrendered to them for transfer, exchange or payment. The Trustee shall cancel all Notes surrendered for transfer, exchange, payment or cancellation and shall destroy them in accordance with its normal procedure. The Company may not issue new Notes to replace Notes it has paid in full or delivered to the Trustee for cancellation. 35 SECTION 2.13. CUSIP NUMBERS. The Company in issuing the Notes may use "CUSIP" and "CINS" numbers (if then generally in use), and the Trustee shall use CUSIP numbers or CINS numbers, as the case may be, in notices of redemption or exchange as a convenience to Holders; PROVIDED that any such notice shall state that no representation is made as to the correctness of such numbers either as printed on the Notes or as contained in any notice of redemption or exchange and that reliance may be placed only on the other identification numbers printed on the Notes. SECTION 2.14. DEFAULTED INTEREST. If the Company defaults in a payment of interest on the Notes, it shall pay, or shall deposit with the Paying Agent money in immediately available funds sufficient to pay the defaulted interest, plus (to the extent lawful) any interest payable on the defaulted interest, to the Persons who are Holders on a subsequent special record date. A special record date, as used in this Section 2.14 with respect to the payment of any defaulted interest, shall mean the 15th day next preceding the date fixed by the Company for the payment of defaulted interest, whether or not such day is a Business Day. At least 15 days before the subsequent special record date, the Company shall mail to each Holder and to the Trustee a notice that states the subsequent special record date, the payment date and the amount of defaulted interest to be paid. ARTICLE THREE REDEMPTION SECTION 3.01. RIGHT OF REDEMPTION. The Notes may be redeemed at the election of the Company, in whole or in part, at any time and from time to time on or after December 15, 2001 and prior to maturity, upon not less than 30 nor more than 60 days' prior notice mailed by first-class mail to each Holder's last address as it appears in the Security Register, at the following Redemption Prices (expressed in percentages of their principal amount), plus accrued and unpaid interest, if any, to the Redemption Date (subject to the right of Holders of record on the relevant Regular Record Date that is on or prior to the Redemption Date to receive interest due on an Interest Payment Date) if redeemed during the 12-month period commencing on December 15 of the applicable year set forth below: Redemption Year Price ---- ---------- 2001 105.125% 2002 102.563 2003 and thereafter 100.000 In addition, at any time prior to December 15, 1999, the Company may redeem up to 35% of the aggregate principal amount of the Notes with the proceeds of one or more Public Equity Offerings, at any time as a whole or from time to time in part, at a 36 Redemption Price (expressed as a percentage of principal amount on the Redemption Date) of 110.250 %, plus accrued and unpaid interest, if any, to the redemption date; provided that, immediately after any such redemption at least $97.5 million aggregate principal amount of the Notes remains outstanding. SECTION 3.02. NOTICES TO TRUSTEE. If the Company elects to redeem Notes pursuant to Section 3.01, it shall notify the Trustee in writing of the Redemption Date and the principal amount of Notes to be redeemed. The Company shall give each notice provided for in this Section 3.02 in an Officers' Certificate at least 45 days before the Redemption Date (unless a shorter period shall be satisfactory to the Trustee). SECTION 3.03. SELECTION OF NOTES TO BE REDEEMED. If less than all of the Notes are to be redeemed at any time, the Trustee shall select the Notes to be redeemed in compliance with the requirements, as certified to it by the Company, of the principal national securities exchange, if any, on which the Notes are listed or, if the Notes are not listed on a national securities exchange, on a pro rata basis, by lot or by such other method as the Trustee in its sole discretion shall deem fair and appropriate; PROVIDED that no Notes of $1,000 in principal amount or less shall be redeemed in part. The Trustee shall make the selection from the Notes outstanding and not previously called for redemption. Notes in denominations of $1,000 in principal amount may only be redeemed in whole. The Trustee may select for redemption portions (equal to $1,000 in principal amount or any integral multiple thereof) of Notes that have denominations larger than $1,000 in principal amount. Provisions of this Indenture that apply to Notes called for redemption also apply to portions of Notes called for redemption. The Trustee shall notify the Company and the Registrar promptly in writing of the Notes or portions of Notes to be called for redemption. SECTION 3.04. NOTICE OF REDEMPTION. With respect to any redemption of Notes pursuant to Section 3.01, at least 30 days but not more than 60 days before a Redemption Date, the Company shall mail a notice of redemption by first class mail to each Holder whose Notes are to be redeemed. The notice shall identify the Notes to be redeemed and shall state: (i) the Redemption Date; (ii) the Redemption Price; (iii) the name and address of the Paying Agent; 37 (iv) that Notes called for redemption must be surrendered to the Paying Agent in order to collect the Redemption Price; (v) that, unless the Company defaults in making the redemption payment, interest on Notes called for redemption ceases to accrue on and after the Redemption Date and the only remaining right of the Holders is to receive payment of the Redemption Price plus accrued interest to the Redemption Date upon surrender of the Notes to the Paying Agent; (vi) that, if any Note is being redeemed in part, the portion of the principal amount (equal to $1,000 in principal amount or any integral multiple thereof) of such Note to be redeemed and that, on and after the Redemption Date, upon surrender of such Note, a new Note or Notes in principal amount equal to the unredeemed portion thereof will be reissued; and (vii) that, if any Note contains a CUSIP number as provided in Section 2.13, no representation is being made as to the correctness of the CUSIP number either as printed on the Notes or as contained in the notice of redemption and that reliance may be placed only on the other identification numbers printed on the Notes. At the Company's request (which request may be revoked by the Company at any time prior to the time at which the Trustee shall have given such notice to the Holders), made in writing to the Trustee at least 45 days (or such shorter period as shall be satisfactory to the Trustee) before a Redemption Date, the Trustee shall give the notice of redemption in the name and at the expense of the Company. If, however, the Company gives such notice to the Holders, the Company shall concurrently deliver to the Trustee an Officers' Certificate stating that such notice has been given. SECTION 3.05. EFFECT OF NOTICE OF REDEMPTION. Once notice of redemption is mailed, Notes called for redemption become due and payable on the Redemption Date and at the Redemption Price. Upon surrender of any Notes to the Paying Agent, such Notes shall be paid at the Redemption Price, plus accrued interest, if any, to the Redemption Date. Notice of redemption shall be deemed to be given when mailed, whether or not the Holder receives the notice. In any event, failure to give such notice, or any defect therein, shall not affect the validity of the proceedings for the redemption of Notes held by Holders to whom such notice was properly given. SECTION 3.06. DEPOSIT OF REDEMPTION PRICE. On or prior to any Redemption Date, the Company shall deposit with the Paying Agent (or, if the Company is acting as its own Paying Agent, shall segregate and hold in trust as provided in Section 2.05) money sufficient to pay the Redemption Price of and accrued interest on all Notes to be 38 redeemed on that date other than Notes or portions thereof called for redemption on that date that have been delivered by the Company to the Trustee for cancellation; provided that if the Company shall deposit money on the Redemption Date, the amount shall be deposited before 11:00 A.M. New York City time. SECTION 3.07. PAYMENT OF NOTES CALLED FOR REDEMPTION. If notice of redemption has been given in the manner provided above, the Notes or portion of Notes specified in such notice to be redeemed shall become due and payable on the Redemption Date at the Redemption Price stated therein, together with accrued interest to such Redemption Date, and on and after such date (unless the Company shall default in the payment of such Notes at the Redemption Price and accrued interest to the Redemption Date, in which case the principal, until paid, shall bear interest from the Redemption Date at the rate prescribed in the Notes), such Notes shall cease to accrue interest. Upon surrender of any Note for redemption in accordance with a notice of redemption, such Note shall be paid and redeemed by the Company at the Redemption Price, together with accrued interest, if any, to the Redemption Date; PROVIDED that installments of interest whose Stated Maturity is on or prior to the Redemption Date shall be payable to the Holders registered as such at the close of business on the relevant Regular Record Date. SECTION 3.08. NOTES REDEEMED IN PART. Upon surrender of any Note that is redeemed in part, the Company shall execute and the Trustee shall authenticate and deliver to the Holder a new Note equal in principal amount to the unredeemed portion of such surrendered Note. ARTICLE FOUR COVENANTS SECTION 4.01. PAYMENT OF NOTES. The Company shall pay the principal of, premium, if any, and interest on the Notes on the dates and in the manner provided in the Notes and this Indenture. An installment of principal, premium, if any, or interest shall be considered paid on the date due if the Trustee or Paying Agent (other than the Company, a Subsidiary of the Company, or any Affiliate of any of them) holds on that date money designated for and sufficient to pay the installment. If the Company or any Subsidiary of the Company or any Affiliate of any of them, acts as Paying Agent, an installment of principal, premium, if any, or interest shall be considered paid on the due date if the entity acting as Paying Agent complies with the last sentence of Section 2.05. As provided in Section 6.09, upon any bankruptcy or reorganization procedure relative to the Company, the Trustee shall serve as the Paying Agent, if any, for the Notes. 39 The Company shall pay interest on overdue principal, premium, if any, and interest on overdue installments of interest, to the extent lawful, at the rate per annum specified in the Notes. SECTION 4.02. MAINTENANCE OF OFFICE OR AGENCY. The Company will maintain in the Borough of Manhattan, The City of New York an office or agency where Notes may be surrendered for registration of transfer or exchange or for presentation for payment and where notices and demands to or upon the Company in respect of the Notes and this Indenture may be served. The Company will give prompt written notice to the Trustee of the location, and any change in the location, of such office or agency. If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the address of the Trustee set forth in Section 10.02. The Company may also from time to time designate one or more other offices or agencies where the Notes may be presented or surrendered for any or all such purposes and may from time to time rescind such designations; PROVIDED that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency in the Borough of Manhattan, The City of New York for such purposes. The Company will give prompt written notice to the Trustee of any such designation or rescission and of any change in the location of any such other office or agency. The Company hereby initially designates The Corporate Trust Office of the Trustee, located in the Borough of Manhattan, The City of New York, as such office of the Company in accordance with Section 2.04. SECTION 4.03. LIMITATION ON INDEBTEDNESS. (a) The Company will not, and will not permit any of its Restricted Subsidiaries to, Incur any Indebtedness; PROVIDED that the Company may Incur Indebtedness, and any Restricted Subsidiary may Incur Acquired Indebtedness, if, after giving effect to the Incurrence of such Indebtedness and the receipt and application of the proceeds therefrom, the Consolidated Leverage Ratio would be less than or equal to 5.75 to 1 for Indebtedness Incurred prior to December 15, 1999, and 5.25 to 1 for Indebtedness Incurred on or after December 15, 1999. Notwithstanding the foregoing, the Company and any Restricted Subsidiary (except as specified below) may Incur each and all of the following: (i) Indebtedness outstanding at any time in an aggregate principal amount not to exceed the amount of the commitments under the New Credit Facility on the Closing Date, less any amount of Indebtedness permanently repaid as provided under Section 4.11 (ii) Indebtedness (A) to the Company evidenced by an unsubordinated promissory note or (B) to any of its Restricted Subsidiaries; PROVIDED that any event which results in any such Restricted Subsidiary ceasing to be a Restricted Subsidiary or any subsequent transfer of such Indebtedness (other than to 40 the Company or another Restricted Subsidiary) shall be deemed, in each case, to constitute an Incurrence of such Indebtedness not permitted by this clause (ii); (iii) Indebtedness issued in exchange for, or the net proceeds of which are used to refinance or refund, then outstanding Indebtedness, other than Indebtedness Incurred under clause (i), (ii), (iv), or (vi) of this paragraph, and any refinancings thereof in an amount not to exceed the amount so refinanced or refunded (plus premiums, accrued interest, fees and expenses); PROVIDED that Indebtedness the proceeds of which are used to refinance or refund the Notes or Indebtedness that is PARI PASSU with, or subordinated in right of payment to, the Notes shall only be permitted under this clause (iii) if (A) in case the Notes are refinanced in part or the Indebtedness to be refinanced is PARI PASSU with the Notes, such new Indebtedness, by its terms or by the terms of any agreement or instrument pursuant to which such new Indebtedness is outstanding, is expressly made PARI PASSU with, or subordinate in right of payment to, the remaining Notes, (B) in case the Indebtedness to be refinanced is subordinated in right of payment to the Notes, such new Indebtedness, by its terms or by the terms of any agreement or instrument pursuant to which such new Indebtedness is issued or remains outstanding, is expressly made subordinate in right of payment to the Notes at least to the extent that the Indebtedness to be refinanced is subordinated to the Notes and (C) such new Indebtedness, determined as of the date of Incurrence of such new Indebtedness, does not mature prior to the Stated Maturity of the Indebtedness to be refinanced or refunded, and the Average Life of such new Indebtedness is at least equal to the remaining Average Life of the Indebtedness to be refinanced or refunded; and PROVIDED FURTHER that in no event may Indebtedness of the Company be refinanced by means of any Indebtedness of any Restricted Subsidiary pursuant to this clause (iii); (iv) Indebtedness (A) in respect of performance, surety or appeal bonds provided in the ordinary course of business, (B) under Currency Agreements and Interest Rate Agreements; PROVIDED that such agreements (a) are designed solely to protect the Company or its Subsidiaries against fluctuations in foreign currency exchange rates or interest rates and (b) do not increase the Indebtedness of the obligor outstanding at any time other than as a result of fluctuations in foreign currency exchange rates or interest rates or by reason of fees, indemnities and compensation payable thereunder; and (C) arising from agreements providing for indemnification, adjustment of purchase price or similar obligations, or from Guarantees or letters of credit, surety bonds or performance bonds securing any obligations of the Company or any of its Restricted Subsidiaries pursuant to such agreements, in any case Incurred in connection with the disposition of any business, assets or Restricted Subsidiary of the Company (other than Guarantees of Indebtedness Incurred by any Person acquiring all or any portion of such business, assets or Restricted Subsidiary of the Company for the purpose of financing such acquisition), in a principal amount not to exceed the gross proceeds actually received by the Company or any Restricted Subsidiary in connection with such disposition; and (v) Indebtedness of the Company, to the extent the net proceeds thereof are promptly (A) used to purchase Notes tendered in an Offer to Purchase made as a result of a Change in Control or (B) deposited to defease the Notes as set forth in Section 8.03 and (vi) Indebtedness Incurred by any Restricted Subsidiary in an amount not to exceed $10 million at any one time outstanding. 41 (b) Notwithstanding any other provision of this Section 4.03, the maximum amount of Indebtedness that the Company or a Restricted Subsidiary may Incur pursuant to this Section 4.03 shall not be deemed to be exceeded, with respect to any outstanding Indebtedness due solely to the result of fluctuations in the exchange rates of currencies. (c) For purposes of determining any particular amount of Indebtedness under this Section 4.03, (1) Indebtedness Incurred under the New Credit Facility on or prior to the Closing Date shall be treated as Incurred pursuant to clause (i) of the second paragraph of Section 4.03(a), (2) Guarantees, Liens or obligations with respect to letters of credit supporting Indebtedness otherwise included in the determination of such particular amount shall not be included and (3) any Liens granted pursuant to the equal and ratable provisions referred to in Section 4.09 shall not be treated as Indebtedness. For purposes of determining compliance with this Section 4.03, in the event that an item of Indebtedness meets the criteria of more than one of the types of Indebtedness described in the above clauses (other than Indebtedness referred to in clause (1) of the preceding sentence), the Company, in its sole discretion, shall classify such item of Indebtedness and only be required to include the amount and type of such Indebtedness in one of such clauses. SECTION 4.04. LIMITATION ON RESTRICTED PAYMENTS. The Company will not, and will not permit any Restricted Subsidiary to, directly or indirectly, (i) declare or pay any dividend or make any distribution on or with respect to its Capital Stock (other than (x) dividends or distributions payable solely in shares of its Capital Stock (other than Redeemable Stock) or in options, warrants or other rights to acquire shares of such Capital Stock and (y) pro rata dividends or distributions on Common Stock of Restricted Subsidiaries held by minority stockholders) held by Persons other than the Company or any of its Restricted Subsidiaries, (ii) purchase, redeem, retire or otherwise acquire for value any shares of Capital Stock of (A) the Company or an Unrestricted Subsidiary (including options, warrants or other rights to acquire such shares of Capital Stock) held by any Person or (B) a Restricted Subsidiary (including options, warrants or other rights to acquire such shares of Capital Stock) held by any Affiliate of the Company (other than a Wholly Owned Restricted Subsidiary) or any holder (or any Affiliate of such holder) of 10% or more of the Capital Stock of the Company, (iii) make any voluntary or optional principal payment, or voluntary or optional redemption, repurchase, defeasance, or other acquisition or retirement for value, of Indebtedness of the Company that is subordinated in right of payment to the Notes (other than the purchase, repurchase or the acquisition of Indebtedness in anticipation of satisfying a sinking fund obligation, principal installment or final maturity, in any case due within one year of the date of acquisition) or (iv) make any Investment, other than a Permitted Investment, in any Person (such payments or any other actions described in clauses (i) through (iv) being collectively "Restricted Payments") if, at the time of, and after giving effect to, the proposed Restricted Payment: (A) a Default or Event of Default shall have occurred and be continuing, (B) the Company could not Incur at least $1.00 of Indebtedness under the first paragraph of Section 4.03 or (C) the aggregate amount of all Restricted 42 Payments (the amount, if other than in cash, to be determined in good faith by the Board of Directors, whose determination shall be conclusive and evidenced by a Board Resolution) made after the Closing Date shall exceed the sum of (1) the remainder of (x) the aggregate amount of the Consolidated EBITDA (or, if the Consolidated EBITDA is a loss, minus 100% of the amount of such loss) (determined by excluding income resulting from transfers of assets by the Company or a Restricted Subsidiary to an Unrestricted Subsidiary) accrued on a cumulative basis during the period (taken as one accounting period) beginning on the first day of the fiscal quarter during which the Closing Date occurs and ending on the last day of the last fiscal quarter preceding the Transaction Date for which reports have been filed pursuant to Section 4.18 minus (y) the product of two multiplied by the aggregate amount of Consolidated Fixed Charges for the period referred to in clause (x) PLUS (2) the aggregate Net Cash Proceeds received by the Company after the Closing Date from the issuance and sale permitted by this Indenture of its Capital Stock (other than Redeemable Stock) to a Person who is not a Subsidiary of the Company, or from the issuance to a Person who is not a Subsidiary of the Company of any options, warrants or other rights to acquire Capital Stock of the Company (in each case, exclusive of any Redeemable Stock or any options, warrants or other rights that are redeemable at the option of the holder, or are required to be redeemed, prior to the Stated Maturity of the Notes) PLUS (3) an amount equal to the net reduction in Investments (other than reductions in Permitted Investments) in any Person resulting from payments of interest on Indebtedness, dividends, repayments of loans or advances, or other transfers of assets, in each case to the Company or any Restricted Subsidiary or from the Net Cash Proceeds from the sale of any such Investment (except, in each case, to the extent any such payment or proceeds are included in the calculation of Adjusted Consolidated Net Income), or from redesignations of Unrestricted Subsidiaries as Restricted Subsidiaries (valued in each case as provided in the definition of "Investments"), not to exceed, in each case, the amount of Investments previously made by the Company or any Restricted Subsidiary in such Person or Unrestricted Subsidiary. The foregoing provision shall not be violated by reason of: (i) the payment of any dividend within 60 days after the date of declaration thereof if, at said date of declaration, such payment would comply with the foregoing paragraph; (ii) the redemption, repurchase, defeasance or other acquisition or retirement for value of Indebtedness that is subordinated in right of payment to the Notes including premium, if any, and accrued and unpaid interest, with the proceeds of, or in exchange for, Indebtedness Incurred under clause (iii) of the second paragraph of Section 4.03(a); (iii)(A) the repurchase, redemption or other acquisition of Capital Stock of the Company (or options, warrants or other rights to acquire such Capital Stock) in exchange for, or out of the proceeds of a substantially concurrent offering of, shares of Capital Stock (other than Redeemable Stock) of the Company or (B) the repurchase, redemption or other acquisition of Capital Stock of a Restricted Subsidiary (or options, warrants or other rights to acquire such Capital Stock) in exchange for, or out of the proceeds of a substantially concurrent offering of, shares of Capital Stock (other than Redeemable Stock) of such Restricted Subsidiary; (iv) the making 43 of any principal payment or the repurchase, redemption, retirement, defeasance or other acquisition for value of Indebtedness of the Company which is subordinated in right of payment to the Notes in exchange for, or out of the proceeds of, a substantially concurrent offering of, shares of the Capital Stock of the Company (other than Redeemable Stock); (v) payments or distributions, to dissenting stockholders pursuant to applicable law, pursuant to or in connection with a consolidation, merger or transfer of assets that complies with Article Five; (vi) Investments in Unrestricted Subsidiaries not to exceed $20 million at any one time outstanding; and (vii) Restricted Payments not to exceed $5 million in the aggregate; PROVIDED that, except in the case of clauses (i) and (iii), no Default or Event of Default shall have occurred and be continuing or occur as a consequence of the actions or payments set forth therein. Each Restricted Payment permitted pursuant to the preceding paragraph (other than the Restricted Payment referred to in clause (ii) thereof and an exchange of Capital Stock for Capital Stock or Indebtedness referred to in clause (iii) or (iv) thereof), and the Net Cash Proceeds from any issuance of Capital Stock referred to in clauses (iii) and (iv), shall be included in calculating whether the conditions of clause (C) of the first paragraph of this Section 4.04 have been met with respect to any subsequent Restricted Payments. In the event the proceeds of an issuance of Capital Stock of the Company are used for the redemption, repurchase or other acquisition of the Notes, or Indebtedness that is PARI PASSU with the Notes, then the Net Cash Proceeds of such issuance shall be included in clause (C) of the first paragraph of this Section 4.04 only to the extent such proceeds are not used for such redemption, repurchase or other acquisition of Indebtedness. SECTION 4.05. LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED SUBSIDIARIES. The Company will not, and will not permit any Restricted Subsidiary to, create or otherwise cause or suffer to exist or become effective any consensual encumbrance or restriction of any kind on the ability of any Restricted Subsidiary to (i) pay dividends or make any other distributions permitted by applicable law on any Capital Stock of such Restricted Subsidiary owned by the Company or any other Restricted Subsidiary, (ii) pay any Indebtedness owed to the Company or any other Restricted Subsidiary, (iii) make loans or advances to the Company or any other Restricted Subsidiary or (iv) transfer any of its property or assets to the Company or any other Restricted Subsidiary. The foregoing provisions shall not restrict any encumbrances or restrictions: (i) existing on the Closing Date in the New Credit Facility, this Indenture, the ResNet Transaction Documents or any other agreements in effect on the Closing Date, and any extensions, refinancings, renewals or replacements of such agreements; PROVIDED that the encumbrances and restrictions in any such extensions, refinancings, renewals or replacements are no less favorable in any material respect to the Holders than those encumbrances or restrictions that are then in effect and that are being extended, refinanced, renewed or replaced; (ii) existing under or by reason of applicable law; (iii) existing with respect to any 44 Person or the property or assets of such Person acquired by the Company or any Restricted Subsidiary, existing at the time of such acquisition and not incurred in contemplation thereof, which encumbrances or restrictions are not applicable to any Person or the property or assets of any Person other than such Person or the property or assets of such Person so acquired; (iv) in the case of clause (iv) of the first paragraph of this Section 4.05, (A) that restrict in a customary manner the subletting, assignment or transfer of any property or asset that is a lease, license, conveyance or contract or similar property or asset, (B) existing by virtue of any transfer of, agreement to transfer, option or right with respect to, or Lien on, any property or assets of the Company or any Restricted Subsidiary not otherwise prohibited by this Indenture or (C) arising or agreed to in the ordinary course of business, not relating to any Indebtedness, and that do not, individually or in the aggregate, detract from the value of property or assets of the Company or any Restricted Subsidiary in any manner material to the Company or any Restricted Subsidiary; or (v) with respect to a Restricted Subsidiary and imposed pursuant to an agreement that has been entered into for the sale or disposition of all or substantially all of the Capital Stock of, or property and assets of, such Restricted Subsidiary. Nothing contained in this Section 4.05 shall prevent the Company or any Restricted Subsidiary from (1) creating, incurring, assuming or suffering to exist any Liens otherwise permitted by the Section 4.09 or (2) restricting the sale or other disposition of property or assets of the Company or any of its Restricted Subsidiaries that secure Indebtedness of the Company or any of its Restricted Subsidiaries. SECTION 4.06. LIMITATION ON THE ISSUANCE AND SALE OF CAPITAL STOCK OF RESTRICTED SUBSIDIARIES. The Company will not sell, and will not permit any Restricted Subsidiary, directly or indirectly, to issue or sell, any shares of Capital Stock of a Restricted Subsidiary (including options, warrants or other rights to purchase shares of such Capital Stock) except (i) to the Company or a Wholly Owned Restricted Subsidiary; (ii) issuances of director's qualifying shares or sales to foreign nationals of shares of Capital Stock of foreign Restricted Subsidiaries, to the extent required by applicable law; (iii) if, immediately after giving effect to such issuance or sale, such Restricted Subsidiary would no longer constitute a Restricted Subsidiary, provided any Investment in such Person remaining after giving effect to such issuance or sale would have been permitted to be made under Section 4.04, if made on the date of such issuance or sale; and (iv) issuances of Common Stock of ResNet (x) to TCI Satellite pursuant to the terms of the ResNet Transaction Documents as in effect on the Closing Date and (y) in exchange for, or the net proceeds of which are used solely for, redemptions of Common Stock of ResNet. SECTION 4.07. LIMITATION ON ISSUANCES OF GUARANTEES BY RESTRICTED SUBSIDIARIES. The Company will not permit any Restricted Subsidiary, directly or indirectly, to Guarantee any Indebtedness of the Company which is PARI PASSU with or subordinate in right of payment to the Notes ("Guaranteed Indebtedness"), unless (i) such Restricted Subsidiary simultaneously executes and delivers a supplemental indenture to this Indenture providing for a Guarantee (a "Subsidiary Guarantee") of payment of the Notes by such 45 Restricted Subsidiary and (ii) such Restricted Subsidiary waives and will not in any manner whatsoever claim or take the benefit or advantage of, any rights of reimbursement, indemnity or subrogation or any other rights against the Company or any other Restricted Subsidiary as a result of any payment by such Restricted Subsidiary under its Subsidiary Guarantee; PROVIDED that this paragraph shall not be applicable to (x) any Guarantee of any Restricted Subsidiary that existed at the time such Person became a Restricted Subsidiary and was not Incurred in connection with, or in contemplation of, such Person becoming a Restricted Subsidiary or (y) any Guarantee of any Subsidiary of Indebtedness Incurred under a revolving credit or working capital facility. If the Guaranteed Indebtedness is (A) PARI PASSU with the Notes, then the Guarantee of such Guaranteed Indebtedness shall be PARI PASSU with, or subordinated to, the Subsidiary Guarantee or (B) subordinated to the Notes, then the Guarantee of such Guaranteed Indebtedness shall be subordinated to the Subsidiary Guarantee at least to the extent that the Guaranteed Indebtedness is subordinated to the Notes. Notwithstanding the foregoing, any Subsidiary Guarantee by a Restricted Subsidiary may provide by its terms that it shall be automatically and unconditionally released and discharged upon (i) any sale, exchange or transfer, to any Person not an Affiliate of the Company, of all of the Company's and each Restricted Subsidiary's Capital Stock in, or all or substantially all the assets of, such Restricted Subsidiary (which sale, exchange or transfer is not prohibited by this Indenture) or (ii) the release or discharge of the Guarantee which resulted in the creation of such Subsidiary Guarantee, except a discharge or release by or as a result of payment under such Guarantee. SECTION 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 of 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; 46 (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 or (vi) transactions pursuant to the ResNet Transaction Documents. Notwithstanding the foregoing, any transaction covered by the first paragraph of this Section 4.08 and not covered by clauses (ii) through (vi) 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. SECTION 4.09. LIMITATION ON LIENS. The Company will not, and will not permit any Restricted Subsidiary to, create, incur, assume or suffer to exist any Lien on any of its assets or properties of any character, or any shares of Capital Stock or Indebtedness of any Restricted Subsidiary, without making effective provision for all of the Notes and all other amounts due under this Indenture to be directly secured equally and ratably with (or, if the obligation or liability to be secured by such Lien is subordinated in right of payment to the Notes, prior to) the obligation or liability secured by such Lien. The foregoing limitation does not apply to (i) Liens existing on the Closing Date; (ii) Liens granted after the Closing Date on any assets or Capital Stock of the Company or its Restricted Subsidiaries created in favor of the Holders; (iii) Liens with respect to the assets of a Restricted Subsidiary granted by such Restricted Subsidiary to the Company or a Wholly Owned Restricted Subsidiary to secure Indebtedness owing to the Company or such other Restricted Subsidiary; (iv) Liens securing Indebtedness which is Incurred to refinance secured Indebtedness which is permitted to be Incurred under clause (iii) of the second paragraph of Section 4.03; PROVIDED that such Liens do not extend to or cover any property or assets of the Company or any Restricted Subsidiary other than the property or assets securing the Indebtedness being refinanced; (v) Liens securing obligations under the New Credit Facility; or (vi) Permitted Liens. SECTION 4.10. LIMITATION ON SALE-LEASEBACK TRANSACTIONS. The Company will not, and will not permit any Restricted Subsidiary to, enter into any sale-leaseback transaction involving any of its assets or properties whether now owned or hereafter acquired, whereby the Company or a Restricted Subsidiary sells or transfers such assets or properties and then or thereafter leases such assets or properties or any part thereof or any other assets or properties which the Company or such Restricted Subsidiary, as the case may be, intends to use for substantially the same purpose or purposes as the assets or properties sold or transferred. The foregoing restriction does not apply to any sale-leaseback transaction if (i) the lease is for a period, including renewal rights, of not in excess of three years; (ii) the lease secures or relates to industrial revenue or pollution control bonds; (iii) the transaction is solely between the Company and any Wholly Owned Restricted Subsidiary or solely between 47 Wholly Owned Restricted Subsidiaries; or (iv) the Company or such Restricted Subsidiary, within twelve months after the sale or transfer of any assets or properties is completed, applies an amount not less than the net proceeds received from such sale in accordance with clause (A) or (B) of the first paragraph of Section 4.12. SECTION 4.11. LIMITATION ON ASSET SALES. The Company will not, and will not permit any Restricted Subsidiary to, consummate any Asset Sale in an amount in greater than 10% of the Company's Adjusted Consolidated Net Tangible Assets, unless (i) the consideration received by the Company or such Restricted Subsidiary is at least equal to the fair market value of the assets sold or disposed of and (ii) at least 75% of the consideration received consists of cash (which shall include any Indebtedness of the Company or its Restricted Subsidiaries that is assumed by the buyer) or Temporary Cash Investments. In the event and to the extent that the Net Cash Proceeds received by the Company or any of its Restricted Subsidiaries from one or more Asset Sales occurring on or after the Closing Date in any period of 12 consecutive months exceed 10% of Adjusted Consolidated Net Tangible Assets (determined as of the date closest to the commencement of such 12-month period for which a consolidated balance sheet of the Company and its subsidiaries have been filed pursuant to Section 4.18), then the Company shall or shall cause the relevant Restricted Subsidiary to (i) within twelve months after the date Net Cash Proceeds so received exceed 10% of Adjusted Consolidated Net Tangible Assets (A) apply an amount equal to such excess Net Cash Proceeds to permanently repay unsubordinated Indebtedness of the Company, or any Restricted Subsidiary providing a Subsidiary Guarantee pursuant to Section 4.07 or Indebtedness of any other Restricted Subsidiary, in each case owing to a Person other than the Company or any of its Restricted Subsidiaries or (B) invest an equal amount, or the amount not so applied pursuant to clause (A) (or enter into a definitive agreement committing to so invest within twelve months after the date of such agreement), in property or assets (other than current assets) of a nature or type or that are used in a business (or in a company having property and assets of a nature or type, or engaged in a business) similar or related to the nature or type of the property and assets of, or the business of, the Company and its Restricted Subsidiaries existing on the date of such investment and (ii) apply (no later than the end of the twelve-month period referred to in clause (i)) such excess Net Cash Proceeds (to the extent not applied pursuant to clause (i)) as provided in the following paragraph of this Section 4.11. The amount of such excess Net Cash Proceeds required to be applied (or to be committed to be applied) during such twelve-month period as set forth in clause (i) of the preceding sentence and not applied as so required by the end of such period shall constitute "Excess Proceeds." If, as of the first day of any calendar month, the aggregate amount of Excess Proceeds not theretofore subject to an Offer to Purchase pursuant to this Section 4.11 totals at least $10 million, the Company must commence, not later than the fifteenth Business Day of such month, and consummate an Offer to Purchase from the Holders on a pro rata basis an aggregate principal amount of Notes on the relevant Payment Date equal to the Excess 48 Proceeds on such date, at a purchase price equal to 101% of the principal amount of the Notes on the relevant Payment Date, plus, in each case, accrued interest (if any) to the Payment Date. SECTION 4.12. REPURCHASE OF NOTES UPON A CHANGE OF CONTROL. The Company must commence, within 30 days after the occurrence of a Change of Control, and consummate an Offer to Purchase for all Notes then outstanding, at a purchase price equal to 101% of the principal amount thereof on the relevant Payment Date, plus accrued interest (if any) to the Payment Date. SECTION 4.13. EXISTENCE. Subject to Articles Four and Five of this Indenture, the Company will do or cause to be done all things necessary to preserve and keep in full force and effect its existence and the existence of each of its Restricted Subsidiaries in accordance with the respective organizational documents of the Company and each such Subsidiary and the rights (whether pursuant to charter, partnership certificate, agreement, statute or otherwise), material licenses and franchises of the Company and each such Subsidiary; PROVIDED that the Company shall not be required to preserve any such right, license or franchise, or the existence of any Restricted Subsidiary, if the maintenance or preservation thereof is no longer desirable in the conduct of the business of the Company and its Restricted Subsidiaries taken as a whole. SECTION 4.14. PAYMENT OF TAXES AND OTHER CLAIMS. The Company will pay or discharge and shall cause each of its Subsidiaries to pay or discharge, or cause to be paid or discharged, before the same shall become delinquent (i) all material taxes, assessments and governmental charges levied or imposed upon (a) the Company or any such Subsidiary, (b) the income or profits of any such Subsidiary which is a corporation or (c) the property of the Company or any such Subsidiary and (ii) all material lawful claims for labor, materials and supplies that, if unpaid, might by law become a lien upon the property of the Company or any such Subsidiary; PROVIDED that the Company shall not be required to pay or discharge, or cause to be paid or discharged, any such tax, assessment, charge or claim the amount, applicability or validity of which is being contested in good faith by appropriate proceedings and for which adequate reserves have been established. SECTION 4.15. MAINTENANCE OF PROPERTIES AND INSURANCE. The Company will cause all properties used or useful in the conduct of its business or the business of any of its Restricted Subsidiaries, to be maintained and kept in good condition, repair and working order and supplied with all necessary equipment and will cause to be made all necessary repairs, renewals, replacements, betterments and improvements thereof, all as in the judgment of the Company may be necessary so that the business carried on in connection therewith may be properly and advantageously conducted at all times; PROVIDED that nothing in this Section 4.15 shall prevent the Company or any such Subsidiary from discontinuing the use, operation or maintenance of any of such properties or disposing of any of them, if such 49 discontinuance or disposal is, in the judgment of the Company, desirable in the conduct of the business of the Company or such Subsidiary. The Company will provide or cause to be provided, for itself and its Restricted Subsidiaries, insurance (including appropriate self-insurance) against loss or damage of the kinds customarily insured against by corporations similarly situated and owning like properties, including, but not limited to, products liability insurance and public liability insurance, with reputable insurers or with the government of the United States of America, or an agency or instrumentality thereof, in such amounts, with such deductibles and by such methods as shall be customary for corporations similarly situated in the industry in which the Company or such Restricted Subsidiary, as the case may be, is then conducting business. SECTION 4.16. NOTICE OF DEFAULTS. In the event that the Company becomes aware of any Default or Event of Default the Company, promptly after it becomes aware thereof, will give written notice thereof to the Trustee. SECTION 4.17. COMPLIANCE CERTIFICATES. (a) The Company shall deliver to the Trustee, within 45 days after the end of each fiscal quarter (90 days after the end of the last fiscal quarter of each year), an Officers' Certificate stating whether or not the signers know of any Default or Event of Default that occurred during such fiscal quarter. In the case of the Officers' Certificate delivered within 90 days of the end of the Company's fiscal year, such certificate shall contain a certification from the principal executive officer, principal financial officer or principal accounting officer that a review has been conducted of the activities of the Company and its Restricted Subsidiaries and the Company's and its Restricted Subsidiaries' performance under this Indenture and that the Company has complied with all conditions and covenants under this Indenture. For purposes of this Section 4.17, such compliance shall be determined without regard to any period of grace or requirement of notice provided under this Indenture. If they do know of such a Default or Event of Default, the certificate shall describe any such Default or Event of Default and its status. The first certificate to be delivered pursuant to this Section 4.17(a) shall be for the first fiscal quarter beginning after the execution of this Indenture. (b) The Company shall deliver to the Trustee, within 90 days after the end of the Company's fiscal year, a certificate signed by the Company's independent certified public accountants stating (i) that their audit examination has included a review of the terms of this Indenture and the Notes as they relate to accounting matters, (ii) that they have read the most recent Officers' Certificate delivered to the Trustee pursuant to paragraph (a) of this Section 4.17 and (iii) whether, in connection with their audit examination, anything came to their attention that caused them to believe that the Company was not in compliance with any of the terms, covenants, provisions or conditions of Article Four and Section 5.01 of this Indenture as they pertain to accounting matters and, if any Default or Event of Default has come to their attention, specifying the nature and period of existence thereof; PROVIDED that such independent certified public accountants shall not be liable in respect of such statement by reason of any failure to obtain knowledge of any such Default or Event of Default that 50 would not be disclosed in the course of an audit examination conducted in accordance with generally accepted auditing standards in effect at the date of such examination. SECTION 4.18. COMMISSION REPORTS AND REPORTS TO HOLDERS. Whether or not the Company is required to file reports with the Commission, for so long as any Notes are outstanding, the Company shall file with the Commission all such reports and other information as it would be required to file with the Commission by Sections 13(a) or 15(d) under the Exchange Act if it were subject thereto. The Company shall supply the Trustee and each Holder or shall supply to the Trustee for forwarding to each such Holder, without cost to such Holder, copies of such reports and other information. The Company also shall comply with the other provisions of TIA Section 314(a). SECTION 4.19. WAIVER OF STAY, EXTENSION OR USURY LAWS. The Company covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law or any usury law or other law that would prohibit or forgive the Company from paying all or any portion of the principal of, premium, if any, or interest on the Notes as contemplated herein, wherever enacted, now or at any time hereafter in force, or that may affect the covenants or the performance of this Indenture; and (to the extent that it may lawfully do so) the Company hereby expressly waives all benefit or advantage of any such law and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted. ARTICLE FIVE SUCCESSOR CORPORATION SECTION 5.01. WHEN COMPANY MAY MERGE, ETC. The Company will not consolidate with, merge with or into, or sell, convey, transfer, lease or otherwise dispose of all or substantially all of its property and assets (as an entirety or substantially an entirety in one transaction or a series of related transactions) to, any Person or permit any Person to merge with or into the Company unless: (i) the Company shall be the continuing Person, or the Person (if other than the Company) formed by such consolidation or into which the Company is merged or that acquired or leased such property and assets of the Company shall be a corporation organized and validly existing under the laws of the United States of America or any jurisdiction thereof and shall expressly assume, by a supplemental indenture, executed and delivered to the Trustee, all of the obligations of the Company on all of the Notes and under this Indenture; (ii) immediately after giving effect to such transaction, no Default or Event of Default shall have occurred and be continuing; 51 (iii) immediately after giving effect to such transaction on a pro forma basis the Company, or any Person becoming the successor obligor of the Notes, as the case may be, could Incur at least $1.00 of Indebtedness under the first paragraph of Section 4.03(a); PROVIDED that this clause (iii) shall not apply to a consolidation or merger with or into a Wholly Owned Restricted Subsidiary with a positive net worth; PROVIDED that, in connection with any such merger or consolidation, no consideration (other than Common Stock in the surviving Person or the Company) shall be issued or distributed to the stockholders of the Company; and (iv) the Company delivers to the Trustee an Officers' Certificate (attaching the arithmetic computations to demonstrate compliance with clause (iii)) and Opinion of Counsel, in each case stating that such consolidation, merger or transfer and such supplemental indenture complies with this provision and that all conditions precedent provided for herein relating to such transaction have been complied with; PROVIDED, HOWEVER, that clause (iii) above does not apply if, in the good faith determination of the Board of Directors of the Company, whose determination shall be evidenced by a Board Resolution, the principal purpose of such transaction is to change the state of incorporation of the Company; and PROVIDED FURTHER that any such transaction shall not have as one of its purposes the evasion of the foregoing limitations. SECTION 5.02. SUCCESSOR SUBSTITUTED. Upon any consolidation or merger, or any sale, conveyance, transfer, lease or other disposition of all or substantially all of the property and assets of the Company in accordance with Section 5.01 of this Indenture, the successor Person formed by such consolidation or into which the Company is merged or to which such sale, conveyance, transfer, lease or other disposition is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Indenture with the same effect as if such successor Person had been named as the Company herein; PROVIDED that the Company shall not be released from its obligation to pay the principal of, premium, if any, or interest on the Notes in the case of a lease of all or substantially all of its property and assets. ARTICLE SIX DEFAULT AND REMEDIES SECTION 6.01. EVENTS OF DEFAULT. An "EVENT OF DEFAULT" shall occur with respect to the Notes if: (a) the Company defaults in the payment of the principal of (or premium, if any, on) any Note when the same becomes due and payable at maturity, upon acceleration, redemption or otherwise; 52 (b) the Company defaults in the payment of interest on any Note when the same becomes due and payable, and such default continues for a period of 30 days; (c) the Company defaults in the performance of, or breaches the provisions of, Article Five or fails to make or consummate an Offer to Purchase in accordance with Section 4.11 or 4.12; (d) the Company defaults in the performance of or breaches any other covenant or agreement of the Company in this Indenture or under the Notes (other than a default specified in clause (a), (b) or (c) above) and such default or breach continues for a period of 30 consecutive days after written notice to the Company by the Trustee or the Holders of 25% or more in aggregate principal amount of the Notes; (e) there occurs with respect to any issue or issues of Indebtedness of the Company or any Significant Subsidiary having an outstanding principal amount of $10 million or more in the aggregate for all such issues of all such Persons, whether such Indebtedness now exists or shall hereafter be created, (I) an event of default that has caused the holder thereof to declare such Indebtedness to be due and payable prior to its Stated Maturity and such Indebtedness has not been discharged in full or such acceleration has not been rescinded or annulled within 30 days of such acceleration and/or (II) the failure to make a principal payment at the final (but not any interim) fixed maturity and such defaulted payment shall not have been made, waived or extended within 30 days of such payment default; (f) any final judgment or order (not covered by insurance) for the payment of money in excess of $10 million in the aggregate for all such final judgments or orders against all such Persons (treating any deductibles, self-insurance or retention as not so covered) shall be rendered against the Company or any Significant Subsidiary and shall not be paid or discharged, and there shall be any period of 60 consecutive days following entry of the final judgment or order that causes the aggregate amount for all such final judgments or orders outstanding and not paid or discharged against all such Persons to exceed $10 million during which a stay of enforcement of such final judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; (g) a court having jurisdiction in the premises enters a decree or order for (A) relief in respect of the Company or any Significant Subsidiary in an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, (B) appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official of the Company or any Significant Subsidiary or for all or substantially all of the property and assets of the Company or any Significant Subsidiary or (C) the winding up or liquidation of the affairs of the 53 Company or any Significant Subsidiary and, in each case, such decree or order shall remain unstayed and in effect for a period of 60 consecutive days; or (h) the Company or any Significant Subsidiary (A) commences a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or consents to the entry of an order for relief in an involuntary case under any such law, (B) consents to the appointment of or taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official of the Company or any Significant Subsidiary or for all or substantially all of the property and assets of the Company or any Significant Subsidiary or (C) effects any general assignment for the benefit of creditors. SECTION 6.02. ACCELERATION. If an Event of Default (other than an Event of Default specified in clause (g) or (h) of Section 6.01 that occurs with respect to the Company) occurs and is continuing under this Indenture, the Trustee or the Holders of at least 25% in aggregate principal amount of the Notes then outstanding, by written notice to the Company (and to the Trustee if such notice is given by the Holders), may, and the Trustee at the request of such Holders shall, declare the principal of, premium, if any, and accrued interest on the Notes to be immediately due and payable. Upon a declaration of acceleration, such principal of, premium, if any, and accrued interest shall be immediately due and payable PROVIDED that for so long as the New Credit Facility is in effect, such declaration shall not become effective until the earlier of (i) five Business Days after receipt of the acceleration notice by the Agent and the Company and (ii) acceleration of the Indebtedness under the New Credit Facility. In the event of a declaration of acceleration because an Event of Default set forth in clause (e) of Section 6.01 has occurred and is continuing, such declaration of acceleration shall be automatically rescinded and annulled if the event of default triggering such Event of Default pursuant to clause (e) shall be remedied or cured by the Company or the relevant Significant Subsidiary or waived by the holders of the relevant Indebtedness within 60 days after the declaration of acceleration with respect thereto. If an Event of Default specified in clause (g) or (h) of Section 6.01 occurs with respect to the Company, the principal of, premium, if any, and accrued interest on the Notes then outstanding shall IPSO FACTO become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Holder. At any time after such a declaration of acceleration, but before a judgment or decree for the payment of the money due has been obtained by the Trustee, the Holders of at least a majority in principal amount of the outstanding Notes by written notice to the Company and to the Trustee, may waive all past Defaults and rescind and annul such declaration of acceleration and its consequences if (i) all existing Events of Default, other than the non-payment of the principal of, premium, if any, and accrued interest on the Notes that have become due solely by such declaration of acceleration, have been cured or waived, (ii) the rescission would not conflict with any judgment or decree of a court of competent jurisdiction and (iii) all moneys paid or advanced by the Trustee hereunder and the 54 reasonable compensation, expenses, disbursement and advances of the Trustee, its agents and counsel and all other amounts due to the Trustee pursuant to Section 7.07 have been paid. SECTION 6.03. OTHER REMEDIES. If an Event of Default occurs and is continuing, the Trustee may pursue any available remedy by proceeding at law or in equity to collect the payment of principal of, premium, if any, or interest on the Notes or to enforce the performance of any provision of the Notes or this Indenture. The Trustee may maintain a proceeding even if it does not possess any of the Notes or does not produce any of them in the proceeding. SECTION 6.04. WAIVER OF PAST DEFAULTS. Subject to Sections 6.02, 6.07 and 9.02, the Holders of at least a majority in principal amount of the outstanding Notes, by notice to the Trustee, may waive an existing Default or Event of Default and its consequences, except a Default in the payment of principal of, premium, if any, or interest on any Note as specified in clause (a) or (b) of Section 6.01 or in respect of a covenant or provision of this Indenture which cannot be modified or amended without the consent of the holder of each outstanding Note affected. Upon any such waiver, such Default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other Default or Event of Default or impair any right consequent thereto. SECTION 6.05. CONTROL BY MAJORITY. The Holders of at least a majority in aggregate principal amount of the outstanding Notes may direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on the Trustee; PROVIDED, that the Trustee may refuse to follow any direction that conflicts with law or this Indenture, that may involve the Trustee in personal liability, or that the Trustee determines in good faith may be unduly prejudicial to the rights of Holders of Notes not joining in the giving of such direction; and PROVIDED FURTHER, that the Trustee may take any other action it deems proper that is not inconsistent with any such direction received from Holders of Notes pursuant to this Section 6.05. SECTION 6.06. LIMITATION ON SUITS. A Holder may not institute any proceeding, judicial or otherwise, with respect to this Indenture or the Notes, or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless: (i) the Holder has previously given to the Trustee written notice of a continuing Event of Default; (ii) the Holders of at least 25% in aggregate principal amount of outstanding Notes shall have made written request to the Trustee to pursue the remedy; 55 (iii) such Holder or Holders have offered to the Trustee indemnity satisfactory to the Trustee against any costs, liabilities or expenses to be incurred in compliance with such request; (iv) the Trustee for 60 days after its receipt of such notice, request and offer of indemnity has failed to comply with such request; and (v) during such 60-day period, the Holders of a majority in aggregate principal amount of the outstanding Notes have not given the Trustee a direction that is inconsistent with such written request. For purposes of Section 6.05 of this Indenture and this Section 6.06, the Trustee shall comply with TIA Section 316(a) in making any determination of whether the Holders of the required aggregate principal amount of outstanding Notes have concurred in any request or direction of the Trustee to pursue any remedy available to the Trustee or the Holders with respect to this Indenture or the Notes or otherwise under the law. A Holder may not use this Indenture to prejudice the rights of another Holder or to obtain a preference or priority over such other Holder. The limitations set forth in this Section 6.06 shall not apply to the right of any Holder of a Note to receive payment of the principal of, premium, if any, or interest on, such Note or to bring suit for the enforcement of any such payment, on or after the due date expressed in the Notes, which right shall not be impaired or affected without the consent of the Holder. SECTION 6.07. RIGHTS OF HOLDERS TO RECEIVE PAYMENT. Notwithstanding any other provision of this Indenture, the right of any Holder of a Note to receive payment of principal of, premium, if any, or interest on such Holder's Note on or after the respective due dates expressed on such Note, or to bring suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of such Holder. SECTION 6.08. COLLECTION SUIT BY TRUSTEE. If an Event of Default in payment of principal, premium or interest specified in clause (a), (b) (c) or (d) of Section 6.01 occurs and is continuing, the Trustee may recover judgment in its own name and as trustee of an express trust against the Company or any other obligor of the Notes for the whole amount of principal, premium, if any, and accrued interest remaining unpaid, together with interest on overdue principal, premium, if any, and, to the extent that payment of such interest is lawful, interest on overdue installments of interest, in each case at the rate specified in the Notes, and such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel. 56 SECTION 6.09. TRUSTEE MAY FILE PROOFS OF CLAIM. The Trustee may file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 7.07) and the Holders allowed in any judicial proceedings relative to the Company (or any other obligor of the Notes), its creditors or its property and shall be entitled and empowered to collect and receive any monies, securities or other property payable or deliverable upon conversion or exchange of the Notes or upon any such claims and to distribute the same, and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due to it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agent and counsel, and any other amounts due the Trustee under Section 7.07. Nothing herein contained shall be deemed to empower the Trustee to authorize or consent to, or accept or adopt on behalf of any Holder, any plan of reorganization, arrangement, adjustment or composition affecting the Notes or the rights of any Holder thereof, or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding. SECTION 6.10. PRIORITIES. If the Trustee collects any money pursuant to this Article Six, it shall pay out the money in the following order: First: to the Trustee for all amounts due under Section 7.07; Second: to Holders for amounts then due and unpaid for principal of, premium, if any, and interest on the Notes in respect of which or for the benefit of which such money has been collected, ratably, without preference or priority of any kind, according to the amounts due and payable on such Notes for principal, premium, if any, and interest, respectively; and Third: to the Company or any other obligors of the Notes, as their interests may appear, or as a court of competent jurisdiction may direct. The Trustee, upon prior written notice to the Company, may fix a record date and payment date for any payment to Holders pursuant to this Section 6.10. SECTION 6.11. UNDERTAKING FOR COSTS. In any suit for the enforcement of any right or remedy under this Indenture or in any suit against the Trustee for any action taken or omitted by it as Trustee, a court may require any party litigant in such suit to file an undertaking to pay the costs of the suit, and the court may assess reasonable costs, including reasonable attorneys' fees, against any party litigant in the suit having due regard to the merits and good faith of the claims or defenses made by the party litigant. This Section 6.11 does not apply to a suit by the Trustee, a suit by a Holder pursuant to Section 6.07 of this 57 Indenture, or a suit by Holders of more than 10% in principal amount of the outstanding Notes. SECTION 6.12. RESTORATION OF RIGHTS AND REMEDIES. If the Trustee or any Holder has instituted any proceeding to enforce any right or remedy under this Indenture and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Holder, then, and in every such case, subject to any determination in such proceeding, the Company, the Trustee and the Holders shall be restored severally and respectively to their former positions hereunder and thereafter all rights and remedies of the Company, Trustee and the Holders shall continue as though no such proceeding had been instituted. SECTION 6.13. RIGHTS AND REMEDIES CUMULATIVE. Except as otherwise provided with respect to the replacement or payment of mutilated, destroyed, lost or wrongfully taken Notes in Section 2.09, no right or remedy herein conferred upon or reserved to the Trustee or to the Holders is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. SECTION 6.14. DELAY OR OMISSION NOT WAIVER. No delay or omission of the Trustee or of any Holder to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein. Every right and remedy given by this Article Six or by law to the Trustee or to the Holders may be exercised from time to time, and as often as may be deemed expedient, by the Trustee or by the Holders, as the case may be. SECTION 6.15. WAIVER OF STAY OR EXTENSION LAWS. The Company (to the extent it may lawfully do so) shall not at any time insist upon, or plead, or in any manner whatsoever claim to take the benefit or advantage of, any stay or extension law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of this Indenture; and the Company (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law, and shall not hinder, delay or impede the execution of any power herein granted to the Trustee, but shall suffer and permit the execution of every such power as though no such law had been enacted. 58 ARTICLE SEVEN TRUSTEE SECTION 7.01. GENERAL. (a) If an Event of Default has occurred and is continuing, the Trustee shall exercise the rights and powers vested in it by this Indenture and shall use the same degree of care and skill in their exercise as a prudent person would exercise or use under the circumstances in the conduct of such person's own affairs. (b) Except during the continuance of an Event of Default: (i) the Trustee undertakes to perform such duties and only such duties as are specifically set forth in this Indenture and no implied covenants or obligations shall be read into this Indenture against the Trustee; and (ii) in the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture, PROVIDED, HOWEVER, that in the case of any such certificates or opinions which by any provision hereof are specifically required to be furnished to the Trustee, the Trustee shall examine the certficates and opinions to determine whether or not they conform to the requirement of this Indenture. (c) The Trustee may not be relieved from liability for its own negligent action, its own negligent failure to act or its own willful misconduct, PROVIDED that: (i) this paragraph (c) shall not limit the effect of paragraph (b) of this Section 7.01; (ii) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer unless it is proved that the Trustee was negligent in ascertaining the pertinent facts; and (iii) the Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Section 6.05 hereof. (d) Trustee shall not be liable for interest on any money received by it except as the Trustee may agree in writing with the Company. (e) Money held in trust by the Trustee need not be segregated from other funds except to the extent required by law. (f) No provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. (g) Whether or not therein expressly so provided, every provision of this Indenture relating to the conduct or affecting the liability of or affording protection to the Trustee shall be subject to the provisions of this Article Seven and to the provisions of the TIA. 59 SECTION 7.02. CERTAIN RIGHTS OF TRUSTEE. Subject to TIA Sections 315(a) through (d): (i) the Trustee may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document believed by it to be genuine and to have been signed or presented by the proper person. The Trustee need not investigate any fact or matter stated in the document; (ii) before the Trustee acts or refrains from acting, it may require an Officers' Certificate or an Opinion of Counsel, which shall conform to Section 10.04. The Trustee shall not be liable for any action it takes or omits to take in good faith in reliance on such certificate or opinion; (iii) the Trustee may act through its attorneys and agents and shall not be responsible for the misconduct or negligence of any agent appointed with due care; (iv) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Holders, unless such Holders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities that might be incurred by it in compliance with such request or direction; (v) the Trustee shall not be liable for any action it takes or omits to take in good faith that it believes to be authorized or within its rights or powers or for any action it takes or omits to take in accordance with the direction of the Holders of a majority in principal amount of the outstanding Notes relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee, under this Indenture; PROVIDED that the Trustee's conduct does not constitute negligence or bad faith; (vi) whenever in the administration of this Indenture the Trustee shall deem it desirable that a making be proved or established prior to taking, suffering or omitting any action hereunder, the Trustee (unless other evidence be herein specifically prescribed) may, in the absence of bad faith on its part, rely upon an Officers' Certificate; (vii) the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document, but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit, and, if the Trustee shall determine to make such further inquiry or investigation, it shall be 60 entitled to examine the books, records and premises of the Company personally or by agent or attorney; and (viii) The Trustee shall not be charged with knowledge of any Default or Event of Default under Section 6.01 hereof unless either (i) a Responsible Officer shall have actual knowledge thereof, or (ii) the Trustee shall have received notice thereof in accordance with Section 10.02 hereof from the Company or any Holder of Notes. SECTION 7.03. INDIVIDUAL RIGHTS OF TRUSTEE. The Trustee, in its individual or any other capacity, may become the owner or pledgee of Notes and may otherwise deal with the Company or its Affiliates with the same rights it would have if it were not the Trustee. Any Agent may do the same with like rights. However, the Trustee is subject to TIA Sections 310(b) and 311. SECTION 7.04. TRUSTEE'S DISCLAIMER. The Trustee (i) makes no representation as to the validity or adequacy of this Indenture or the Notes, (ii) shall not be accountable for the Company's use or application of the proceeds from the Notes and (iii) shall not be responsible for any statement in the Notes other than its certificate of authentication. SECTION 7.05. NOTICE OF DEFAULT. If any Default or any Event of Default occurs and is continuing and if such Default or Event of Default is known to the Trustee, the Trustee shall mail to each Holder in the manner and to the extent provided in TIA Section 313(c) notice of the Default or Event of Default within 45 days after it occurs, unless such Default or Event of Default has been cured; PROVIDED, HOWEVER, that, except in the case of a default in the payment of the principal of, premium, if any, or interest on any Note, the Trustee shall be protected in withholding such notice if and so long as the board of directors, the executive committee or a trust committee of directors and/or Responsible Officers of the Trustee in good faith determine that the withholding of such notice is in the interest of the Holders. SECTION 7.06. REPORTS BY TRUSTEE TO HOLDERS. Within 60 days after each May 15, beginning with May 15, 1997, the Trustee shall mail to each Holder as provided in TIA Section 313(c) a brief report dated as of such May 15, if required by TIA Section 313(a). SECTION 7.07. COMPENSATION AND INDEMNITY. The Company shall pay to the Trustee such compensation as shall be agreed upon in writing for its services. The compensation of the Trustee shall not be limited by any law on compensation of a trustee of an express trust. The Company shall reimburse the Trustee upon request for all reasonable out-of-pocket expenses and advances incurred or made by the Trustee. Such expenses shall include the reasonable compensation and expenses of the Trustee's agents and counsel. 61 The Company shall indemnify the Trustee for, and hold it harmless against, any loss or liability or expense incurred (including, without limitation, reasonable attorneys' fees) by it without negligence or bad faith on its part in connection with the acceptance or administration of this Indenture and its duties under this Indenture and the Notes, including the costs and expenses of defending itself against any claim or liability and of complying with any process served upon it or any of its officers in connection with the exercise or performance of any of its powers or duties under this Indenture and the Notes. The obligation of the Company under this Section 7.07 shall survive the resignation or removal of the Trustee, the satisfaction and discharge of this Indenture or the termination of this Indenture. To secure the Company's payment obligations in this Section 7.07, the Trustee shall have a lien prior to the Notes on all money or property held or collected by the Trustee, in its capacity as Trustee, except money or property held in trust to pay principal of, premium, if any, and interest on particular Notes. Such lien shall survive the resignation or removal of the Trustee, the satisfaction and discharge of this Indenture or the termination of this Indenture. If the Trustee incurs expenses or renders services after the occurrence of an Event of Default specified in clause (f) or (g) of Section 6.01, the expenses and the compensation for the services will be intended to constitute expenses of administration under the United States Bankruptcy Code or any applicable federal or state law for the relief of debtors. SECTION 7.08. REPLACEMENT OF TRUSTEE. A resignation or removal of the Trustee and appointment of a successor Trustee shall become effective only upon the successor Trustee's acceptance of appointment as provided in this Section 7.08. The Trustee may resign at any time by so notifying the Company in writing at least 30 days prior to the date of the proposed resignation. The Holders of a majority in principal amount of the outstanding Notes may remove the Trustee by so notifying the Trustee in writing and may appoint a successor Trustee with the consent of the Company. The Company may remove the Trustee if: (i) the Trustee is no longer eligible under Section 7.10; (ii) the Trustee is adjudged a bankrupt or an insolvent; (iii) a receiver or other public officer takes charge of the Trustee or its property; or (iv) the Trustee becomes incapable of acting. If the Trustee resigns or is removed, or if a vacancy exists in the office of Trustee for any reason, the Company shall promptly appoint a successor Trustee. Within one year after the successor Trustee takes office, the Holders of a majority in principal amount of the outstanding Notes may appoint a successor Trustee to replace the successor Trustee appointed by the Company. If the successor Trustee does not deliver its written acceptance required by the next succeeding paragraph of this Section 7.08 within 30 days 62 after the retiring Trustee resigns or is removed, the retiring Trustee, the Company or the Holders of a majority in principal amount of the outstanding Notes may petition any court of competent jurisdiction for the appointment of a successor Trustee. A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to the Company. Immediately after the delivery of such written acceptance, provided all sums owing to the Trustee hereunder shall have been paid and subject to the lien provided in Section 7.07, (i) the retiring Trustee shall transfer all property held by it as Trustee to the successor Trustee, (ii) the resignation or removal of the retiring Trustee shall become effective and (iii) the successor Trustee shall have all the rights, powers and duties of the Trustee under this Indenture. A successor Trustee shall mail notice of its succession to each Holder. If the Trustee is no longer eligible under Section 7.10, any Holder who satisfies the requirements of TIA Section 310(b) may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. The Company shall give notice of any resignation and any removal of the Trustee and each appointment of a successor Trustee to all Holders. Each notice shall include the name of the successor Trustee and the address of its Corporate Trust Office. Notwithstanding replacement of the Trustee pursuant to this Section 7.08, the Company's obligation under Section 7.07 shall continue for the benefit of the retiring Trustee. SECTION 7.09. SUCCESSOR TRUSTEE BY MERGER, ETC. If the Trustee consolidates with, merges or converts into, or transfers all or substantially all of its corporate trust business to, another corporation or national banking association, the resulting, surviving or transferee corporation or national banking association without any further act shall be the successor Trustee with the same effect as if the successor Trustee had been named as the Trustee herein. SECTION 7.10. ELIGIBILITY. This Indenture shall always have a Trustee who satisfies the requirements of TIA Section 310(a)(1). The Trustee shall have a combined capital and surplus of at least $25 million as set forth in its most recent published annual report of condition. SECTION 7.11. MONEY HELD IN TRUST. The Trustee shall not be liable for interest on any money received by it except as the Trustee may agree with the Company. Money held in trust by the Trustee need not be segregated from other funds except to the extent required by law and except for money held in trust under Article Eight of this Indenture. 63 SECTION 7.12. WITHHOLDING TAXES. The Trustee, as agent for the Company, shall exclude and withhold from each payment of principal and interest and other amounts due hereunder or under the Notes any and all withholding taxes applicable thereto as required by law. The Trustee agrees to act as such withholding agent and, in connection therewith, whenever any present or future taxes or similar charges are required to be withheld with respect to any amounts payable in respect of the Notes, to withhold such amounts and timely pay the same to the appropriate authority in the name of and on behalf of the holders of the Notes, that it will file any necessary withholding tax returns or statements when due, and that, as promptly as possible after the payment thereof, it will deliver to each Holder of a Note appropriate documentation showing the payment thereof, together with such additional documentary evidence as such Holders may reasonably request from time to time. ARTICLE EIGHT DISCHARGE OF INDENTURE SECTION 8.01. TERMINATION OF COMPANY'S OBLIGATIONS. Except as otherwise provided in this Section 8.01, the Company may terminate its obligations under the Notes and this Indenture if: (i) all Notes previously authenticated and delivered (other than destroyed, lost or stolen Notes that have been replaced or Notes that are paid pursuant to Section 4.01 or Notes for whose payment money or securities have theretofore been held in trust and thereafter repaid to the Company, as provided in Section 8.05) have been delivered to the Trustee for cancellation and the Company has paid all sums payable by it hereunder; or (ii) (A) the Notes mature within one year or all of them are to be called for redemption within one year under arrangements satisfactory to the Trustee for giving the notice of redemption, (B) the Company irrevocably deposits in trust with the Trustee during such one-year period, under the terms of an irrevocable trust agreement in form and substance satisfactory to the Trustee, as trust funds solely for the benefit of the Holders for that purpose, money or U.S. Government Obligations sufficient (in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee), without consideration of any reinvestment of any interest thereon, to pay principal, premium, if, any, and interest on the Notes to maturity or redemption, as the case may be, and to pay all other sums payable by it hereunder, (C) no Default or Event of Default with respect to the Notes shall have occurred and be continuing on the date of such deposit, (D) such deposit will not result in a breach or violation of, or constitute a default under, this Indenture or any other agreement or instrument to which the Company is a party or by which it is bound and (E) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, in each 64 case stating that all conditions precedent provided for herein relating to the satisfaction and discharge of this Indenture have been complied with. With respect to the foregoing clause (i), the Company's obligations under Section 7.07 shall survive. With respect to the foregoing clause (ii), the Company's obligations in Sections 2.02, 2.03, 2.04, 2.05, 2.06, 2.07, 2.08, 2.09, 2.14, 4.01, 4.02, 7.07, 7.08, 8.04, 8.05, and 8.06 shall survive until the Notes are no longer outstanding. Thereafter, only the Company's obligations in Sections 7.07, 8.05 and 8.06 shall survive. After any such irrevocable deposit, the Trustee upon request shall acknowledge in writing the discharge of the Company's obligations under the Notes and this Indenture except for those surviving obligations specified above. SECTION 8.02. DEFEASANCE AND DISCHARGE OF INDENTURE. The Company will be deemed to have paid and will be discharged from any and all obligations in respect of the Notes on the 123rd day after the date of the deposit referred to in clause (A) of this Section 8.02, and the provisions of this Indenture will no longer be in effect with respect to the Notes, and the Trustee, at the expense of the Company, shall execute proper instruments acknowledging the same, except as to (i) rights of registration of transfer and exchange, (ii) substitution of apparently mutilated, defaced, destroyed, lost or stolen Notes, (iii) rights of Holders to receive payments of principal thereof and interest thereon, (iv) the Company's obligations under Section 4.02, (v) the rights, obligations and immunities of the Trustee hereunder and (vi) the rights of the Holders as beneficiaries of this Indenture with respect to the property so deposited with the Trustee payable to all or any of them; PROVIDED that the following conditions shall have been satisfied: (A) with reference to this Section 8.02, the Company has irrevocably deposited or caused to be irrevocably deposited with the Trustee (or another trustee satisfying the requirements of Section 7.10 of this Indenture) and conveyed all right, title and interest for the benefit of the Holders, under the terms of an irrevocable trust agreement in form and substance satisfactory to the Trustee as trust funds in trust, specifically pledged to the Trustee for the benefit of the Holders as security for payment of the principal of, premium, if any, and interest, if any, on the Notes, and dedicated solely to, the benefit of the Holders, in and to (1) money in an amount, (2) U.S. Government Obligations that, through the payment of interest, premium, if any, and principal in respect thereof in accordance with their terms, will provide, not later than one day before the due date of any payment referred to in this clause (A), money in an amount or (3) a combination thereof in an amount sufficient, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, to pay and discharge, without consideration of the reinvestment of such interest and after payment of all federal, state and local taxes or other charges and assessments in respect thereof payable by the Trustee, the principal of, premium, if any, and accrued interest on the outstanding Notes at the Stated Maturity of such principal or interest; PROVIDED that the Trustee 65 shall have been irrevocably instructed to apply such money or the proceeds of such U.S. Government Obligations to the payment of such principal, premium, if any, and interest with respect to the Notes; (B) such deposit will not result in a breach or violation of, or constitute a default under, this Indenture or any other agreement or instrument to which the Company is a party or by which it is bound; (C) immediately after giving effect to such deposit on a pro forma basis, no Default or Event of Default shall have occurred and be continuing on the date of such deposit or during the period ending on the 123rd day after such date of deposit; (D) the Company shall have delivered to the Trustee (1) either (x) a ruling directed to the Trustee received from the Internal Revenue Service to the effect that the Holders will not recognize income, gain or loss for federal income tax purposes as a result of the Company's exercise of its option under this Section 8.02 and will be subject to federal income tax on the same amount and in the same manner and at the same times as would have been the case if such option had not been exercised or (y) an Opinion of Counsel to the same effect as the ruling described in clause (x) above accompanied by a ruling to that effect published by the Internal Revenue Service, unless there has been a change in the applicable federal income tax law since the date of this Indenture such that a ruling from the Internal Revenue Service is no longer required and (2) an Opinion of Counsel to the effect that (x) the creation of the defeasance trust does not violate the Investment Company Act of 1940 and (y) after the passage of 123 days following the deposit (except, with respect to any trust funds for the account of any Holder who may be deemed to be an "insider" for purposes of the United States Bankruptcy Code, after one year following the deposit), the trust funds will not be subject to the effect of Section 547 of the United States Bankruptcy Code or Section 15 of the New York Debtor and Creditor Law in a case commenced by or against the Company under either such statute, and either (I) the trust funds will no longer remain the property of the Company (and therefore will not be subject to the effect of any applicable bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally) or (II) if a court were to rule under any such law in any case or proceeding that the trust funds remained property of the Company, (a) assuming such trust funds remained in the possession of the Trustee prior to such court ruling to the extent not paid to the Holders, the Trustee will hold, for the benefit of the Holders, a valid and perfected security interest in such trust funds that is not avoidable in bankruptcy or otherwise except for the effect of Section 552(b) of the United States Bankruptcy Code on interest on the trust funds accruing after the commencement of a case under such statute and (b) the Holders will be entitled to receive adequate protection of their interests in such trust funds if such trust funds are used in such case or proceeding; 66 (E) if the Notes are then listed on a national securities exchange, the Company shall have delivered to the Trustee an Opinion of Counsel to the effect that such deposit defeasance and discharge will not cause the Notes to be delisted; and (F) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, in each case stating that all conditions precedent provided for herein relating to the defeasance contemplated by this Section 8.02 have been complied with. Notwithstanding the foregoing, prior to the end of the 123-day (or one year) period referred to in clause (D)(2)(y) of this Section 8.02, none of the Company's obligations under this Indenture shall be discharged. Subsequent to the end of such 123-day (or one year) period with respect to this Section 8.02, the Company's obligations in Sections 2.02, 2.03, 2.04, 2.05, 2.06, 2.07, 2.08, 2.09, 2.14, 4.01, 4.02, 7.07, 7.08, 8.05 and 8.06 shall survive until the Notes are no longer outstanding. Thereafter, only the Company's obligations in Sections 7.07, 8.05 and 8.06 shall survive. If and when a ruling from the Internal Revenue Service or an Opinion of Counsel referred to in clause (D)(1) of this Section 8.02 is able to be provided specifically without regard to, and not in reliance upon, the continuance of the Company's obligations under Section 4.01, then the Company's obligations under such Section 4.01 shall cease upon delivery to the Trustee of such ruling or Opinion of Counsel and compliance with the other conditions precedent provided for herein relating to the defeasance contemplated by this Section 8.02. After any such irrevocable deposit, the Trustee upon request shall acknowledge in writing the discharge of the Company's obligations under the Notes and this Indenture except for those surviving obligations in the immediately preceding paragraph. SECTION 8.03. DEFEASANCE OF CERTAIN OBLIGATIONS. The Company may omit to comply with any term, provision or condition set forth in clauses (iii) and (iv) of Section 5.01 and Sections 4.03 through 4.18, and clauses (c) and (d) of Section 6.01 with respect to clauses (iii) and (iv) of Section 5.01 and Sections 4.03 through 4.18, and clauses (e) and (f) of Section 6.01 shall be deemed not to be Events of Default, in each case with respect to the outstanding Notes if: (i) with reference to this Section 8.03, the Company has irrevocably deposited or caused to be irrevocably deposited with the Trustee (or another trustee satisfying the requirements of Section 7.10) and conveyed all right, title and interest to the Trustee for the benefit of the Holders, under the terms of an irrevocable trust agreement in form and substance satisfactory to the Trustee as trust funds in trust, specifically pledged to the Trustee for the benefit of the Holders as security for payment of the principal of, premium, if any, and interest, if any, on the Notes, and dedicated solely to, the benefit of the Holders, in and to (A) money in an amount, (B) U.S. Government Obligations that, through the payment of interest and principal in respect thereof in accordance with their terms, will provide, not later than one day 67 before the due date of any payment referred to in this clause (i), money in an amount or (C) a combination thereof in an amount sufficient, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, to pay and discharge, without consideration of the reinvestment of such interest and after payment of all federal, state and local taxes or other charges and assessments in respect thereof payable by the Trustee, the principal of, premium, if any, and interest on the outstanding Notes on the Stated Maturity of such principal or interest; PROVIDED that the Trustee shall have been irrevocably instructed to apply such money or the proceeds of such U.S. Government Obligations to the payment of such principal, premium, if any, and interest with respect to the Notes; (ii) such deposit will not result in a breach or violation of, or constitute a default under, this Indenture or any other agreement or instrument to which the Company is a party or by which it is bound; (iii) no Default or Event of Default shall have occurred and be continuing on the date of such deposit; (iv) the Company has delivered to the Trustee an Opinion of Counsel to the effect that (A) the creation of the defeasance trust does not violate the Investment Company Act of 1940, (B) the Holders have a valid first-priority security interest in the trust funds, (C) the Holders will not recognize income, gain or loss for federal income tax purposes as a result of such deposit and defeasance of certain obligations and will be subject to federal income tax on the same amount and in the same manner and at the same times as would have been the case if such deposit and defeasance had not occurred and (D) after the passage of 123 days following the deposit (except, with respect to any trust funds for the account of any Holder who may be deemed to be an "insider" for purposes of the United States Bankruptcy Code, after one year following the deposit), the trust funds will not be subject to the effect of Section 547 of the United States Bankruptcy Code or Section 15 of the New York Debtor and Creditor Law in a case commenced by or against the Company under either such statute, and either (1) the trust funds will no longer remain the property of the Company (and therefore will not be subject to the effect of any applicable bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally) or (2) if a court were to rule under any such law in any case or proceeding that the trust funds remained property of the Company, (x) assuming such trust funds remained in the possession of the Trustee prior to such court ruling to the extent not paid to the Holders, the Trustee will hold, for the benefit of the Holders, a valid and perfected security interest in such trust funds that is not avoidable in bankruptcy or otherwise (except for the effect of Section 552(b) of the United States Bankruptcy Code on interest on the trust funds accruing after the commencement of a case under such statute), (y) the Holders will be entitled to receive adequate protection of their interests in such trust funds if such trust funds are used in such case or proceeding 68 and (z) no property, rights in property or other interests granted to the Trustee or the Holders in exchange for, or with respect to, such trust funds will be subject to any prior rights of holders of other Indebtedness of the Company or any of its Subsidiaries; (v) if the Notes are then listed on a national securities exchange, the Company shall have delivered to the Trustee an Opinion of Counsel to the effect that such deposit defeasance and discharge will not cause the Notes to be delisted; and (vi) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, in each case stating that all conditions precedent provided for herein relating to the defeasance contemplated by this Section 8.03 have been complied with. SECTION 8.04. APPLICATION OF TRUST MONEY. Subject to Section 8.06, the Trustee or Paying Agent shall hold in trust money or U.S. Government Obligations deposited with it pursuant to Section 8.01, 8.02 or 8.03, as the case may be, and shall apply the deposited money and the money from U.S. Government Obligations in accordance with the Notes and this Indenture to the payment of principal of, premium, if any, and interest on the Notes; but such money need not be segregated from other funds except to the extent required by law. SECTION 8.05. REPAYMENT TO COMPANY. Subject to Sections 7.07, 8.01, 8.02 and 8.03, the Trustee and the Paying Agent shall promptly pay to the Company upon request set forth in an Officers' Certificate any excess money held by them at any time and thereupon shall be relieved from all liability with respect to such money. The Trustee and the Paying Agent shall pay to the Company upon request any money held by them for the payment of principal, premium, if any, or interest that remains unclaimed for two years; PROVIDED that the Trustee or such Paying Agent before being required to make any payment may cause to be published at the expense of the Company once in a newspaper of general circulation in The City of New York or mail to each Holder entitled to such money at such Holder's address (as set forth in the Security Register) notice that such money remains unclaimed and that after a date specified therein (which shall be at least 30 days from the date of such publication or mailing) any unclaimed balance of such money then remaining will be repaid to the Company. After payment to the Company, Holders entitled to such money must look to the Company for payment as general creditors unless an applicable law designates another Person, and all liability of the Trustee and such Paying Agent with respect to such money shall cease. SECTION 8.06. REINSTATEMENT. If the Trustee or Paying Agent is unable to apply any money or U.S. Government Obligations in accordance with Section 8.01, 8.02 or 8.03, as the case may be, by reason of any legal proceeding or by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, the Company's obligations under this Indenture and the Notes 69 shall be revived and reinstated as though no deposit had occurred pursuant to Section 8.01, 8.02 or 8.03, as the case may be, until such time as the Trustee or Paying Agent is permitted to apply all such money or U.S. Government Obligations in accordance with Section 8.01, 8.02 or 8.03, as the case may be; PROVIDED that, if the Company has made any payment of principal of, premium, if any, or interest on any Notes because of the reinstatement of its obligations, the Company shall be subrogated to the rights of the Holders of such Notes to receive such payment from the money or U.S. Government Obligations held by the Trustee or Paying Agent. ARTICLE NINE AMENDMENTS, SUPPLEMENTS AND WAIVERS SECTION 9.01. WITHOUT CONSENT OF HOLDERS. The Company, when authorized by a Board Resolution, and the Trustee may amend or supplement this Indenture or the Notes without notice to or the consent of any Holder: (1) to cure any ambiguity, defect or inconsistency in this Indenture; PROVIDED that such amendments or supplements shall not adversely affect the interests of the Holders in any material respect; (2) to comply with Article Five; (3) to comply with Section 4.07, provided that Section 4.07 may not be amended under this Section 9.01; (4) to comply with any requirements of the Commission in connection with the qualification of this Indenture under the TIA; (5) to evidence and provide for the acceptance of appointment hereunder by a successor Trustee; or (6) to make any change that does not materially and adversely affect the rights of any Holder. SECTION 9.02. WITH CONSENT OF HOLDERS. Subject to Sections 6.04 and 6.07 and without prior notice to the Holders, the Company, when authorized by its Board of Directors (as evidenced by a Board Resolution), and the Trustee may amend this Indenture and the Notes with the written consent of the Holders of a majority in principal amount of the Notes then outstanding, and the Holders of a majority in principal amount of the Notes then outstanding by written notice to the Trustee may waive future compliance by the Company with any provision of this Indenture or the Notes. 70 Notwithstanding the provisions of this Section 9.02, without the consent of each Holder affected, an amendment or waiver, including a waiver pursuant to Section 6.04, may not: (i) change the Stated Maturity of the principal of, or any installment of interest on, any Note, or reduce the principal amount thereof or the rate of interest thereon or any premium payable upon the redemption thereof, or adversely affect any right of repayment at the option of any Holder of any Note, or change any place of payment where, or the currency in which, any Note or any premium or the interest thereon is payable, or impair the right to institute suit for the enforcement of any such payment on or after the Stated Maturity thereof (or, in the case of redemption, on or after the Redemption Date); (ii) reduce the percentage in principal amount of outstanding Notes the consent of whose Holders is required for any such supplemental indenture, for any waiver of compliance with certain provisions of this Indenture or certain Defaults and their consequences provided for in this Indenture; (iii) waive a Default in the payment of principal of, premium, if any, or interest on, any Note; or (iv) modify any of the provisions of this Section 9.02, except to increase any such percentage or to provide that certain other provisions of this Indenture cannot be modified or waived without the consent of the Holder of each outstanding Note affected thereby. It shall not be necessary for the consent of the Holders under this Section 9.02 to approve the particular form of any proposed amendment, supplement or waiver, but it shall be sufficient if such consent approves the substance thereof. After an amendment, supplement or waiver under this Section 9.02 becomes effective, the Company shall mail to the Holders affected thereby a notice briefly describing the amendment, supplement or waiver. The Company will mail supplemental indentures to Holders upon request. Any failure of the Company to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such supplemental indenture or waiver. SECTION 9.03. REVOCATION AND EFFECT OF CONSENT. Until an amendment or waiver becomes effective, a consent to it by a Holder is a continuing consent by the Holder and every subsequent Holder of a Note or portion of a Note that evidences the same debt as the Note of the consenting Holder, even if notation of the consent is not made on any Note. However, any such Holder or subsequent Holder may revoke the consent as to its Note or portion of its Note. Such revocation shall be effective only if the Trustee receives the notice of revocation before the date the amendment, supplement or waiver becomes effective. An 71 amendment, supplement or waiver shall become effective on receipt by the Trustee of written consents from the Holders of the requisite percentage in principal amount of the outstanding Notes. The Company may, but shall not be obligated to, fix a record date for the purpose of determining the Holders entitled to consent to any amendment, supplement or waiver. If a record date is fixed, then, notwithstanding the last two sentences of the immediately preceding paragraph, those Persons who were Holders at such record date (or their duly designated proxies) and only those Persons shall be entitled to consent to such amendment, supplement or waiver or to revoke any consent previously given, whether or not such Persons continue to be Holders after such record date. No such consent shall be valid or effective for more than 90 days after such record date. After an amendment, supplement or waiver becomes effective, it shall bind every Holder unless it is of the type described in any of clauses (i) through (iv) of Section 9.02. In case of an amendment or waiver of the type described in clauses (i) through (iv) of Section 9.02, the amendment or waiver shall bind each Holder who has consented to it and every subsequent Holder of a Note that evidences the same indebtedness as the Note of the consenting Holder. SECTION 9.04. NOTATION ON OR EXCHANGE OF NOTES. If an amendment, supplement or waiver changes the terms of a Note, the Trustee may require the Holder to deliver it to the Trustee. The Trustee may place an appropriate notation on the Note about the changed terms and return it to the Holder and the Trustee may place an appropriate notation on any Note thereafter authenticated. Alternatively, if the Company or the Trustee so determines, the Company in exchange for the Note shall issue and the Trustee shall authenticate a new Note that reflects the changed terms. SECTION 9.05. TRUSTEE TO SIGN AMENDMENTS, ETC. The Trustee shall be entitled to receive, and shall be fully protected in relying upon, in addition to the other documents required by Section 10.03, an Opinion of Counsel stating that the execution of any amendment, supplement or waiver authorized pursuant to this Article Nine is authorized or permitted by this Indenture. Subject to the preceding sentence, the Trustee shall sign such amendment, supplement or waiver if the same does not adversely affect the rights of the Trustee. The Trustee may, but shall not be obligated to, execute any such amendment, supplement or waiver that affects the Trustee's own rights, duties or immunities under this Indenture or otherwise. SECTION 9.06. CONFORMITY WITH TRUST INDENTURE ACT. Every supplemental indenture executed pursuant to this Article Nine shall conform to the requirements of the TIA as then in effect. 72 ARTICLE TEN MISCELLANEOUS SECTION 10.01. TRUST INDENTURE ACT OF 1939. Prior to the effectiveness of the Registration Statement, this Indenture shall incorporate and be governed by the provisions of the TIA that are required to be part of and to govern indentures qualified under the TIA. After the effectiveness of the Registration Statement, this Indenture shall be subject to the provisions of the TIA that are required to be a part of this Indenture and shall, to the extent applicable, be governed by such provisions. SECTION 10.02. NOTICES. Any notice or communication shall be sufficiently given if in writing and delivered in person or mailed by first class mail addressed as follows: if to the Company: ----------------- LodgeNet Entertainment Corporation 808 West Avenue North Sioux Falls, South Dakota 57104 Attention: General Counsel if to the Trustee: ----------------- Marine Midland Bank 140 Broadway 12th Floor New York, New York 10005-1180 Attention: Corporate Trust Administration Department The Company or the Trustee by notice to the other may designate additional or different addresses for subsequent notices or communications. Any notice or communication mailed to a Holder shall be mailed to him at his address as it appears on the Security Register by first class mail and shall be sufficiently given to him if so mailed within the time prescribed. Copies of any such communication or notice to a Holder shall also be mailed to the Trustee and each Agent at the same time. Failure to mail a notice or communication to a Holder or any defect in it shall not affect its sufficiency with respect to other Holders. Except for a notice to the Trustee, which is deemed given only when received, and except as otherwise provided in this Indenture, if a notice or communication is mailed in the manner provided in this Section 10.02, it is duly given, whether or not the addressee receives it. Where this Indenture provides for notice in any manner, such notice may be waived in writing by the Person entitled to receive such notice, either before or after the 73 event, and such waiver shall be the equivalent of such notice. Waivers of notice by Holders shall be filed with the Trustee, but such filing shall not be a condition precedent to the validity of any action taken in reliance upon such waiver. In case by reason of the suspension of regular mail service or by reason of any other cause it shall be impracticable to give such notice by mail, then such notification as shall be made with the approval of the Trustee shall constitute a sufficient notification for every purpose hereunder. SECTION 10.03. CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT. Upon any request or application by the Company to the Trustee to take any action under this Indenture, the Company shall furnish to the Trustee: (i) an Officers' Certificate stating that, in the opinion of the signers, all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with; and (ii) an Opinion of Counsel stating that, in the opinion of such Counsel, all such conditions precedent have been complied with. SECTION 10.04. STATEMENTS REQUIRED IN CERTIFICATE OR OPINION. Each certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture shall include: (i) a statement that each person signing such certificate or opinion has read such covenant or condition and the definitions herein relating thereto; (ii) a brief statement as to the nature and scope of the examination or investigation upon which the statement or opinion contained in such certificate or opinion is based; (iii) a statement that, in the opinion of each such person, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (iv) a statement as to whether or not, in the opinion of each such person, such condition or covenant has been complied with; PROVIDED, HOWEVER, that, with respect to matters of fact, an Opinion of Counsel may rely on an Officers' Certificate or certificates of public officials. SECTION 10.05. RULES BY TRUSTEE, PAYING AGENT OR REGISTRAR. The Trustee may make reasonable rules for action by or at a meeting of Holders. The Paying Agent or Registrar may make reasonable rules for its functions. 74 SECTION 10.06. PAYMENT DATE OTHER THAN A BUSINESS DAY. If an Interest Payment Date, Redemption Date, Change of Control Payment Date, Excess Proceeds Payment Date, Stated Maturity or date of maturity of any Note shall not be a Business Day, then payment of principal of, premium, if any, or interest on such Note, as the case may be, need not be made on such date, but may be made on the next succeeding Business Day with the same force and effect as if made on the Interest Payment Date, Change of Control Payment Date, Excess Proceeds Payment Date, or Redemption Date, or at the Stated Maturity or date of maturity of such Note; PROVIDED that no interest shall accrue for the period from and after such Interest Payment Date, Change of Control Payment Date, Excess Proceeds Payment Date, Redemption Date, Stated Maturity or date of maturity, as the case may be. SECTION 10.07. GOVERNING LAW. The laws of the State of New York shall govern this Indenture and the Notes. The Trustee, the Company and the Holders agree to submit to the jurisdiction of the courts of the State of New York in any action or proceeding arising out of or relating to this Indenture or the Notes. SECTION 10.08. NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS. This Indenture may not be used to interpret another indenture, loan or debt agreement of the Company or any Subsidiary of the Company. Any such indenture, loan or debt agreement may not be used to interpret this Indenture. SECTION 10.09. NO RECOURSE AGAINST OTHERS. No recourse for the payment of the principal of, premium, if any, or interest on any of the Notes, or for any claim based thereon or otherwise in respect thereof, and no recourse under or upon any obligation, covenant or agreement of the Company contained in this Indenture, or in any of the Notes, or because of the creation of any Indebtedness represented thereby, shall be had against any incorporator or against any past, present or future partner, shareholder, other equityholder, officer, director, employee or controlling person, as such, of the Company or of any successor Person, either directly or through the Company or any successor Person, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise; it being expressly understood that all such liability is hereby expressly waived and released as a condition of, and as a consideration for, the execution of this Indenture and the issue of the Notes. SECTION 10.10. SUCCESSORS. All agreements of the Company in this Indenture and the Notes shall bind its successors. All agreements of the Trustee in this Indenture shall bind its successor. SECTION 10.11. DUPLICATE ORIGINALS. The parties may sign any number of copies of this Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. 75 SECTION 10.12. SEPARABILITY. In case any provision in this Indenture or in the Notes shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 10.13. TABLE OF CONTENTS, HEADINGS, ETC. The Table of Contents, Cross-Reference Table and headings of the Articles and Sections of this Indenture have been inserted for convenience of reference only, are not to be considered a part hereof and shall in no way modify or restrict any of the terms and provisions hereof. SIGNATURES IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed, all as of the date first written above. LODGENET ENTERTAINMENT CORPORATION By: /s/ Jeffrey T. Welsner -------------------------------- Name: Jeffrey T. Welsner Title: Vice President - Finance, Treasurer MARINE MIDLAND BANK, as Trustee By: /s/ Frank Godino --------------------------------- Name: FRANK GODINO Title: ASSISTANT VICE PRESIDENT EXHIBIT A [FACE OF NOTE] LODGENET ENTERTAINMENT CORPORATION 10 1/4% Senior Note due 2006 [CUSIP] [CINS][__________] No. $_________ LODGENET ENTERTAINMENT CORPORATION, a Delaware corporation (the "Company", which term includes any successor under the Indenture hereinafter referred to), for value received, promises to pay to [_____________], or its registered assigns, the principal sum of [____________] ($[____]) on December 15, 2006. Interest Payment Dates: June 15, and December 15, commencing June 15, 1997. Regular Record Dates: June 1 and December 1. Reference is hereby made to the further provisions of this Note set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. A-2 IN WITNESS WHEREOF, the Company has caused this Note to be signed manually or by facsimile by its duly authorized officers. Date: December 19, 1996 LODGENET ENTERTAINMENT CORPORATION By:_____________________________ Name: Title: Attest:____________________________ Name: Title: (Trustee's Certificate of Authentication) This is one of the 10 1/4% Senior Notes due 2006 described in the within-mentioned Indenture. MARINE MIDLAND BANK, as Trustee By:_____________________________ Authorized Signatory A-3 [REVERSE SIDE OF NOTE] LODGENET ENTERTAINMENT CORPORATION 10 1/4% Senior Note due 2006 1. PRINCIPAL AND INTEREST. The Company will pay the principal of this Note on December 15, 2006. The Company promises to pay interest on the principal amount of this Note on each Interest Payment Date, as set forth below, at the rate per annum shown above. Interest will be payable semiannually (to the holders of record of the Notes at the close of business on the June 1 or December 1 immediately preceding the Interest Payment Date) on each Interest Payment Date, commencing June 15, 1997. If an exchange offer ("Exchange Offer") registered under the Securities Act is not consummated, or a shelf registration statement under the Securities Act with respect to resales of the Notes is not declared effective by the Commission, on or before June 19, 1997 in accordance with the terms of the Registration Rights Agreement ("Registration Rights Agreement") dated December 16, 1996 between the Company and Morgan Stanley & Co. Incorporated, NatWest Capital Markets Limited and Montgomery Securities, the annual interest rate borne by the Notes shall be increased by 0.5% from the rate shown above accruing from December 19, 1996, payable in cash semiannually, in arrears, on each June 15 and December 15, commencing December 15, 1997 and if the Exchange Offer is not consummated, or a shelf registration statement under the Securities Act with respect to the resale of the Notes is not declared effective by the Commission, on or before September 19, 1997 in accordance with the terms of the Registration Rights Agreement, the annual interest rate borne by the Notes shall be increased by an additional 0.5% per annum. Once the Exchange Offer is consummated or a shelf registration statement is declared effective, the annual interest rate borne by the Notes shall be changed to again be the rate shown above. The Holder of this Note is entitled to the benefits of such Registration Rights Agreement. Interest on the Notes will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from December 19, 1996; PROVIDED that, if there is no existing default in the payment of interest and this Note is authenticated between a Regular Record Date referred to on the face hereof and the next succeeding Interest Payment Date, interest shall accrue from such Interest Payment Date. Interest will be computed on the basis of a 360-day year of twelve 30-day months. A-4 The Company shall pay interest on overdue principal and premium, if any, and interest on overdue installments of interest, to the extent lawful, at a rate per annum that is 2% in excess of the rate otherwise payable. 2. METHOD OF PAYMENT. The Company will pay interest (except defaulted interest) on the principal amount of the Notes as provided above on each June 15 and December 15 to the persons who are Holders (as reflected in the Security Register at the close of business on such June 1 and December 1 immediately preceding the Interest Payment Date), in each case, even if the Note is cancelled on registration of transfer or registration of exchange after such record date; PROVIDED that, with respect to the payment of principal, the Company will make payment to the Holder that surrenders this Note to a Paying Agent on or after December 15, 2006. The Company will pay principal, premium, if any, and as provided above, interest in money of the United States that at the time of payment is legal tender for payment of public and private debts. However, the Company may pay principal, premium, if any, and interest by its check payable in such money. It may mail an interest check to a Holder's registered address (as reflected in the Security Register). If a payment date is a date other than a Business Day at a place of payment, payment may be made at that place on the next succeeding day that is a Business Day and no interest shall accrue for the intervening period. 3. PAYING AGENT AND REGISTRAR. Initially, the Trustee will act as authenticating agent, Paying Agent and Registrar. The Company may change any authenticating agent, Paying Agent or Registrar without notice. The Company, any Subsidiary or any Affiliate of any of them may act as Paying Agent, Registrar or co-Registrar. 4. INDENTURE; LIMITATIONS. The Company issued the Notes under an Indenture dated as of December 19, 1996 (the "Indenture"), between the Company and Marine Midland Bank, as trustee (the "Trustee"). Capitalized terms herein are used as defined in the Indenture unless otherwise indicated. The terms of the Notes include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act. The Notes are subject to all such terms, and Holders are referred to the Indenture and the Trust Indenture Act for a statement of all such terms. To the extent permitted by applicable law, in the event of any inconsistency between the terms of this Note and the terms of the Indenture, the terms of the Indenture shall control. The Notes are unsecured, general obligations of the Company. The Indenture limits the original aggregate principal amount of the Notes to $150,000,000. A-5 5. REDEMPTION. The Notes will be redeemable, at the Company's option, in whole or in part, at any time on or after December 15, 2001 and prior to maturity, upon not less than 30 nor more than 60 days' prior notice mailed by first-class mail to each Holder's last address as it appears in the Security Register, at the following Redemption Prices (expressed in percentages of their principal amount), plus accrued and unpaid interest, if any, to the Redemption Date (subject to the right of Holders of record on the relevant Regular Record Date that is on or prior to the Redemption Date to receive interest due on an Interest Payment Date), if redeemed during the 12-month period commencing on December 15 of the applicable year set forth below: Redemption Year Price ---- ----------- 2001 105.125% 2002 102.563 2003 and thereafter 100.000 Notes in original denominations larger than $1,000 may be redeemed in part. On and after the Redemption Date, interest ceases to accrue on Notes or portions of Notes called for redemption, unless the Company defaults in the payment of the Redemption Price. In addition, at any time prior to December 15, 1999, the Company may redeem up to 35% of the aggregate principal amount of the Notes with the proceeds of one or more Public Equity Offerings, at any time as a whole or from time to time in part, at a Redemption Price (expressed as a percentage of principal amount on the Redemption Date) of 110.250%, plus accrued and unpaid interest, if any, to the redemption date; provided that, immediately after any such redemption at least $97.5 million aggregate principal amount of the Notes remains outstanding. 6. REPURCHASE UPON CHANGE OF CONTROL. Upon the occurrence of any Change of Control, each Holder shall have the right to require the repurchase of its Notes by the Company in cash pursuant to the offer described in the Indenture at a purchase price equal to 101% of the principal amount thereof on the relevant Payment Date, plus accrued and unpaid interest, if any, to the Payment Date. A notice of such Change of Control will be mailed within 30 days after any Change of Control occurs to each Holder at his last address as it appears in the Security Register. Notes in original denominations larger than $1,000 may be sold to the Company in part. On and after the Payment Date, interest ceases to accrue on Notes or portions of Notes surrendered for purchase by the Company, unless the Company defaults in the payment of the purchase price. A-6 7. DENOMINATIONS; TRANSFER; EXCHANGE. The Notes are in registered form without coupons in denominations of $1,000 of principal amount and multiples of $1,000 in excess thereof. A Holder may register the transfer or exchange of Notes in accordance with the Indenture. The Registrar may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and to pay any taxes and fees required by law or permitted by the Indenture. The Registrar need not register the transfer or exchange of any Notes selected for redemption. Also, it need not register the transfer or exchange of any Notes for a period of 15 days before a selection of Notes to be redeemed is made. 8. PERSONS DEEMED OWNERS. A Holder shall be treated as the owner of a Note for all purposes. 9. UNCLAIMED MONEY. If money for the payment of principal, premium, if any, or interest remains unclaimed for two years, the Trustee and the Paying Agent will pay the money back to the Company at its request. After that, Holders entitled to the money must look to the Company for payment, unless an abandoned property law designates another Person, and all liability of the Trustee and such Paying Agent with respect to such money shall cease. 10. DISCHARGE PRIOR TO REDEMPTION OR MATURITY. If the Company deposits with the Trustee money or U.S. Government Obligations sufficient to pay the then outstanding principal of, premium, if any, and accrued interest on the Notes (a) to redemption or maturity, the Company will be discharged from the Indenture and the Notes, except in certain circumstances for certain sections thereof, and (b) to the Stated Maturity, the Company will be discharged from certain covenants set forth in the Indenture. 11. AMENDMENT; SUPPLEMENT; WAIVER. Subject to certain exceptions, the Indenture or the Notes may be amended or supplemented with the consent of the Holders of at least a majority in principal amount of the Notes then outstanding, and any existing default or compliance with any provision may be waived with the consent of the Holders of at least a majority in principal amount of the Notes then outstanding. Without notice to or the consent of any Holder, the parties thereto may amend or supplement the Indenture or the Notes to, among other things, cure any ambiguity, defect or inconsistency and make any change that does not materially and adversely affect the rights of any Holder. A-7 12. RESTRICTIVE COVENANTS. The Indenture imposes certain limitations on the ability of the Company and its Restricted Subsidiaries, among other things, to Incur additional Indebtedness, make Restricted Payments, use the proceeds from Asset Sales, engage in transactions with Affiliates or merge, consolidate or transfer substantially all of its assets. Within 45 days after the end of each fiscal quarter (90 days after the end of the last fiscal quarter of each year), the Company must report to the Trustee on compliance with such limitations. 13. SUCCESSOR PERSONS. When a successor person or other entity assumes all the obligations of its predecessor under the Notes and the Indenture, the predecessor person will be released from those obligations. 14. DEFAULTS AND REMEDIES. The following events constitute "Events of Default" under the Indenture: (a) default in the payment of principal of (or premium, if any, on) any Note when the same becomes due and payable at maturity, upon acceleration, redemption or otherwise; (b) default in the payment of interest on any Note when the same becomes due and payable, and such default continues for a period of 30 days; (c) default in the performance or breach of the provisions of the Indenture applicable to mergers, consolidations and transfers of all or substantially all of the assets of the Company or the failure to make or consummate an Offer to Purchase in accordance with Section 4.11 or 4.12 of the Indenture; (d) the Company defaults in the performance of or breaches any other covenant or agreement of the Company in the Indenture or under the Notes (other than a default specified in clause (a), (b) or (c) above) and such default or breach continues for a period of 30 consecutive days after written notice by the Trustee or the Holders of 25% or more in aggregate principal amount of the Notes; (e) there occurs with respect to any issue or issues of Indebtedness of the Company or any Significant Subsidiary having an outstanding principal amount of $10 million or more in the aggregate for all such issues of all such Persons, whether such Indebtedness now exists or shall hereafter be created, (I) an event of default that has caused the holder thereof to declare such Indebtedness to be due and payable prior to its Stated Maturity and such Indebtedness has not been discharged in full or such acceleration has not been rescinded or annulled within 30 days of such acceleration and/or (II) the failure to make a principal payment at the final (but not any interim) fixed maturity and such defaulted payment shall not have been made, waived or extended within 30 days of such payment default; (f) any final judgment or order (not covered by insurance) for the payment of money in excess of $10 million in the aggregate for all such final judgments or orders against all such Persons (treating any deductibles, self-insurance or retention as not so covered) shall be rendered against the Company or any Significant Subsidiary and shall not be paid or discharged, and there shall be any period of 60 consecutive days following entry of the final judgment or order that causes the aggregate amount for all such final judgments or orders outstanding and not paid A-8 or discharged against all such Persons to exceed $10 million during which a stay of enforcement of such final judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; (g) a court having jurisdiction in the premises enters a decree or order for (A) relief in respect of the Company or any Significant Subsidiary in an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, (B) appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official of the Company or any Significant Subsidiary or for all or substantially all of the property and assets of the Company or any Significant Subsidiary or (C) the winding up or liquidation of the affairs of the Company or any Significant Subsidiary and, in each case, such decree or order shall remain unstayed and in effect for a period of 60 consecutive days; or (h) the Company or any Significant Subsidiary (A) commences a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or consents to the entry of an order for relief in an involuntary case under any such law, (B) consents to the appointment of or taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official of the Company or any Significant Subsidiary or for all or substantially all of the property and assets of the Company or any of its Significant Subsidiaries or (C) effects any general assignment for the benefit of creditors. If an Event of Default, as defined in the Indenture, occurs and is continuing, the Trustee or the Holders of at least 25% in principal amount of the Notes may declare all the Notes to be due and payable. If a bankruptcy or insolvency default with respect to the Company or any Restricted Subsidiary occurs and is continuing, the Notes automatically become due and payable. Holders may not enforce the Indenture or the Notes except as provided in the Indenture. The Trustee may require indemnity satisfactory to it before it enforces the Indenture or the Notes. Subject to certain limitations, Holders of at least a majority in principal amount of the Notes then outstanding may direct the Trustee in its exercise of any trust or power. 15. TRUSTEE DEALINGS WITH COMPANY. The Trustee under the Indenture, in its individual or any other capacity, may make loans to, accept deposits from and perform services for the Company or its Affiliates and may otherwise deal with the Company or its Affiliates as if it were not the Trustee. 16. NO RECOURSE AGAINST OTHERS. No incorporator or any past, present or future partner, stockholder, other equity holder, officer, director, employee or controlling person as such, of the Company or of any successor Person shall have any liability for any obligations of the Company under the Notes or the Indenture or for any claim based on, in respect of or by reason of, such obligations or their creation. Each Holder by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for the issuance of the Notes. A-9 17. AUTHENTICATION. This Note shall not be valid until the Trustee or authenticating agent signs the certificate of authentication on the other side of this Note. 18. ABBREVIATIONS. Customary abbreviations may be used in the name of a Holder or an assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by the entireties), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian) and U/G/M/A (= Uniform Gifts to Minors Act). The Company will furnish to any Holder upon written request and without charge a copy of the Indenture. Requests may be made to LodgeNet Entertainment Corporation, 808 West Avenue North, Sioux Falls, South Dakota 57104, Attention: Vice President -- General Counsel. A-10 [FORM OF TRANSFER NOTICE] FOR VALUE RECEIVED the undersigned registered holder hereby sell(s), assign(s) and transfer(s) unto Insert Taxpayer Identification No. __________________________________ ________________________________________________________________________________ Please print or typewrite name and address including zip code of assignee ________________________________________________________________________________ the within Note and all rights thereunder, hereby irrevocably constituting and appointing ___________________________________________________________ attorney to transfer said Note on the books of the Company with full power of substitution in the premises. [THE FOLLOWING PROVISION TO BE INCLUDED ON ALL NOTES OTHER THAN EXCHANGE NOTES, UNLEGENDED OFFSHORE GLOBAL NOTES AND UNLEGENDED OFFSHORE PHYSICAL NOTES] In connection with any transfer of this Note occurring prior to the date which is the earlier of (i) the date the shelf registration statement is declared effective or (ii) the end of the period referred to in Rule 144(k) under the Securities Act, the undersigned confirms that without utilizing any general solicitation or general advertising that: [CHECK ONE] [ ] (a) this Note is being transferred in compliance with the exemption from registration under the Securities Act provided by Rule 144A thereunder. OR [ ] (b) this Note is being transferred other than in accordance with (a) above and documents are being furnished which comply with the conditions of transfer set forth in this Note and the Indenture. A-11 If neither of the foregoing boxes is checked, the Trustee or other Registrar shall not be obligated to register this Note in the name of any Person other than the Holder hereof unless and until the conditions to any such transfer of registration set forth herein and in Section 2.08 of the Indenture shall have been satisfied. Date:__________________ _______________________________________ NOTICE: The signature to this assignment must correspond with the name as written upon the face of the within-mentioned instrument in every particular, without alteration or any change whatsoever. TO BE COMPLETED BY PURCHASER IF (a) ABOVE IS CHECKED. The undersigned represents and warrants that it is purchasing this Note for its own account or an account with respect to which it exercises sole investment discretion and that it and any such account is a "qualified institutional buyer" within the meaning of Rule 144A under the Securities Act and is aware that the sale to it is being made in reliance on Rule 144A and acknowledges that it has received such information regarding the Company as the undersigned has requested pursuant to Rule 144A or has determined not to request such information and that it is aware that the transferor is relying upon the undersigned's foregoing representations in order to claim the exemption from registration provided by Rule 144A. Dated:_________________ _______________________________________________ NOTICE: To be executed by an executive officer A-12 OPTION OF HOLDER TO ELECT PURCHASE If you wish to have this Note purchased by the Company pursuant to Section 4.11 or Section 4.12 of the Indenture, check the Box: / / If you wish to have a portion of this Note purchased by the Company pursuant to Section 4.11 or Section 4.12 of the Indenture, state the amount: $___________________. Date: ______________ Your Signature:_________________________________________________________________ (Sign exactly as your name appears on the other side of this Note) Signature Guarantee: ______________________________ EXHIBIT B FORM OF CERTIFICATE [________________, ____] Marine Midland Bank 140 Broadway New York, New York 10005 Attention: Corporate Trust Administration Department Re: LodgeNet Entertainment Corporation (the "Company") 10 1/4% Senior Notes due 2006 (the "Notes") -------------------------------------------------- Dear Sirs: This letter relates to U.S. $[_________] principal amount of Notes represented by a Note (the "Legended Note") which bears a legend outlining restrictions upon transfer of such Legended Note. Pursuant to Section 2.02 of the Indenture dated as of December 19, 1996 (the "Indenture") relating to the Notes, we hereby certify that we are (or we will hold such securities on behalf of) a person outside the United States to whom the Notes could be transferred in accordance with Rule 904 of Regulation S promulgated under the U.S. Securities Act of 1933. Accordingly, you are hereby requested to exchange the legended certificate for an unlegended certificate representing an identical principal amount of Notes, all in the manner provided for in the Indenture. You and the Company are entitled to rely upon this letter and are irrevocably authorized to produce this letter or a copy hereof to any interested party in any administrative or legal proceedings or official inquiry with respect to the matters covered hereby. Terms used in this certificate have the meanings set forth in Regulation S. Very truly yours, [Name of Holder] By: _______________________________ Authorized Signature EXHIBIT C Form of Certificate to Be Delivered in Connection with Transfers to Non-QIB Accredited Investors ----------------------------------------- [____________ , ____] Marine Midland Bank 140 Broadway New York, New York 10005 Attention: Corporate Trust Administration Department Re: LodgeNet Entertainment Corporation (the "Company") 10 1/4% Senior Notes due 2006 (the "Notes") -------------------------------------------------- Dear Sirs: In connection with our proposed purchase of $[_____________] aggregate principal amount of the Notes, we confirm that: 1. We understand that any subsequent transfer of the Notes is subject to certain restrictions and conditions set forth in the Indenture dated as of December 19, 1996 (the "Indenture"), relating to the Notes, and the undersigned agrees to be bound by, and not to resell, pledge or otherwise transfer the Notes except in compliance with, such restrictions and conditions and the Securities Act of 1933 (the "Securities Act"). 2. We understand that the offer and sale of the Notes have not been registered under the Securities Act, and that the Notes may not be offered or sold except as permitted in the following sentence. We agree, on our own behalf and on behalf of any accounts for which we are acting as hereinafter stated, that if we should sell any Notes, we will do so only (A) to the Company or any subsidiary thereof, (B) in accordance with Rule 144A under the Securities Act to a "qualified institutional buyer" (as defined therein), (C) to an institutional "accredited investor" (as defined below) that, prior to such transfer, furnishes (or has furnished on its behalf by a U.S. broker-dealer) to you and to the Company a signed letter substantially in the form of this letter, (D) outside the United States in accordance with Rule 904 of Regulation S under the Securities Act, (E) pursuant to the exemption from registration provided by Rule 144 under the Securities Act, or (F) pursuant to an effective C-2 registration statement under the Securities Act, and we further agree to provide to any person purchasing any of the Notes from us a notice advising such purchaser that resales of the Notes are restricted as stated herein. 3. We understand that, on any proposed resale of any Notes, we will be required to furnish to you and the Company such certifications, legal opinions and other information as you and the Company may reasonably require to confirm that the proposed sale complies with the foregoing restrictions. We further understand that the Notes purchased by us will bear a legend to the foregoing effect. 4. We are an institutional "accredited investor" (as defined in Rule 501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act) and have such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of our investment in the Notes, and we and any accounts for which we are acting are each able to bear the economic risk of our or its investment. 5. We are acquiring the Notes purchased by us for our own account or for one or more accounts (each of which is an institutional "accredited investor") as to each of which we exercise sole investment discretion. You and the Company are entitled to rely upon this letter and are irrevocably authorized to produce this letter or a copy hereof to any interested party in any administrative or legal proceedings or official inquiry with respect to the matters covered hereby. Very truly yours, [Name of Transferee] By:_________________________ Authorized Signature EXHIBIT D Form of Certificate to Be Delivered in Connection with Transfers Pursuant to Regulation S -------------------------------- [____________, ____] Marine Midland Bank 140 Broadway New York, New York 10005 Attention: Corporate Trust Administration Department Re: LodgeNet Entertainment Corporation (the "Company") 10 1/4% Senior Notes due 2006 (the "Notes") -------------------------------------------------- Dear Sirs: In connection with our proposed sale of U.S.$[___________] aggregate principal amount of the Notes, we confirm that such sale has been effected pursuant to and in accordance with Regulation S under the Securities Act of 1933 and, accordingly, we represent that: (1) the offer of the Notes was not made to a person in the United States; (2) at the time the buy order was originated, the transferee was outside the United States or we and any person acting on our behalf reasonably believed that the transferee was outside the United States; (3) no directed selling efforts have been made by us in the United States in contravention of the requirements of Rule 903(b) or Rule 904(b) of Regulation S, as applicable; and (4) the transaction is not part of a plan or scheme to evade the registration requirements of the U.S. Securities Act of 1933. D-2 You and the Company are entitled to rely upon this letter and are irrevocably authorized to produce this letter or a copy hereof to any interested party in any administrative or legal proceedings or official inquiry with respect to the matters covered hereby. Terms used in this certificate have the meanings set forth in Regulation S. Very truly yours, [Name of Transferor] By:____________________________ Authorized Signature EX-10.3 5 EXHIBIT 10.3 STOCK OPTION PLAN LODGENET ENTERTAINMENT CORPORATION STOCK OPTION PLAN (As Amended and Restated Effective August 15, 1996) TABLE OF CONTENTS PAGE ---- 1. Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2. Administration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 3. Eligibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 4. Common Stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 5. Grants to Non-Employee Directors. . . . . . . . . . . . . . . . . . . . . 3 (a) Grants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 (b) NSOs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 (c) Termination of Service . . . . . . . . . . . . . . . . . . . . . . . 3 (d) Payment of Director's Fees in Securities . . . . . . . . . . . . . . 3 6. Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 7. Required Terms and Conditions of ISOs . . . . . . . . . . . . . . . . . . 4 (a) Exercise Price . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 (b) Maximum Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 (c) Time of Exercise . . . . . . . . . . . . . . . . . . . . . . . . . . 5 (d) Value of Shares. . . . . . . . . . . . . . . . . . . . . . . . . . . 5 (e) Conversion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 8. Required Terms and Conditions of NSOs . . . . . . . . . . . . . . . . . . 6 9. Expiration of Options Granted to Key Employees; Termination of Employment, Disability, Death, Retirement, or Occurrence of Specified Events. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 (a) General Rule . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 (b) Expiration Upon Termination of Employment. . . . . . . . . . . . . . 6 (c) Expiration Upon Disability or Death. . . . . . . . . . . . . . . . . 7 (d) Expiration Upon Retirement . . . . . . . . . . . . . . . . . . . . . 7 (e) Expiration Upon Occurrence of Specified Events . . . . . . . . . . . 8 10. Method of Exercise of Options . . . . . . . . . . . . . . . . . . . . . . 9 11. Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 12. Terms and Conditions of Options . . . . . . . . . . . . . . . . . . . . 12 13. Non-Transferability . . . . . . . . . . . . . . . . . . . . . . . . . . 13 14. Indemnification of the Committee. . . . . . . . . . . . . . . . . . . . 13 15. No Contract of Employment . . . . . . . . . . . . . . . . . . . . . . . 14 16. Termination and Amendment of the Plan . . . . . . . . . . . . . . . . . 14 17. Withholding Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 -i- 18. Leaves of Absence . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 19. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 20. Fair Market Value . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 21. Successors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 22. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 -ii- LODGENET ENTERTAINMENT CORPORATION STOCK OPTION PLAN (As Amended and Restated Effective August 15, 1996) 1. Purpose LodgeNet Entertainment Corporation, a Delaware corporation (the "Corporation"), adopted the LodgeNet Entertainment Corporation Stock Option Plan, effective as of August 16, 1993. The purpose of the LodgeNet Entertainment Corporation Stock Option Plan (the "Plan") is to enable the Corporation and its subsidiaries to attract, retain, and reward key managerial employees ("Key Employees") and certain non-employee members of the board of directors ("Board") of the Corporation ("Non-Employee Director") by offering them an opportunity to have a greater proprietary interest in and closer identity with the Corporation and with its financial success. An option granted under the Plan to a Key Employee to purchase shares of the Corporation's common stock, $0.01 par value ("Common Stock"), may be an incentive stock option ("ISO") as defined in Section 422 of the Internal Revenue Code of 1986 as heretofore or hereafter amended ("Code") or a nonqualified stock option ("NSO") (collectively referred to as "Options"). An Option that is not an ISO shall be an NSO. Proceeds received by the Corporation from the sale of shares of Common Stock pursuant to Options granted under the Plan shall be used for general corporate purposes. This amendment and restatement of the Plan incorporates amendments adopted in 1995 and 1996 as well as amendments that bring the Plan into compliance with Rule 16b-3 and permit Non-Employee Directors to elect to receive their fees in NSOs and/or shares of Common Stock. 2. Administration The Plan shall be administered by the Compensation Committee of the Board ("Committee") that shall satisfy the requirements of Rule 16b-3 with respect to grants to executive officers and members of the Board. Subject to the express provisions of the Plan, the Committee may interpret the Plan, prescribe, amend and rescind rules and regulations relating to it, determine the terms and provisions of the respective Option Agreements (which need not be identical) and make such other determinations as it deems necessary or advisable for the administration of the Plan. The Committee may delegate decisions with respect to Options to Key Employees who are not executive officers or members of the Board to such executive officer or officers of the Corporation as the Committee determines. The decisions of the Committee and its delegatee(s) under the -1- Plan shall be conclusive and binding. No member of the Board or the Committee or any of its delegatee(s) shall be liable for any action taken or determination made in good faith. 3. Eligibility Key Employees who have been selected by the Committee to receive an Option shall participate in the Plan. Certain Non-Employee Directors shall participate in the Plan through grants of NSOs and shares of Common Stock pursuant to Section 5 hereof and discretionary grants of NSOs pursuant to Section 8 hereof. (Key Employees and Non-Employee Directors who participate in the Plan shall be collectively referred to as "Participants"). The Committee shall determine, within the limits of the express provisions of the Plan, those Participants to whom, and the time or times at which, Options shall be granted. The Committee shall also determine, with respect to Options to Participants, the number of shares of Common Stock to be subject to each such Option: the type of Options (ISO or NSO); the duration of each Option; the exercise price under each Option; the time or times within which (during the term of the Option) all or portions of each Option may be exercised; whether cash. Common Stock Options or other property may be accepted in full or partial payment upon exercise of an Option; and any other terms and conditions of such Options. In making such determinations, the Committee may take into account the nature of the services rendered by the Participant, his present and potential contributions to the Corporation's success and such other factors as the Committee in its discretion shall deem relevant. 4. Common Stock The total number of shares of Common Stock that may be subject to Options (including ISOs) under the Plan shall be 1,000,000 shares. Such total number of shares shall be adjusted in accordance with the provisions of Section 11 hereof, and a share of Common Stock subject to an Option shall only be counted once. Such shares may be either authorized but unissued shares or reacquired shares. In the event that any Option granted under the Plan expires unexercised or is terminated, surrendered or cancelled without being exercised in whole or in part, for any reason, then the number of shares of Common Stock theretofore subject to such Option, or the unexercised, terminated, surrendered, or canceled portion thereof, shall be added to the remaining number of shares of Common Stock that may be made subject to Options under the Plan. -2- 5. Grants to Non-Employee Directors (a) Grants Each individual who becomes a Non-Employee Director of the Company shall automatically be granted an Option on the date of his or her initial election or appointment to the Board of Directors consisting of an NSO to purchase 6,000 shares of Common Stock, and an automatic grant of an NSO to purchase an additional 6,000 shares of Common Stock on each anniversary of such election or appointment during the term of service. (b) NSOs The per share exercise price of each NSO granted to a Non-Employee Director shall be 100 percent of the Fair Market Value (hereinafter defined) of a share of Common Stock on the date of grant. Subject to the provisions of subsection (c) of this Section, if applicable, each such NSO may be exercised in whole or in part not earlier than six months after the date of grant and shall expire on the date ten years after the date of grant. Payment of the exercise price of each such NSO shall be made (i) in cash or (ii) in Common Stock valued at its Fair Market Value on the date of exercise or by a combination of (i) and (ii), as determined by the Non-Employee Director to whom the NSO is granted at the time of exercise. (c) Termination of Service If the service of a Non-Employee Director as a member of the Board terminates for any reason other than (i) due to disability (as determined by the Committee), retirement on or after age sixty-five, or death, or (ii) following an event described in subsection 11(b), all unexercised NSOs granted to him at any time prior to such termination shall expire ninety days after the date of such termination. (d) Payment of Director's Fees in Securities Effective May 8, 1996, a Non-Employee Director may elect to receive his or her annual retainer payments and meeting fees from the Corporation in the form of cash, NSOs, shares of Common Stock, or a combination thereof. Such NSOs and shares of Common Stock shall be issued under the Plan. An election under this Section 5(d) shall be filed with the Corporation in the prescribed manner and by the deadline established by the Committee. The election shall apply only to -3- annual retainers and meeting fees payable after such form has been received by the Corporation. The number of NSOs and/or shares of Common Stock to be granted to Outside Directors in lieu of annual retainers and meeting fees that would otherwise be paid in cash shall be calculated in a manner determined by the Board. The terms of such NSOs shall also be determined by the Board. 6. Options The following provisions shall apply to each Option granted to a Key Employee: (a) Options may be granted to Key Employees at any time and from time to time as shall be determined by the Committee. The Committee shall have complete discretion in determining the number of shares of Common Stock subject to Options granted to each Key Employee. The Committee may grant any type of Option to purchase Common Stock that is permitted by law at the time of the grant, including ISOs. (b) Each Option shall be evidenced by a written agreement specifying the type of Option granted, the Option exercise price, the terms for payment of the exercise price, the duration of the Option and the number of shares of Common Stock to which the Option pertains (the "Option Agreement"). An Option Agreement may also contain a vesting schedule, a non-competition agreement, a confidentiality provision, provisions for forfeiture in the event of termination of the Key Employee's employment by the Corporation for Cause (hereinafter defined) or termination of the Key Employee's employment by the Key Employee without Good Reason (hereinafter defined), and such restrictions and conditions and other terms as the Committee shall determine. Option Agreements need not be identical. (c) The Committee, in its discretion, shall have the power to accelerate the dates for exercise of any or all Options, or any part thereof, granted to a Key Employee under the Plan. 7. Required Terms and Conditions of ISOs The provisions of each ISO granted to a Key Employee under this Section 7 shall be interpreted in a manner consistent with Section 422 of the Code and with all regulations issued thereunder. Each ISO granted to a Key Employee shall be in such form and subject to such restrictions and conditions and other terms as the Committee may determine at the time of grant, subject to the general provisions of -4- the Plan, Section 422 of the Code, the applicable Option Agreement and the following specific rules: (a) Exercise Price Except as otherwise provided, the per share exercise price of each ISO shall be at least 100 percent of the Fair Market Value of the Common Stock at the time such ISO is granted, provided that in the case of an ISO granted to a Key Employee who at the time of grant owns (as defined in Section 424(d) of the Code) stock of the Corporation or its parent or subsidiaries possessing more than 10 percent of the total combined voting power of all classes of stock of any such corporation, the exercise price shall be at least 110 percent of the Fair Market Value of the Common Stock subject to the ISO at the time such ISO is granted and the ISO by its terms shall not be exercisable after the expiration of five years from the date the ISO is granted. In no event may the exercise price be less than the par value of the Common Stock subject to such ISO. (b) Maximum Term Subject to earlier termination as provided in Section 9, each ISO shall expire on the date determined in the applicable Option Agreement at the time the ISO is granted, provided that no ISO shall be exercisable after the expiration of ten years from the date it is granted, except as otherwise provided in subsection (a) next above. (c) Time of Exercise The Committee shall specify in the Option Agreement at the time each ISO is granted, the duration of each ISO and the time or times within which (during the term of the ISO) all or portions of each ISO may be exercised, except to the extent that other terms of exercise are specifically provided by other provisions of the Plan. (d) Value of Shares The aggregate Fair Market Value (determined at the time of grant) of Common Stock with respect to which ISOs are exercisable for the first time by a Key Employee during any calendar year (under all option plans of the Corporation or of a corporation which, at the time such ISO was granted, is a parent or subsidiary of the Corporation, or is a predecessor corporation of any such corporation) shall not exceed $100,000. If the aggregate Fair Market Value (determined at the time of grant) of the stock subject -5- to an Option, which first becomes exercisable in any calendar year exceeds the limitation of this subsection, so much of the Option that does not exceed the applicable dollar limit shall be an ISO and the remainder shall be an NSO; but in all other respects, the original Option Agreement shall remain in full force and effect. (e) Conversion The Committee may, in its sole discretion, cause the Corporation to convert an ISO to an NSO upon such terms and conditions and in such manner as the Committee deems equitable. 8. Required Terms and Conditions of NSOs Notwithstanding anything to the contrary in the Plan, the terms and conditions applicable to NSOs granted to Participant's (including Non- Employee Directors, other than grants pursuant to Section 5(a)) pursuant to the Plan (which need not be identical) and the Option Agreements relating thereto shall be determined by the Committee and the Committee shall make such other determinations as it deems necessary or advisable for the administration of NSOs granted under the Plan, including prescribing, amending and rescinding rules and regulations relating to NSOs and converting NSOs granted outside the Plan into NSOs under the Plan with the consent of the holder of any such Option. 9. Expiration of Options Granted to Key Employees; Termination of Employment, Disability, Death, Retirement, or Occurrence of Specified Events (a) General Rule Except with respect to Options expiring pursuant to subsection 9(b), (c) or (d) below, each Option granted to a Key Employee shall, unless sooner expired pursuant to subsection 9(e) below, expire on the expiration date or dates set forth in the applicable Option Agreement. Each Option expiring pursuant to subsection 9(b), (c) or (d) below shall expire on the date set forth in subsection 9(b), (c) or (d) notwithstanding any restrictions and conditions that may be contained in a Key Employee's Option Agreement. (b) Expiration Upon Termination of Employment An Option granted to a Key Employee shall expire on the first to occur of (i) the applicable date or dates determined pursuant to subsection 9(a) or (ii) the date that the employment of the Key Employee with the Corporation or its subsidiaries terminates for any -6- reason other than death or disability pursuant to subsection 9(c), retirement pursuant to subsection 9(d), or pursuant to subsection 9(e). Notwithstanding the preceding provisions of this subsection 9(b), the Committee, in its sole discretion, may permit a Key Employee (i) to exercise an Option that is exercisable immediately prior to the termination of employment, notwithstanding any restrictions and conditions that may be contained in his Option Agreement, during a period not to exceed ninety days following his termination of employment, and/or (ii) to exercise an Option that becomes exercisable after termination of employment and prior to the termination of such ninety-day period, during such period. In no event, however, may the Committee permit such Key Employee to exercise all Option under this subsection 9(b) after the expiration date or dates set forth in the applicable Option Agreement. (c) Expiration Upon Disability or Death If the employment of a Key Employee with the Corporation and its subsidiaries terminates by reason of disability (as determined by the Committee) or death, his unexpired Options or portions thereof, if any, held on the date of disability or death that would expire pursuant to the terms of his Option Agreement during the twelve month period commencing on the date of disability or death, shall expire on the last day of such twelve-month period. During such twelve-month period, any such Option or portion thereof referred to in the preceding sentence may be exercised by such Key Employee, or the person specified in Section 10, with respect to the same number of shares and in the same manner and to the same extent as if the Key Employee had continued as a full-time employee of the Corporation or its subsidiaries during such twelve-month period. Any unexpired Option or portion thereof held by the Key Employee on the date of disability or death, that would expire pursuant to the terms of his Option Agreement on a date more than twelve months after the date of disability or death, shall expire unexercised on the date of disability on the date of disability or death. (d) Expiration Upon Retirement If the employment of a Key Employee with the Corporation and its subsidiaries terminates due to retirement under any qualified retirement plan maintained by the Corporation and/or any of its subsidiaries, his Option shall expire on the earlier to occur of (i) the applicable expiration date or -7- dates set forth in the applicable Option Agreement(s) or (ii) the third anniversary of the date of such termination of employment. It a Key Employee who has so retired dies prior to exercising in full an Option that has not expired pursuant to the preceding sentence, then notwithstanding the preceding sentence, such Option shall expire on the first anniversary of the date of the Key Employee's death. During the period commencing on the date of retirement or death, as the case may be, and ending on the applicable later expiration date, the Options may be exercised by such Key Employee, or the person specified in Section 10, with respect to the same number of shares and in the same manner and to the same extent as if the Key Employee had continued as a full-time employee of the Corporation or its subsidiaries during such period. (e) Expiration Upon Occurrence of Specified Events If, within two years after the occurrence of any event described in subsection 11(b), the employment of a Key Employee with the Corporation and its subsidiaries terminates voluntarily for Good Reason, or involuntarily for any reason other than for Cause, or due to the death, disability (as determined by the Committee) or retirement (as defined in subsection (d)) of a Key Employee, and if such event described in subsection 11(b) does not have the prior written approval of a majority of the Continuing Directors, the dates upon which his outstanding Options may be exercised shall be advanced to the date of termination. In such event, not later than ninety days following the date of his termination, the Key Employee may elect to exercise in whole or in part any or all of his Options in accordance with the terms of Section 10, notwithstanding any restrictions and conditions that may be contained in his Option Agreement. For purposes of the preceding sentence an event described in subsection 11(b) shall not have the prior written approval of a majority of the Continuing Directors unless, in the case of an event described in subsection 11(b)(i) or (iii), such approval occurs before the time of such event, and, in the case of an event described in subsection 11(b)(ii), such approval occurs before the time that any person (including any Affiliate or Associate) directly or indirectly acquires or becomes entitled to vote 20 percent or more of the Voting Power of the Corporation. Notwithstanding any of the provisions of this subsection 9(e), if the employment of a Key Employee with the Corporation or its subsidiaries terminates under conditions which meet the requirements of either subsection 9(c) (as to death or disability) or (d) (as to retirement) and this subsection 9(e), then such Key -8- Employee, or the person specified in Section 10, within thirty days following the date of his termination, may elect, by giving written notice to the Secretary of the Corporation, to have the provisions of either subsection 9(c) (as to death or disability) or (d) (as to retirement) or this subsection (e) apply to his Options. For purposes of the Plan: (i) termination for "Cause" shall mean termination of his employment by the Corporation or any subsidiary because of (A) the Key Employee's dishonesty, fraud or breach of trust or substantial nonperformance of, his duties, (B) any act or omission by the Key Employee that is a substantial cause for a regulatory body with jurisdiction over the Corporation or any of its subsidiaries to request or recommend the suspension or removal of the Key Employee or to impose sanctions upon the Corporation or the Key Employee, or (C) a material breach by the Key Employee of any applicable employment agreement between him and the Corporation or any of its subsidiaries, (ii) termination with "Good Reason" shall mean termination of his employment by a Key Employee because, without his express written consent, (A) the Corporation or any subsidiary materially breaches any of the terms of an employment agreement between the Corporation or any of its subsidiaries and the Key Employee, (B) the Key Employee is assigned duties materially inconsistent with his position, duties, and status as of the date immediately preceding the date of termination, or (C) the Corporation or any subsidiary substantially reduces the Key Employee's fixed annual salary or his benefits under the Corporation's or a subsidiary's qualified retirement or welfare plans so that, when considered m the aggregate and with any substitute plan or plans, his aggregate compensation is at a lower level than at the commencement of the term of employment, and (iii) "Continuing Director" shall mean a person who was a member of the Board elected by the stockholders prior to the occurrence of any event described in subsection 11(b). 10. Method of Exercise of Options Any Option granted under the Plan may be exercised by the Participant, by a legatee or legatees of such Option under the Participant's last will, by his executors, personal representatives or distributees, or by his assignee or assignees as provided in Section 13 below, by delivering to the Secretary of the Corporation written notice of the number of shares of Common Stock with respect to which the Option is being exercised, accompanied by full payment to the Corporation of the exercise price of the shares being purchased under the Option, and by satisfying, all other -9- conditions provided for in the Plan Except as otherwise provided in the Plan or in any Option Agreement, the exercise price of Common Stock upon exercise of any Option by a Key Employee shall be paid in full (i) in cash, (ii) in Common Stock valued at its Fair Market Value on the date of exercise, (iii) in cash by a broker-dealer to whom the holder of the Option has submitted an exercise notice consisting of a fully endorsed Option, (iv) by agreeing to surrender Options then exercisable by him valued at the excess of the aggregate Fair Market Value of the Common Stock subject to such Options on the date of exercise over the aggregate option price of such Common Stock, (v) by directing the Corporation to withhold such number of shares of Common Stock otherwise issuable upon exercise of such Option having an aggregate Fair Market Value on the date of exercise equal to the exercise price of the Option or (vi) by such other medium of payment as the Committee, in its discretion, shall authorize or by any combination of (i), (ii), (iii), (iv) and (v), at the discretion of the Committee or in any manner provided in the Option Agreement. The Corporation shall issue, in the name of the Participant (or, if applicable, the legatee(s), executor(s), personal representative(s), or distributee(s) of a deceased Participant, or the assignee(s) as provided in Section 13), stock certificates representing the total number of shares of Common Stock issuable pursuant to the exercise of any Option as soon as reasonably practicable after such exercise, provided that any Common Stock purchased by a Key Employee through a broker-dealer pursuant to clause (iii) above shall be delivered to such broker-dealer in accordance with 12 C.F R. Sec. 220.3(e)(4). 11. Adjustments (a) Appropriate adjustment in the maximum number of shares of Common Stock issuable pursuant to the Plan, the number of shares subject to Options under the Plan and the exercise price with respect to Options shall be made to give effect to any increase or decrease in the number of shares of issued Common Stock resulting from a subdivision or consolidation of shares whether through reorganization, recapitalization, stock split, reverse stock split, spin-off, split- off, spin-out, or other distribution of assets to stockholders, stock distributions or combination of shares, assumption and conversion of outstanding Options due to an acquisition by the Corporation of the stock or assets of any other corporation, payment of stock dividends, other increase or decrease in the number of such shares outstanding effected, without receipt of consideration by the Corporation, or any other occurrence for which the Committee determines an adjustment is appropriate; provided, however, that no -10- adjustment in the number of shares with respect to which Options may be granted under the Plan, or in the number of shares subject to outstanding Options shall be made except in the event, and then only to the extent that such adjustment together with all respective prior adjustments which were not made as a result of this provision, involve a net change of more then ten percent (i) from the number of shares of Common Stock with respect to which Options may be granted under the Plan, or (ii) with respect to each outstanding Option, from the respective number of shares of Common Stock subject thereto on the date of grant thereof. The decision of the Committee as to the amount and timing of any such adjustments shall be conclusive. (b) In the event that: (i) any person (as such term is used in Section 13 of the Securities Exchange Act of 1934 and the rules and regulations thereunder and including any Affiliate or Associate of such person, as defined in Rule 12b-2 under said Act, and any person acting in concert with such person) directly or indirectly acquires or otherwise becomes entitled to vote more than 50 percent of the voting power entitled to be cast at elections for directors ("Voting Power") of the Corporation; or (ii) there occurs any merger or consolidation of the Corporation, or any sale, lease or exchange of all or any substantial part of the consolidated assets of the Corporation and its subsidiaries to any other person and (A) in the case of a merger or consolidation, the holders of outstanding stock of the Corporation entitled to vote in elections of directors immediately before such merger or consolidation (excluding for this purpose any person (including any Affiliate or Associate) that directly or indirectly owns or is entitled to vote 20 percent or more of the Voting Power of the Corporation) hold less than 80 percent of the Voting Power of the survivor of such merger or consolidation or its parent; or (B) in the case of any such sale, lease or exchange, the Corporation does not own at least 50 percent of the Voting Power of the other person; or (iii) one or more new directors of the Corporation are elected and at such time five or more directors (or, if less, a majority of the directors) then holding office were not nominated as candidates by a majority of the Continuing Directors; -11- the Committee may, in its discretion, revise, alter, amend or modify any Option Agreement with a Key Employee and any then outstanding and unexercised Option granted to a Key Employee in any manner that it deems appropriate, including, but not limited to, any of the following respects: (A) the Option may be deemed to pertain to and apply to the securities to which a holder of the number of shares of Common Stock subject to the unexercised portion of the Option would be entitled if he actually owned such shares immediately prior to the record date or other time any such event became effective; and (B) subject to subsection 7(d), the dates upon which outstanding and unexercised Options may be exercised may be advanced (without regard to installment exercise limitations, if any). If the Committee believes that any such event is reasonably likely to occur, the Committee may so revise, alter, amend or modify as set forth above at any time before and contingent upon the consummation of such an event. (c) In the case of dissolution of the Corporation, every Option granted to a Key Employee outstanding hereunder shall terminate notwithstanding any restrictions and conditions that may be contained in his Option Agreement Each such Option holder shall have thirty days prior written notice of such event, during which time he shall have a right, subject to subsection 7(d), to exercise his partly or wholly unexercised Option (without regard to installment exercise limitations, if any). (d) On the basis of information known to the Corporation, the Committee shall make all determinations relating to the applicability and interpretation of this Section 11, and all such determinations shall be conclusive and binding. 12. Terms and Conditions of Options (a) Each Key Employee shall agree to such restrictions and conditions and other terms in connection with the exercise of an Option, including restrictions and conditions on the disposition of the Common Stock acquired upon the exercise thereof, as the Committee may deem appropriate. The certificates delivered to a Participant evidencing the shares of Common Stock -12- acquired upon exercise of an Option may bear a legend referring to the restrictions and conditions and other terms contained in the respective Option Agreement and the Plan, and the Corporation may place a stop transfer order with its transfer agent against the transfer of such shares. If requested to do so by the Committee at the time of exercise of an Option, each Participant shall execute a written instrument stating that he is purchasing the Common Stock for investment and not with any present intention to sell the same. (b) The obligation of the Corporation to sell and deliver Common Stock under the Plan shall be subject to all applicable laws, regulations, rules and approvals, including, but not by way of limitation, the effectiveness of a registration statement under the Securities Act of 1933, if deemed necessary or appropriate by the Committee, of the Common Stock, Options, and other securities reserved for issuance or that may be offered under the Plan. A Participant shall have no rights as a stockholder with respect to any shares covered by an Option granted to, or exercised by, him until the date of delivery of a stock certificate to him for such shares. No adjustment other than pursuant to Section 11(a) hereof shall be made for dividends or other rights for which the record date is prior to the date such stock certificate is delivered. 13. Non-Transferability Except as provided in the applicable Option Agreement, Options granted under the Plan and any rights and privileges pertaining thereto, may not be transferred assigned, pledged or hypothecated in any manner, by operation of law or otherwise, other than by will or by the laws of descent and distribution and shall not be subject to execution, attachment or similar process. The granting of an Option shall impose no obligation upon the applicable Participant to exercise such Option. 14. Indemnification of the Committee In addition to such other rights of indemnification as they may have as members of the Board, or as members of the Committee, or as its delegatees, the members of the Committee and its delegatees shall be indemnified by the Corporation against (a) the reasonable expenses (as such expenses are incurred), including attorney' fees actually and necessarily incurred in connection with the defense of any action, suit or proceeding (or in connection with any appeal therein), to which they or any of them may be a party by reason of any action taken or failure to act under or in connection with the Plan or any Option granted -13- hereunder; and (b) against all amounts paid by them in settlement thereof (provided such settlement is approved by independent legal counsel selected by the Corporation) or paid by them in satisfaction of a judgment in any such action, suit or proceeding, except in relation to matters as to which it shall be adjudged in such action, suit or proceeding that such Committee member or delegatee is liable for gross negligence or misconduct in the performance of his duties; provided that within sixty days after institution of any such action suit or proceeding a Committee member or delegatee shall in writing offer the Corporation the opportunity, at its own expense, to handle and defend the same. 15. No Contract of Employment Neither the adoption of the Plan nor the grant of any Option shall bc deemed to obligate the Corporation or any subsidiary to continue the employment of any Key Employee for any particular period, nor shall the granting of an Option Constitute a request or consent to postpone the retirement date of any Key Employee. 16. Termination and Amendment of the Plan (a) No ISOs shall be granted under the Plan more than ten years after the first to occur of (i) the date the Plan was adopted by the Board or (ii) the date the Plan was approved by the stockholders of the Corporation. The Board may at any time terminate, suspend or modify the Plan without the authorization of stockholders to the extent allowed by applicable law, regulation or rule. (b) No termination, suspension or modification of the Plan shall adversely affect any right acquired by any Participant under an Option granted before the date of such termination, suspension or modification, unless such Participant shall consent; but it shall be conclusively presumed that any adjustment for changes in capitalization as provided for herein does not adversely affect any such right. Any member of the Board who is an officer or employee of the Corporation shall be without vote on any proposed amendment to the Plan, or on any other matter which might affect that member's individual interest under the Plan. 17. Withholding Taxes Whenever the Corporation proposes or is required to issue or transfer shares of Common Stock to a Participant under the Plan, the Corporation shall have the right to require the Participant to remit to the Corporation an amount sufficient to satisfy all federal, state and local -14- withholding tax requirements prior to the delivery of any certificate or certificates for such shares. If such certificates have been delivered prior to the time a withholding obligation arises, the Corporation shall have the right to require the Participant to remit to the Corporation an amount sufficient to satisfy all federal, state or local withholding tax requirements at the time such obligation arises and to withhold from other amounts payable to the Participant, as compensation or otherwise, as necessary. A Participant may elect to satisfy his tax withholding obligation incurred with respect to the Taxable Date of an Option by (a) directing the Corporation to withhold a portion of the shares of Common Stock otherwise distributable to the Participant, or (b) by transferring to the Corporation a certain number of shares of previously owned Common Stock, such shares being valued at the Fair Market Value thereof on the Taxable Date. 18. Leaves of Absence The Committee shall be entitled to make such rules, regulations and determinations as it deems appropriate under the Plan regarding any leave of absence taken by a Key Employee who is the recipient of any Option. Without limiting the generality of the foregoing, the Committee shall be entitled to determine (a) whether or not any such leave of absence shall constitute a termination of employment within the meaning of the Plan, and (b) the impact, if any, of any such leave of absence on Options under the Plan theretofore made to any Key Employee who takes such leave of absence. 19. Governing Law The Plan, and all agreements hereunder, shall be construed in accordance with and governed by the laws of the State of Delaware and, in the case of ISOs, Section 422 of the Code and regulations issued thereunder. 20. Fair Market Value "Fair Market Value" as of a given date for all purposes of the Plan and any Option Agreement means (a) if the Common Stock is listed on a national security exchange, the average of the closing prices of the Common Stock on the Composite Tape for the ten consecutive trading days immediately preceding such given date; (b) if the Common Stock is traded on an exchange or market in which prices are reported on a bid and asked price, the average of the mean between the bid and the asked price for the Common Stock at the close of trading for the ten consecutive trading days immediately preceding such given date; and (c) if the Common Stock is not listed on a national securities exchange nor traded on the over-the-counter -15- market, such value as the Committee, in good faith, shall determine. Notwithstanding any provision of the Plan to the contrary, no determination made with respect to the Fair Market Value of Common Stock subject to an ISO shall be inconsistent with Section 422 of the Code or regulations issued thereunder 21. Successors In the event of a sale of substantially all of the assets of the Corporation, or a merger, consolidation or share exchange involving the Corporation, all obligations of the Corporation under the Plan with respect to Options granted hereunder shall be binding on the successor to the transaction. Employment of a Key Employee with such a successor shall be considered employment of the Key Employee with the Corporation for purposes of the Plan. 22. Notices Notices given pursuant to the Plan shall be in writing and shall be deemed received when personally delivered or five days after mailed by United States registered or certified mail, return receipt requested, addressee only, postage prepaid. Notice to the Corporation shall be directed to: Corporate Secretary LodgeNet Entertainment Corporation 808 West Avenue North Sioux Falls, South Dakota 57104 Notices to or with respect to a Participant shall be directed to the Participant, or the executors, personal representatives or distributees of a deceased Participant, at the Participant's home address on the records of the Corporation. -16- EX-10.5 6 EXHIBIT 10.5 AGREEMENT TO EXTEND LEASE AGREEMENT TO EXTEND LEASE This Agreement to Extend Lease ("Agreement") made this 6th day of November, 1996, between Modern Press Realty Company ("Landlord") and Lodgenet Entertainment Corporation ("Tenant"). WHEREAS, Landlord and Tenant entered into an "Office and Building Lease" on or about December 9, 1991 ("Lease"); and WHEREAS, the parties do hereby agree to extend the term of the Lease. NOW, THEREFORE, in consideration of the promises, covenants, terms and conditions hereinafter set forth, the parties do hereby agree as follows: 1. The term of the Lease is extended for the period of seven months, by changing the date of the expiration of the term thereof from the 31st day of December, 1996, to the 31st day of July, 1997. Furthermore, Tenant shall have the option to extend the lease past July 31, 1997, for two (2) additional periods of one month each, provided that: a. Tenant shall give not less than ninety (90) days prior written notice to Landlord of Tenant's exercise of either option; b. Tenant shall only be entitled to exercise the second one month option if Tenant has exercised the first one month option; and c. Tenant's exercise of either option to extend shall be effective only if Tenant is not in default under the Lease and only if the Lease does not otherwise terminate prior to expiration of the applicable term. 2. All of the terms, conditions, covenants and agreements of said Lease shall continue to bind the respective parties hereto for such extended term and the option periods (if such option periods are exercised by Tenant), and in all other respects, said Lease is to remain unchanged and in full force between the parties, except as follows: a. Section twenty of the Lease (Entitled "Purchase Options") shall not apply during the extended term or the option periods; b. The Lease shall terminate at such time, if any, as the parties close the sale of the subject property by Landlord to Tenant; c. The monthly Base Rental is $7,761.71 per month; d. Section 7.0 of the Lease is hereby amended to provide that if such damage or destruction shall include in excess of 35% of the Leased Premises or occur during the fifth year of the Lease or occur during the extended term or either option period of the Lease, Landlord or Tenant may, at each one's option, within thirty (30) days thereof, declare the Lease terminated; e. Section 17.0 of the Lease is hereby amended to provide that Tenant shall, during the extended term and the option periods permit the usual notice of "To Let" or "For Sale" to be placed on the Leased Premises and to remain thereon without molestation; and f. The notice address for Landlord as set forth in Section 21.1 of the Lease shall be in care of First Bank of South Dakota, N.A., P.O. Box 5308, Sioux Falls, South Dakota 57117-5308. 3. This Agreement and the extension of the Lease term shall not be or constitute a waiver of any rights by either party. Specifically and without limitation, LodgeNet is not waiving any right it may have to rescind the exercise of the option to purchase because of possible environmental contamination of the Real Property. MODERN PRESS REALTY COMPANY BY: /s/ Thomas J. Flynn ------------------------------------ ITS: Agent ----------------------------------- LODGENET ENTERTAINMENT CORPORATION BY: /s/ Steven D. Truckenmiller ------------------------------------ ITS: VP ----------------------------------- EX-10.14 7 EXHIBIT 10.14 AMEND TO SECURITIES PURCHASE AGMT AMENDMENT NO. 1 TO SECURITIES PURCHASE AGREEMENT THIS AMENDMENT NO. 1, dated as of December 19, 1996 (this "Amendment"), is between LodgeNet Entertainment Corporation, a Delaware corporation (the "Company") and John Hancock Mutual Life Insurance Company and Massachusetts Mutual Life Insurance Company (the "Required Holders") as holders of 75% of the outstanding principal amount of the Company's 11.50% Senior Subordinated Notes due 2005 (the "Notes"). This Amendment is a first amendment to the Securities Purchase Agreement dated as of August 9, 1995 between the Company, John Hancock Mutual Life Insurance Company, Allstate Life Insurance Company, CM Life Insurance Comapny and Connecticut Mutual Life Insurance Company, pursuant to which the Notes were issued (the "Securities Agreement"). Capitalized terms used in this Amendment without definition have the meanings given therefor in the Securities Agreement. RECITAL The Company has requested that Holders consent to certain amendments to the Securities Agreement in connection with the issuance by the Company of $150,000,000 in aggregate amount of its 10.25% Senior Notes due 2006 (the "144A Notes") to be issued pursuant to an Indenture dated as of December 19, 1996 by the Company as Issuer and Marine Midland Bank as Trustee (the "144A Indenture") and the amendment of its current Revolving Credit Facility. The Required Holders have agreed to consent to such amendments subject to the terms and conditions of this Amendment. NOW THEREFORE, for good and valuable consideration, the sufficiency of which is acknowledged by the parties, it is agreed: 1. REPRESENTATION AND WARRANTIES. The Company hereby represents and warrants to each of the Holders: 1A. AUTHORITY. This Amendment has been duly authorized by all necessary corporate action on the part of the Company and has been duly executed and delivered by an authorized officer of the Company and constitutes the legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms. 1B. NO CONFLICTS. Subject to the consents referenced in Section 1E of this Amendment, the execution and delivery of the Amendment and fulfillment of and compliance with the terms and provisions hereof, do not and will not conflict with the provisions of, or constitute a default under, or result in any violation of, or result in the creation of any Lien (other than Liens securing the New Facility Agreement described in Paragraph 1G hereof) upon any of the properties or assets of the Company or any Subsidiary pursuant to its charter or by-laws or other organizational documents, any award of any arbitrator or any agreement (including any agreement with stockholders or other equity holders), instrument, order, judgment, decree, statute, law, rule or regulation to which it is subject. 1C. DISCLOSURE. The Company has delivered to each Holder a copy of the Offering Memorandum dated December 16, 1996 prepared by the Company in connection with the offer and sale of the 144A Notes (the "144A Memorandum"). The 144A Memorandum fairly describes, in all material respects, the general nature of the business and principal properties of the Company and the terms, conditions and use of proceeds of the 144A Notes and the 144A Indenture. The 144A Memorandum does not contain any untrue statement of material fact or omit to state a material fact necessary in order to make the statement contained therein, in light of the circumstances under which they were made, not misleading. -2- 1D. NO DEFAULTS. As of the date hereof, no Default or Event of Default exists, and immediately after the issuance of the 144A Notes and the application of the proceeds thereof and the effectiveness of this Amendment, no Default or Event of Default shall exist or be reasonably anticipated to result therefrom. 1E. CONSENTS. As of the date hereof, the only Debt of the Company entitled to the benefits of paragraph 12 of the Securities Agreement are the Senior Notes, the Senior Note Agreement and the Revolving Credit Facility. Except for the consents of the "Majority Banks" (as such term is defined in the Revolving Credit Facility) and the Required Holders, no authorization, consent, approval, exemption or other action by or notice to or filing with any Governmental Authority or any other Person is required in connection with the amendments to the Securities Agreement contemplated by this Amendment. 1F. 144A NOTES. Attached hereto as Exhibit A is a true, complete and correct copy of the 144A Indenture. Except for the 144A Indenture, the 144A Notes to be issued in the form of Exhibit A to the 144A Indenture and the 144A Memorandum, there are no other agreements or understandings (whether written or oral) between the Company or any Subsidiary and any other Person relating to the Debt evidenced by the 144A Notes. The Notes will rank not less than pari passu with the 144A Notes, in priority of payment and in right of security and credit support, if any. 1G. REVOLVING CAPITAL FACILITY. The Company has provided the Holders with true, complete and correct copies of the Amended and Restated Revolving Credit Agreement dated as of December 19, 1996 by and among the Company, the Banks named therein and National Westminster Bank Plc, as Agent and National Westminster Bank of Canada, as Issuing Bank, and providing for secured advances by such Banks (the "New Facility Agreement") which will be in effect upon the issuance of the 144A Notes. Except for the New Facility Agreement and the Exhibits attached thereto and the agreements or instruments referred to therein, there will be, upon the issuance of the 144A Notes, no other agreements or understandings (whether written or oral) between the Company or any Subsidiary and any other Person relating to the Revolving Credit Facility. 2. AMENDMENTS. The Securities Agreement is hereby amended as follows: 2A. PARAGRAPH 1B, RANKING. Paragraph 1B of the Securities Agreement is deleted and the following is substituted therefor: "1B. RANKING. The Notes shall rank pari passu with each other, will constitute direct senior obligations of the Company and shall rank not less than pari passu in priority of payment with all other outstanding Debt of the Company past, present or future, except for Debt which is preferred as a result of being secured (but only to the extent such security is not prohibited by this Agreement and then only to the extent of such security)." 2B. PARAGRAPHS 6 AND 7, AFFIRMATIVE AND NEGATIVE COVENANTS. Paragraphs 6E, 6F, 6G, 6H, 7A, 7B, 7C, 7D, 7E, 7F, 7G and 7I of the Securities Agreement are deleted in their entirety and Sections 4.03, 4.04, 4.05, 4.06, 4.07, 4.08, 4.09, 4.10, 4.11, 4.12, 4.13, 4.14, 4.15, 4.18, 4.19, 5.01 and 5.02 of the 144A Indenture are substituted therfor as if such Sections were set forth in this Amendment in their entirety and all defined terms used in such Sections shall have the meanings given therefor in the 144A Indenture as if such definitions were set forth in this Amendment in their entirety, PROVIDED: (i) the terms "Notes" in such Sections, shall, for the purposes of the Securities Agreement, mean the Notes as defined in the Securities Agreement; -3- (ii) the term "Closing Date" as used in such Sections, shall, for the purposes of the Securities Agreement, mean the date on which the 144A Notes are originally issued under the 144A Indenture; (iii) the term "Indenture" in such Sections shall, for the purposes of the Securities Agreement, mean the Securities Agreement; and (iv) such Sections shall retain their section number designations for the purpose of cross-references within, and to, such Sections in the Securities Agreement and Sections 4.03 through 4.15 together with Sections 4.18 and 4.19 shall collectively constitute "Article Four" of the Securities Agreement and Sections 5.01 and 5.02 shall constitute "Article Five" of the Securities Agreement for such purpose. 2C. PARAGRAPH 8, EVENTS OF DEFAULT. (i) Subparagraph (d) of paragraph 8A of the Securities Agreement is deleted and the following is substituted therefor: "(d) the Company fails to perform or observe any covenant contained in any of Sections 4.03, 4.04, 4.05, 4.07, 4.08, 4.11 or 5.01, as such Sections have been incorporated by reference into this Agreement from that certain Indenture dated as of December 19, 1996 between the Company, as Issuer and Marine Midland Bank, as Trustee and relating to the issuance of the Company's 10.25% Senior Notes due 2006." (ii) Subparagraph (f) of paragraph 8A of the Securities Agreement is amended to insert the phrase "or to permit the holder or holders of such Debt (or a trustee on behalf of such holder or holders) to cause," after the word "cause" in clause (ii) of such subparagraph (f). 2D. PARAGRAPH 11B, OTHER TERMS. (i) The definition set forth in paragraph 11B of the Securities Agreement for the term "Revolving Credit Agreement" is deleted and the following is substituted therefor: "Revolving Credit Agreement" shall mean the Amended and Restated Loan Agreement dated as of December 19, 1996 by and among the Company, the Banks named therein and the National Westminster Bank, Plc, as Agent, and National Westminster Bank of Canada, as Issuing Bank, as amended, amended and restated, modified or supplemented from time to time. (ii) The proviso in clause (ii) of the definition of Revolving Credit Facility set forth in paragraph 11B of the Securities Agreement is deleted and the following is substituted therefor: "PROVIDED that the provisions of any credit agreement referred to in this clause (ii) do not restrict the Company's ability to amend this Agreement or the Notes". (iii) The defined terms "Default Notice", "Senior Covenant Default", "Senior Obligations", "Senior Payment Default" and "Permitted Post Petition Interest" set forth in paragraph 11B of the Securities Agreement are deleted. -4- 2E. PARAGRAPH 12. SUBORDINATION OF THE NOTES. Paragraphs 12A through 12N, inclusive, of the Securities Agreement are deleted. 2F. PARAGRAPH 13C. CONSENT TO AMENDMENTS. The last sentence of paragraph 13C of the Securities Agreement is deleted. 3. EFFECTIVENESS. This Amendment shall become effective upon satisfaction of the following conditions precedent: (i) Each of the Holders shall have received an opinion from Eric R. Jacobsen, Vice President and General Counsel, of the Company to the effect that (A) the Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate and other power and authority to execute, deliver and perform this Amendment; (B) this Amendment has been duly authorized by all necessary corporate action on the part of the Company and has been duly executed and delivered by an authorized officer of the Company and constitutes the legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except as such enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the rights of creditors generally, or by equitable principals; (C) other than the consents which have been obtained, no consent, approval, exemption or any action by or notice to or filing with any Governmental Authority or any other Person is required in connection with the execution and delivery of this Amendment; (D) the execution, delivery and performance of this Amendment do not, and will not, conflict with the provisions of or constitute a default under or result in any violation of or result in the creation of any Lien (other than Liens securing the New Facility Agreement) upon any of the properties or assets of the Company or any Subsidiary pursuant to its charter or by-laws or other organizational document, any award of any arbitrator or order, judgment, decree, statute, law, rule or regulation to which it is subject or the Securities Agreement, the Revolving Credit Agreement, the Senior Note Agreement, 144A Indenture or any other material agreement to which the Company or any Subsidiary is a party or to which it or its assets are subject and otherwise in form and substance satisfactory to the Required Holders; (ii) The 144A Notes shall have been duly issued and the 144A Indenture shall be in full force and effect and the Required Holders shall have received such evidence thereof as they shall have reasonably requested, including, without limitation, delivery to the Holders of counterparts, addressed to the Holders, of each certificate or opinion delivered to the original purchasers of the 144A Notes; (iii) The Loan Agreement dated as of March 17, 1995 by and between the Company and NatWest Bank, N.A., as agent and as bank shall have been terminated, and all amounts due thereunder shall have been paid in full and the New Facility Agreement shall be in full force and effect and the Required Holders shall have received such evidence thereof as they shall have reasonably requested, including, without limitation, delivery to each Holder of copies of each opinion and certificate delivered in connection with the New Facility Agreement; and (iv) All consents required from any Governmental Authority or any other Person to this Amendment shall have been obtained and the Required Holders shall have received such evidence thereof as they shall have reasonably requested. 4. NO OTHER AMENDMENTS. Except as expressly set forth herein, the Securities Agreement shall continue in full force and effect without alteration or amendment. -5- 5. COUNTERPARTS. This Amendment may be executed in any number of counterparts, each of which, when so executed and delivered, shall be an original, but all of which shall together constitute one in the same instrument. 6. GOVERNING LAW. THIS AMENDMENT IS DELIVERED IN THE COMMONWEALTH OF MASSACHUSETTS IS TO BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES SHALL BE GOVERNED BY, THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS (WITHOUT GIVING EFFECT TO ANY LAWS OR RULES RELATING TO CONFLICTS OF LAWS THAT WOULD CAUSE THE APPLICATION OF THE LAWS OF ANY JURISDICTION OTHER THAN THE COMMONWEALTH OF MASSACHUSETTS). EXECUTED under seal as of the date first written above. LODGENET ENTERTAINMENT CORPORATION By:/s/ Jeffrey T. Weisner ------------------------------ Name: Jeffrey T. Weisner Title: Vice President, Finance JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY By:/s/ Marlene DeLeon ------------------------------ Name: Marlene DeLeon Title: MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY By:/s/ Lawrence D. St. Leman ------------------------------ Name: Lawrence D. St. Leman Title: EX-10.17 8 EXHIBIT 10.17 AMENDED AND RESTATED LOAN AGMT EXECUTION COPY - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- LODGENET ENTERTAINMENT CORPORATION $100,000,000 AMENDED AND RESTATED CREDIT AGREEMENT DATED AS OF DECEMBER 19, 1996 WITH NATIONAL WESTMINSTER BANK PLC, AS AGENT AND ISSUING BANK, NATIONAL WESTMINSTER BANK OF CANADA, AS ISSUING BANK, AND THE BANKS PARTY HERETO - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- TABLE OF CONTENTS PAGE ARTICLE 1. DEFINITIONS.......................................................1 ARTICLE 2. COMMITMENTS; LOANS...............................................20 Section 2.1 Loans.....................................................20 Section 2.2 Notices Relating to Loans.................................20 Section 2.3 Disbursement of Loan Proceeds.............................21 Section 2.4 Notes.....................................................21 Section 2.5 Commitment Reduction; Repayment of Loans..................22 Section 2.6 Interest..................................................23 Section 2.7 Fees......................................................24 Section 2.8 Changes in Commitment; Prepayments........................25 Section 2.9 Use of Proceeds of Loans..................................26 Section 2.10 Computations..............................................26 Section 2.11 Minimum Amounts of Borrowings, Conversions, Prepayments and Interest Periods......................................26 Section 2.12 Time and Method of Payments...............................27 Section 2.13 Lending Offices...........................................27 Section 2.14 Several Obligations.......................................27 Section 2.16 Letters of Credit.........................................27 Section 2.17 Financing Documents.......................................33 Section 2.18 Pro Rata Treatment Among Banks............................33 Section 2.19 Non-Receipt of Funds by the Agent.........................34 Section 2.20 Sharing of Payments and Set-Off Among Banks...............34 Section 2.21 Conversions of Loans......................................35 Section 2.22 Additional Costs; Capital Requirements....................35 Section 2.23 Limitation on Types of Loans..............................36 Section 2.24 Illegality................................................37 Section 2.25 Certain Conversions pursuant to Sections 2.22 and 2.24....37 Section 2.26 Alternate Lending Installation............................38 Section 2.27 Indemnification...........................................38 ARTICLE 3. REPRESENTATIONS AND WARRANTIES...................................39 Section 3.1 Organization..............................................39 Section 3.2 Power, Authority, Consents................................39 Section 3.3 No Violation of Law or Agreements.........................40 Section 3.4 Due Execution, Validity, Enforceability...................40 Section 3.5 Properties, Liens.........................................40 Section 3.6 Litigation................................................40 Section 3.7 No Defaults, Compliance With Laws.........................41 Section 3.8 Burdensome Documents......................................41 i PAGE Section 3.9 Financial Statements; Projections.........................41 Section 3.10 Tax Returns...............................................42 Section 3.11 Intellectual Property.....................................42 Section 3.12 Regulation U..............................................42 Section 3.13 Name Changes, Mergers, Acquisitions.......................42 Section 3.14 Full Disclosure...........................................42 Section 3.15 Licenses and Approvals....................................43 Section 3.16 Labor Disputes; Collective Bargaining Agreements; Employee Grievances.......................................43 Section 3.17 Condition of Assets.......................................43 Section 3.18 ERISA.....................................................44 Section 3.19 Material Agreements.......................................44 Section 3.20 Collateral Documents......................................44 Section 3.21 Solvency..................................................45 ARTICLE 4. CONDITIONS TO THE LOANS..........................................45 Section 4.1 Conditions to Initial Loans...............................45 Section 4.2 Conditions to Subsequent Loans and L/Cs...................48 ARTICLE 5. DELIVERY OF FINANCIAL REPORTS, DOCUMENTS AND OTHER INFORMATION............................................48 Section 5.1 Annual Financial Statements...............................48 Section 5.2 Quarterly Financial Statements49 Section 5.3 Projections...............................................49 Section 5.4 Compliance Information....................................49 Section 5.5 No Default Certificate....................................49 Section 5.6 Accountants' Reports......................................50 Section 5.7 Copies of Documents.......................................50 Section 5.8 Notices of Defaults.......................................50 Section 5.9 ERISA Notices and Requests................................50 Section 5.10 Additional Information; Guest-Pay Rooms...................51 ARTICLE 6. AFFIRMATIVE COVENANTS............................................52 Section 6.1 Books and Records.........................................52 Section 6.2 Inspections and Audits....................................52 Section 6.3 Maintenance and Repairs...................................52 Section 6.4 Continuance of Business...................................52 Section 6.5 Copies of Corporate Documents.............................53 Section 6.6 Perform Obligations.......................................53 Section 6.7 Notice of Litigation......................................53 ii PAGE Section 6.8 Insurance.................................................53 Section 6.9 Financial Covenants.......................................53 Section 6.10 Notice of Certain Events..................................55 Section 6.11 Comply with ERISA.........................................55 Section 6.12 Environmental Compliance..................................55 Section 6.13 Further Assurances........................................55 ARTICLE 7. NEGATIVE COVENANTS...............................................57 Section 7.1 Indebtedness..............................................57 Section 7.2 Liens.....................................................58 Section 7.3 Guaranties................................................59 Section 7.4 Mergers, Acquisitions.....................................60 Section 7.5 Redemptions; Distributions................................60 Section 7.6 Stock Issuances...........................................61 Section 7.7 Changes in Business; Asset Dispositions...................61 Section 7.8 Prepayments and Repayments of Indebtedness................61 Section 7.9 Investments...............................................62 Section 7.10 Fiscal Year...............................................64 Section 7.11 ERISA Obligations.........................................64 Section 7.12 Amendments of Documents...................................65 Section 7.13 Capital Expenditures......................................65 Section 7.14 Rental Obligations........................................66 Section 7.15 Use of Cash...............................................66 Section 7.16 Management Fees...........................................66 Section 7.17 Transactions with Affiliates..............................66 Section 7.18 Hazardous Material........................................67 ARTICLE 8. EVENTS OF DEFAULT................................................67 Section 8.1 Payments..................................................67 Section 8.2 Certain Covenants.........................................67 Section 8.3 Other Covenants...........................................68 Section 8.4 Other Defaults............................................68 Section 8.5 Representations and Warranties............................68 Section 8.6 Bankruptcy................................................69 Section 8.7 Judgments.................................................69 Section 8.8 ERISA.....................................................69 Section 8.9 Change of Control.........................................69 Section 8.10 Collateral................................................70 ARTICLE 9. THE AGENT........................................................70 Section 9.1 Appointment, Powers and Immunities........................70 Section 9.2 Reliance by Agent.........................................70 Section 9.3 Events of Default.........................................71 iii PAGE Section 9.4 Rights as a Bank..........................................71 Section 9.5 Indemnification...........................................71 Section 9.6 Non-Reliance on Agent and other Banks.....................71 Section 9.7 Failure to Act............................................72 Section 9.8 Resignation or Removal of Agent...........................72 Section 9.9 Sharing of Payments.......................................72 Section 9.10 Collateral Matters........................................73 ARTICLE 10. MISCELLANEOUS PROVISIONS........................................74 Section 10.1 Fees and Expenses; Indemnity..............................74 Section 10.2 Taxes.....................................................75 Section 10.3 Payments..................................................75 Section 10.4 Survival of Agreements and Representations; Construction..76 Section 10.5 Lien on and Set-off of Deposits...........................76 Section 10.6 Amendments and Waivers; Entire Agreement..................76 Section 10.7 Remedies Cumulative; Counterclaims........................77 Section 10.8 Additional Actions........................................77 Section 10.9 Notices...................................................77 Section 10.10 Counterparts..............................................79 Section 10.11 Severability..............................................79 Section 10.12 Successors and Assigns....................................79 Section 10.13 GOVERNING LAW; CONSENT TO JURISDICTION; WAIVER OF TRIAL BY JURY...................................80 iv PAGE EXHIBITS A Commitments and Percentages B Promissory Note C Assignment and Assumption Agreement D ResNet Guaranty E LodgeNet Canada Guaranty F Security Agreement G Pledge Agreement H Patent and Trademark Security Agreement I Borrower U.S. Legal Opinion SCHEDULES 3.1 Organization and Capitalization 3.5 Real Estate 3.6 Litigation 3.11 Intellectual Property 3.13 Name Changes, Mergers 3.19 Material Agreements 7.1 Outstanding Indebtedness 7.2 Permitted Liens v AMENDED AND RESTATED CREDIT AGREEMENT THIS AMENDED AND RESTATED CREDIT AGREEMENT dated as of December 19, 1996 by and among LODGENET ENTERTAINMENT CORPORATION, a Delaware corporation (the "BORROWER"), the Banks that from time to time become a party to this Agreement (individually, a "BANK" and collectively, the "BANKS"), NATIONAL WESTMINSTER BANK PLC, a United Kingdom public limited company, as Agent for the Banks (in such capacity, together with its successors in such capacity, the "AGENT"), and NATIONAL WESTMINSTER BANK OF CANADA, as an "ISSUING BANK" (as hereinafter defined). W I T N E S S E T H: WHEREAS, the Borrower, the Agent and certain of the Banks entered into that certain Loan Agreement dated as of March 11, 1996 (the "Original Loan Agreement") pursuant to which certain loans and letter of credit obligations are currently outstanding; and WHEREAS, the Borrower wishes to obtain an increased, secured revolving loan and letter of credit facility from the Banks in the aggregate principal amount of up to One Hundred Million Dollars ($100,000,000), subject to adjustment, in order to finance capital expenditures and provide for the ongoing working capital requirements of the Borrower, and the Banks are willing to make such increased facility available to the Borrower on the terms and conditions hereinafter set forth; NOW, THEREFORE, the parties hereto agree as follows: ARTICLE 1. DEFINITIONS. As used in this Agreement, the following terms shall have the following meanings: ADDITIONAL COSTS: as defined in subsection 2.22(b) hereof. AFFECTED LOANS: as defined in Section 2.25 hereof. AFFECTED TYPE: as defined in Section 2.25 hereof. 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 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), PROVIDED THAT, in any event: (i) any Person that owns directly or indirectly 5% or more of the securities having ordinary voting power for the election of directors or other governing body of a corporation or 5% or more of the partnership or other ownership interests of any other Person (other than as a limited partner of such other Person) will be deemed to control such corporation or other Person; and (ii) each director and officer of the Borrower shall be deemed to be an Affiliate of the Borrower. AGENCY FEES: as defined in subsection 2.7(b) 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 (or, for purposes of calculating Interest Coverage compliance in subsection 6.9(b) hereof for fiscal 1997, such shorter fiscal period as may be appropriate) for which the 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 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 Agent in its sole judgment based, in the 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 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 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 Agent in its sole judgment based, in the 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 percent (1.00%), subject to adjustment in accordance with subsection 2.6(b) hereof. APPLICABLE EURODOLLAR RATE MARGIN: with respect to Eurodollar Rate Loans, two percent (2.00%), subject to adjustment in accordance with subsection 2.6(b) hereof. APPLICABLE LENDING OFFICE: with respect to each Bank, 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 Bank or of an affiliate of such Bank as such Bank may from time to time specify to the 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 2.16(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 C hereto. 2 BANK DEFAULT: (i) the refusal (which has not been retracted) of a Bank to make available its portion of any incurrence of Loans or to fund its portion of any unreimbursed payment under Section 2.16 hereof or (ii) a Bank having notified the Agent and/or the Borrower that it does not intend to comply with its obligations under Section 2.1 or Section 2.16 hereof, in the case of either (i) or (ii) as a result of the appointment of a receiver or conservator with respect to such Bank at the direction or request of any regulatory agency or authority. 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 the Principal U.S. 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 2.16(d) hereof. BORROWING NOTICE: as defined in Section 2.2 hereof. BUSINESS DAY: any day other than Saturday, Sunday or any other day on which commercial banks in New York City are authorized or required to close under the laws of the State of New York. 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 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. 3 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, but in any event no later than December 31, 1996. 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 Agreement 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 Agent on behalf of itself, the Banks and the Issuing Banks, to secure the Obligations. COLLATERAL DOCUMENTS: the Pledge Agreement, the Security Agreement, the Patent and Trademark Security Agreement 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: as to each Bank, the amount set forth opposite such Bank's name on Annex A hereto under the caption "Commitment" as such amount may be subject to increase or reduction in accordance with the terms hereof. COMMITMENT FEE: as defined in subsection 2.7(a) hereof. COMMITMENT FEE PERCENTAGE : one-half of one percent (0.50%); PROVIDED, HOWEVER, that at any time that the Applicable Base Rate Margin and the Applicable Eurodollar Rate Margin are determined by reference to the table contained in subsection 2.6(b) hereof, the Commitment Fee Percentage shall equal the applicable percentage set forth below the caption "Commitment Fee Percentage" in such table at such time. COMMITMENT TERMINATION DATE: the earliest of (i) December 31, 2002 and (ii) the date on which the Commitments are terminated in full or reduced to zero pursuant to subsection 2.8(b) hereof. 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; (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 4 September 30, 1996, 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. CREDIT PERIOD: the period commencing on the date of this Agreement and ending on the Commitment Termination Date. DEBT INSTRUMENT: as defined in subsection 8.4(a) hereof. DEFAULTING BANK: any Bank with respect to which a Bank 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. 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. 5 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 BUSINESS DAY: a Business Day on which dealings in Dollar deposits are carried out in the Eurodollar interbank market. 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 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) Eurodollar 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 Banks to which such Interest Period relates; divided by (b) 1 minus the Reserve Requirement for such Eurodollar Loan for such Interest Period. The Agent shall use its best efforts to advise the Borrower of the Eurodollar Rate as soon as practicable after each change in the Eurodollar Rate; PROVIDED, HOWEVER, that the failure of the Agent to so advise the Borrower on any one or more occasions shall not affect the rights of the Banks or the Agent or the obligations of the Borrower hereunder. EVENT OF DEFAULT: as defined in Article 8 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 6 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 or cash equivalents 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 2.8(c) 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) all reasonable and customary fees and costs actually paid during such period in connection with the incurrence directly by the Borrower or any Subsidiary of Indebtedness for money borrowed permitted pursuant to Section 7.1 hereof or, to the extent permitted hereunder, the issuance of equity securities of the Borrower pursuant to a public offering or private placement of such securities, (d) cash used for Investments permitted pursuant to and in accordance with subsection 7.9(e) hereof, and (e) $500,000. 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 Agent on such day on such transactions as reasonably determined by the Agent). FEE(S): as defined in subsection 2.7(d) hereof. FINANCIAL STATEMENTS: with respect to the Borrower: (i) its unaudited consolidated Balance Sheet as at September 30, 1996, together with the related unaudited consolidated Statement of Operations and Statement of Cash Flows for the fiscal period then ended, and (ii) its audited consolidated Balance Sheet as at December 31, 1995, together with the related audited consolidated Statement of Operations and Statement of Cash Flows for the fiscal year then ended. GUARANTIES: the ResNet Guaranty, the LodgeNet Canada Guaranty and any other guaranty of the Obligations delivered pursuant to subsection 7.9(e)(iv) or 6.13(g) hereof. GUARANTOR(S): ResNet, LodgeNet Canada and any other Subsidiary of the Borrower required, or designated by the Borrower, to deliver a guaranty of the Obligations pursuant to subsection 7.9(e)(iv) or 6.13(g) hereof. 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. 7 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; (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 (or, for purposes of calculating Interest Coverage compliance in subsection 6.9(b) hereof for fiscal 1997, such shorter fiscal period as may be appropriate) for which 8 the Agent has received financial statements in compliance with Sections 5.1 and 5.2 hereof (or, if as at any date of determination the 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 Agent in its sole judgment based, in the 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 Banks shall have notified the Agent is available at any time) as the Borrower may select as provided in Section 2.2 hereof, except that each such Interest Period that commences on the last Eurodollar 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 Eurodollar 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, in the case of an Interest Period for Eurodollar Loans, if such next succeeding Eurodollar Business Day falls in the next succeeding calendar month, on the next preceding Eurodollar Business Day); (ii) no more than five (5) Interest Periods for Eurodollar Loans shall be in effect at the same time; (iii) no Interest Period for any type of Loan shall end later than the Commitment Termination Date; and (iv) notwithstanding clause (iii) above, no Interest Period shall have a duration of less than one (1) month (in the case of Eurodollar Loans). In the event that the Borrower fails to select the duration of any Interest Period for any Loan within the time period and otherwise as provided in Section 2.2 hereof, such Loans will be automatically converted into a Base Rate Loan on the last day of the preceding Interest Period for such Loan. 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 satisfactory to the Agent and, in each case, with counterparties satisfactory to the 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 9 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. ISSUING BANK: as defined in subsection 2.16(a) hereof. 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 2.16 hereof and (ii) each existing letter of credit issued pursuant to the Original Loan Agreement outstanding on the date hereof, in each case, as amended, supplemented or modified from time to time. 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 2.7(c) hereof. L/C ISSUANCE REQUEST: as defined in subsection 2.16(b) hereof. L/C OBLIGATIONS: as of any date of determination, all the existing liabilities (including all fees) of the Borrower to the Issuing Banks and the Banks and the 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. LETTER AGREEMENT(S): as defined in subsection 2.7(b) hereof. 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). 10 LOAN(S): as defined in Section 2.1 hereof. 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. LOAN DOCUMENTS: this Agreement, the Notes, the Guaranties, the Collateral Documents, the L/C(s), the Letter Agreements(s), Interest Rate Contracts to which any Bank 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 PARTY: the Borrower, its Subsidiaries (including the Guarantors) or any other Person (other than the Banks, the Issuing Banks and the Agent) which now or hereafter executes and delivers to any Bank or the Agent any Loan Document. LODGENET CANADA: LodgeNet Entertainment (Canada) Corporation, a Canadian corporation and a Wholly-Owned Subsidiary of the Borrower. MAJORITY BANKS: (i) at any time while no Loans are outstanding hereunder, Non-Defaulting Banks having at least 60% of the aggregate amount of the Commitments, and (ii) at any time while Loans are outstanding hereunder, Non-Defaulting Banks holding at least 60% of the outstanding aggregate principal amount of the Loans and Net L/C Obligations hereunder. MANAGEMENT: as defined in Section 8.9 hereof. 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 2.16(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 Banks, the Issuing Banks or the Agent under any Loan Document. MAXIMUM L/C AMOUNT: the sum of Five Million Dollars ($5,000,000) as the same shall and/or may be reduced pursuant to Sections 2.2 and 2.8 hereof. 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 11 make, contributions or has made, or been obligated to make, contributions within the preceding six (6) years. NATWEST CANADA: National Westminster Bank of Canada, in its capacity as an Issuing Bank hereunder. NATWEST PLC: National Westminster Bank Plc, New York branch, in its capacity as a Bank hereunder. 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. NEW TYPE LOANS: as defined in Section 2.25 hereof. NON-DEFAULTING BANK: each Bank other than a Defaulting Bank. NOTE(S): as defined in Section 2.4 hereof. OBLIGATIONS: collectively, all of the Loans, Indebtedness, liabilities and obligations of the Borrower to the Banks, the Issuing Banks and the Agent arising out of this Agreement or the Loan Documents, whether now existing or hereafter arising, whether or not currently contemplated, including, without limitation, the L/C Obligations and, to the extent provided by any Bank 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) all income taxes, to the extent not paid or not currently payable and (iv) extraordinary non-operating losses 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 or cash equivalents 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 or cash equivalents 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. For the purpose hereof, the amount of Operating Cash Flow (as defined above) of ResNet to be included in the calculation of the Operating Cash Flow of the Borrower shall be determined as follows: (a) FIRST, 12 by calculating the LESSER of (i) the total Operating Cash Flow of ResNet and (ii) the quotient obtained by dividing (y) the amount of the then-current obligation of ResNet for payment of Guaranteed Obligations under the ResNet Guaranty by (z) the then-applicable multiple listed under the caption "Maximum Total Leverage" in subsection 6.9(a) hereof; (b) THEREAFTER, if the amount calculated under clause (a)(i) above shall be greater than the amount under clause (a)(ii) above (such difference being the "Excess ResNet Operating Cash Flow"), then there shall also be added to such clause (a)(ii) amount the product obtained by multiplying the percentage representing the Borrower's equity ownership in ResNet times the amount of Excess ResNet Operating Cash Flow. ORIGINAL LOAN AGREEMENT: as defined in the first recital to this Agreement. PATENT AND TRADEMARK SECURITY AGREEMENT: the Patent and Trademark Security Agreement of even date herewith, substantially in the form of Exhibit H hereto, among the Borrower, the Subsidiaries party thereto and the Agent, on behalf of itself, the Banks and the Issuing Banks, as the same may be, from time to time, amended, modified or supplemented. PAYOR: as defined in Section 2.19 hereof. 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. PERCENTAGE: with respect to any Bank, a fraction (expressed as a percentage) the numerator of which is the Commitment of such Bank at such time and the denominator of which is the Total Commitment at such time (for purposes of computation after any termination of the Total Commitment, without giving effect to any such termination of the Total Commitment). PERMITTED DEBT: Indebtedness (i) which is not secured by any Lien, (ii) which contains terms, covenants and conditions satisfactory to the Agent and the Majority Banks, 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 or ResNet LLC for money borrowed from the Borrower or ResNet, as the case may be, (i) which is evidenced by a promissory note of ResNet or ResNet LLC to the Borrower or ResNet, as the case may be, (ii) which represents senior, unsubordinated Indebtedness of ResNet or ResNet LLC, and (iii) the repayment of which is not restricted in any manner by any covenant, agreement or other restriction binding upon or affecting ResNet or ResNet LLC. 13 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; and (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. 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 Group is then making or accruing an obligation to make contributions or has within the preceding five plan years made contributions. PLEDGE AGREEMENT: the Pledge Agreement of even date herewith, substantially in the form of Exhibit G hereto, between the Borrower and the Agent, on behalf of itself, the Banks and the Issuing Banks, pledging all Subsidiaries' capital stock owned by the Borrower and all intercompany notes owing to or held by the Borrower, as the same may be, from time to time, 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 14 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 (or, for purposes of calculating Interest Coverage compliance in subsection 6.9(b) hereof for fiscal 1997, such shorter fiscal period as may be appropriate) for which the Agent has received financial statements in compliance with Sections 5.1 and 5.2 hereof (or, if as at any date of determination the 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 Agent in its sole judgment based, in the Agent's discretion, on such financial information as it shall have requested and received from the Borrower). PRINCIPAL U.S. OFFICE: the principal U.S. office of NatWest Plc presently located at 175 Water Street, New York, New York 10038. PROJECTIONS: with respect to the Borrower, its forecasted consolidated Balance Sheet and related forecasted consolidated Statement of Operations and Statement of Cash Flows for the period from the date hereof through December 31, 2002, 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. 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 Eurodollar Business Day, the relevant Quarterly Date shall be the next succeeding Eurodollar Business Day (or, if the next succeeding Eurodollar Business Day falls in the next succeeding calendar month, then on the next preceding Eurodollar 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, the Principal U.S. Office. 15 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 Bank, 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 Bank, 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 or monetary 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 (or, for purposes of calculating Interest Coverage compliance in subsection 6.9(b) hereof for fiscal 1997, such shorter fiscal period as may be appropriate) for which the Agent has received financial statements in compliance with Sections 5.1 and 5.2 hereof (or, if as at any date of determination the 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 Agent in its sole judgment based, in the 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. REQUIRED PAYMENT: as defined in Section 2.19 hereof. 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: ResNet Communications, Inc., a Delaware corporation and Subsidiary of the Borrower, including ResNet Communications, LLC, a Delaware limited liability company and Subsidiary of ResNet Communications, Inc. ("ResNet LLC"). 16 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. SEC: the Securities and Exchange Commission or any entity succeeding to any of its principal functions. SECURITY AGREEMENT: the Security Agreement of even date herewith, substantially in the form of Exhibit F hereto, among the Borrower, the Subsidiaries party thereto and the Agent, on behalf of itself, the Banks and the Issuing Banks, as the same may be, from time to time, 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 by Amendment No. 1 thereto dated December 19, 1996, as further amended or otherwise modified as permitted hereby. SENIOR 1996 NOTES: those certain 10.25% 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 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. 17 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 and ResNet LLC shall each be deemed to be a Subsidiary of the Borrower so long as (i) in the case of ResNet, 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. SUBSTANTIAL PORTION: assets of the Borrower and its Subsidiaries which (a) represent more than fifteen percent (15%) of the consolidated assets of the Borrower and its Subsidiaries, as would be shown in the consolidated financial statements of the Borrower and its 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 Subsidiaries for the 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. TCI CONVERTIBLE DEBT: that certain Indebtedness of ResNet 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 and TCI Digital Satellite Entertainment, Inc. 18 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 (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 COMMITMENT: the aggregate obligation of the Banks to make Loans hereunder and issue or participate in the issuance of L/Cs hereunder not exceeding One Hundred Million Dollars ($100,000,000), as the same shall and/or may be increased or reduced from time to time pursuant to Article 2 hereof. 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); PROVIDED, HOWEVER, that during the period from the date hereof through June 30, 1997, Total Debt shall be calculated net of the total amount of cash (or other Investments permitted by subsection 7.9(a) hereof) then held by the Borrower up to a maximum of $25,000,000. Total Debt shall be determined by the Agent, in its reasonable judgment, based upon its review of a certificate of the Borrower delivered to the Agent which shall set forth, in reasonable detail, such calculation of Total Debt, along with such financial information as the Agent shall have requested and received from the Borrower or, in the absence of such certificate, such other pertinent financial information as the 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: the Uniform Commercial Code as in effect in the State of New York. 19 UNREIMBURSED DRAWINGS: as defined in subsection 2.16(c) hereof. UNUSED COMMITMENT: as at any date, for each Bank, the difference, if any, between: (i) the amount of such Bank's Commitment as in effect on such date, minus (ii) the sum of the then aggregate outstanding principal amount of all Loans made by such Bank and such Bank's Percentage of the 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. 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. COMMITMENTS; LOANS. SECTION 2.1 LOANS. Each Bank hereby severally agrees, on the terms and subject to the conditions of this Agreement, to make loans (individually a "LOAN" and, collectively, the "LOANS") to the Borrower during the Credit Period to and including the Commitment Termination Date in an aggregate principal amount at any one time outstanding up to, but not exceeding, the Commitment of such Bank as then in effect; PROVIDED, HOWEVER, that no Loan shall be made hereunder if, after giving effect to the making of such Loan, the sum of the aggregate amount of all Loans and the Net L/C Obligations then outstanding would exceed the Total Commitment. Subject to the terms of this Agreement, during the Credit Period the Borrower may borrow, repay (PROVIDED THAT repayment of Eurodollar Loans shall be subject to the provisions of Section 2.27 hereof) and reborrow up to the amount of the Total Commitment (after giving effect to the mandatory and voluntary increases and reductions required and permitted herein) by means of Base Rate Loans or Eurodollar Loans, and during such period and thereafter until the date of the payment in full of all of the Loans, the Borrower may convert Loans of one type into Loans of another type (as provided in Section 2.21 hereof). SECTION 2.2 NOTICES RELATING TO LOANS. The Borrower shall give the Agent written or telephonic (followed by same day telecopy) notice of any increase or termination or reduction of the Commitments, each borrowing (excluding borrowings of Mandatory L/C Borrowings), conversion and prepayment of each Loan and of the duration of each Interest Period applicable to each Eurodollar Loan (in each case, a "BORROWING NOTICE"). Each such written notice shall be irrevocable and shall be effective only if received by the Agent not later than 11 a.m., New York City time, on the date that is: 20 (a) In the case of an election to apply to increase the Commitments pursuant to subsection 2.8(a) hereof, forty-five (45) Business Days prior to the proposed effective date of such increase; (b) In the case of each notice of termination or reduction and each notice of borrowing or prepayment of, or conversion into, Base Rate Loans, one (1) Business Days prior to the date of the related termination, reduction, borrowing, prepayment or conversion; and (c) In the case of each notice of borrowing or prepayment of, or conversion into, Eurodollar Loans, or the duration of an Interest Period for Eurodollar Loans, three (3) Eurodollar Business Days prior to the date of the related borrowing, prepayment, or conversion or the first day of such Interest Period. Each such notice of increase or termination or reduction shall specify the amount thereof. Each such notice of borrowing, conversion or prepayment shall specify the amount (subject to Section 2.1 hereof) and type of Loans to be borrowed, converted or prepaid (and, in the case of a conversion, the type of Loans to result from such conversion), the date of borrowing, conversion or prepayment (which shall be: (x) a Business Day in the case of each borrowing or prepayment of Base Rate Loans, and (y) a Eurodollar Business Day in the case of each borrowing or prepayment of Eurodollar Loans and each conversion of or into a Eurodollar Loan). Each such notice of the duration of an Interest Period shall specify the Loans to which such Interest Period is to relate. The Agent shall notify the Banks of the content of each such Borrowing Notice promptly after its receipt thereof. SECTION 2.3 DISBURSEMENT OF LOAN PROCEEDS. The Borrower shall give the Agent notice of each borrowing hereunder as provided in Section 2.2 hereof. Not later than 11:00 a.m., New York City time, on the date specified for each borrowing hereunder, each Bank shall transfer to the Agent, by wire transfer or otherwise, but in any event in immediately available funds, the amount of the Loan to be made by it on such date, and the Agent, upon its receipt thereof, shall disburse such sum to the Borrower by depositing the amount thereof in an account of the Borrower designated by the Borrower maintained with the Agent. SECTION 2.4 NOTES. (a) The Loans made by each Bank shall be evidenced by a single promissory note of the Borrower in substantially the form of Exhibit B hereto (each, a "NOTE" and collectively, the "NOTES"). Each Note shall be dated the date of the initial borrowing of the Loans under this Agreement, shall be payable to the order of such Bank in a principal amount equal to such Bank's Commitment as originally in effect, and shall otherwise be duly completed. The Notes shall be payable as provided in this Article 2. (b) Each Bank shall enter on a schedule attached to its Note or in its internal records a notation with respect to each Loan made hereunder of: (i) the date and principal amount thereof, (ii) each payment and prepayment of principal thereof, (iii) whether the interest rate is initially to be determined in accordance with subsection 2.6(a)(i) or 2.6(a)(ii) hereof, and (iv) the 21 Interest Period, if applicable. The failure of any Bank to make any such notation shall not limit or otherwise affect the obligation of the Borrower to repay the Loans in accordance with their respective terms as set forth herein. SECTION 2.5 COMMITMENT REDUCTION; REPAYMENT OF LOANS. (a) The Total Commitment shall be successively and permanently reduced on each December 31 during the Credit Period commencing on December 31, 1998 and ending on December 31, 2002 in the respective amounts obtained by multiplying (i) the amount of the Total Commitment on December 31, 1998 times (ii) the percentage set forth below applicable to each such date (such reductions to be applied, pursuant to Section 2.18 hereof, PRO RATA among the Banks with respect to the amount of each Bank's Commitment), and the Borrower shall repay outstanding Loans in an amount sufficient so that the aggregate outstanding principal amount of Loans and Net L/C Obligations on each such date shall not exceed the Total Commitment after giving effect to such reduction: Percentage by Which Total Commitment at Commitment Reduction/ December 31, 1998 Payment Date Shall be Reduced -------------------- -------------------- December 31, 1998 15% December 31, 1999 20% December 31, 2000 20% December 31, 2001 20% December 31, 2002 25% (b) The Loans: (i) shall be repaid as and when necessary to cause the aggregate principal amount of the Loans and Net L/C Obligations outstanding not to exceed each Bank's Commitment, as increased or reduced pursuant to Section 2.8 hereof, and (ii) may be repaid at any time and from time to time, in whole or in part, without premium or penalty, upon prior written notice to the Agent as provided in Section 2.2 hereof, in integral multiples of $500,000, and any amount so repaid may, subject to the terms and conditions hereof, including the borrowing limitation imposed by the Commitments, be reborrowed hereunder during the Credit Period; PROVIDED, HOWEVER, that: (A) repayment of Eurodollar Loans on any day other than the last day of an Interest Period for such Loans shall be subject to the provisions of Section 2.27 hereof, and (B) all repayments of Loans or any portion thereof shall be made together with payment of all interest accrued on the amount repaid through the date of such repayment. (c) Except as set forth in Sections 2.22, 2.23 and 2.25 hereof, all payments and repayments made pursuant to the terms hereof shall be applied first to Base Rate Loans, and shall be applied to Eurodollar Loans only to the extent any such payment exceeds the principal amount of Base Rate Loans outstanding at the time of such payment. (d) The Borrower may request a Eurodollar Loan only if compliance with the Commitment reduction schedule set forth above in subsection 2.5(a) hereof (with the payments 22 provided for therein being applied in accordance with subsection 2.5(c) hereof) would not result in any portion of the principal amount of such Eurodollar Loan being paid prior to the last day of the Interest Period applicable thereto. SECTION 2.6 INTEREST. (a) The Borrower shall pay to the Agent for the account of each Bank interest on the unpaid principal amount of each Loan made by such Bank 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) 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 March 31, 1997, 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, and the Commitment Fee Percentage shall be automatically changed, if necessary, to reflect the percentages indicated for such category on the table below, with any such change to be effective on and after the date of delivery to the Agent of the certificate described in Section 5.5 hereof relating to such fiscal quarter: Applicable Applicable Commitment Base Rate Eurodollar Fee Total Leverage Margin Rate Margin Percentage -------------- ---------- ----------- ---------- 5.00 to 1 or higher 1.00% 2.00% 0.500% Lower than 5.00 to 1 0.75% 1.75% 0.500% Lower than 4.50 to 1 0.50% 1.50% 0.375% Lower than 4.00 to 1 0.25% 1.25% 0.250% In the event that any condition that gives rise to any change in a Total Leverage category pursuant to the first sentence of this subsection 2.6(b) is no longer satisfied as of the end of any subsequent fiscal quarter, on and after the date of delivery to the Agent of the certificate described in Section 5.5 hereof relating to such subsequent fiscal quarter, the Applicable Base Rate Margin, the Applicable Eurodollar Rate Margin and the Commitment Fee Percentage 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, the Applicable Eurodollar Rate Margin and the Commitment Fee Percentage shall be determined by reference to the definition of such terms, without any adjustment pursuant 23 to this subsection 2.6(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 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 Agent or any Bank. Promptly after the establishment of any interest rate provided for herein or any change therein, the Agent will notify the Banks and the Borrower thereof, PROVIDED THAT the failure of the Agent to so notify the Borrower or the Banks 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 Bank to the extent that such Bank's receipt thereof would not be permissible under the law or laws applicable to such Bank limiting rates of interest that may be charged or collected by such Bank. 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 Bank on the earliest interest payment date or dates on which the receipt thereof would be permissible under the laws applicable to such Bank limiting rates of interest that may be charged or collected by such Bank. Such deferred interest shall not bear interest. SECTION 2.7 FEES. (a) The Borrower shall pay to the Agent for the account of each Bank a commitment fee (the "COMMITMENT FEE") equal to the Commitment Fee Percentage per annum in effect from time to time on the average daily amount of such Bank's Unused Commitment, for the period from the date hereof to and including the earlier of the date such Bank's Commitment is terminated or the Commitment Termination Date. The accrued Commitment Fee shall be payable quarterly on the Quarterly Dates and on the earlier of the date the Commitments are terminated or the Commitment Termination Date, and, in the event the Borrower reduces the Commitment as provided in subsection 2.8(b) hereof, on the effective date of such reduction. (b) Simultaneously with the execution and delivery of this Agreement and from time to time thereafter, the Borrower shall pay to the Agent the fees (collectively, the "AGENCY FEES") specified in that certain letter agreement dated as of the date hereof between the Borrower 24 and the Agent and in any other letter agreement executed between the Borrower and the Agent after the date hereof (the "LETTER AGREEMENTS"). (c) (i) The Borrower shall pay to the Agent for the benefit of the Banks, PRO RATA according to their respective 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 2.6(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 subsection (i), the Borrower shall pay on demand to the Issuing Bank (as defined in Section 2.16 below), 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 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 connection with the issuance, amendment, transfer, administration, cancellation or payment under any or all L/Cs. The fees referred to in subsections 2.7(c)(i) and (ii) are hereinafter sometimes referred to individually as an "L/C FEE" and collectively as the "L/C FEES". (d) The Commitment Fee, the Agency Fees and the L/C Fees are hereinafter sometimes referred to individually as a "FEE" and collectively as the "FEES". SECTION 2.8 CHANGES IN COMMITMENT; PREPAYMENTS. (a) The Borrower shall be permitted to make application(s) at any time on or before December 31, 1998 to increase the Total Commitment (but not the Commitment of any Bank without such Bank's agreement) in a principal amount of not less than $25,000,000 per application (and in an integral multiple of $500,000), and not more than $75,000,000 in aggregate principal amount for all such applications, which increases in the Total Commitment may be effectuated, if at all, by an increase in the Commitment(s) of NatWest Plc or the then-existing Banks, and/or by the addition of new Banks; PROVIDED THAT (i) the Borrower shall give notice of such application(s) to the Agent as provided in Section 2.2 hereof and (ii) the Borrower shall have delivered to the 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. (b) The Borrower shall be entitled to terminate or reduce the Commitments, PROVIDED THAT the Borrower shall give notice of such termination or reduction to the Agent as provided in Section 2.2 hereof and that any partial reduction of the Commitments shall be in an aggregate amount equal to $500,000 or an integral multiple thereof. Any such termination or reduction shall be permanent and irrevocable. 25 (c) Commencing on May 31, 2000 and continuing on May 31 of each fiscal year of the Borrower thereafter, the Borrower shall prepay any Loans, and the Total Commitment shall be permanently and irrevocably reduced, by an amount equal to fifty percent (50%) of the Borrower's Excess Cash Flow for the immediately preceding fiscal year if at December 31 of such preceding fiscal year Total Leverage was greater than 4.00 to 1. Simultaneously with the delivery of the Borrower's financial statements pursuant to Section 5.1 hereof, for each of the Borrower's fiscal years beginning with the Borrower's 1998 fiscal year, the Borrower shall provide the Agent with a schedule setting forth the computation of Excess Cash Flow, and Total Leverage at December 31, for such fiscal year to which such financial statements relate. (d) The Borrower shall prepay any Loans, and the Total Commitment shall be permanently and irrevocably reduced, by an amount equal to one hundred percent (100%) of the aggregate net proceeds in excess of $500,000 realized in any fiscal year by the Borrower and its Subsidiaries from any and all Asset Dispositions and Events of Loss constituting less than a Substantial Portion, to the extent that such aggregate net proceeds are not reinvested by the Borrower in substantially similar assets within 180 days from the date of such disposition; PROVIDED, HOWEVER, that in any event, if the Borrower and its Subsidiaries realize in any fiscal year aggregate net proceeds from an Event of Loss in excess of a Substantial Portion, the Borrower shall prepay any Loans, and the Total Commitment shall be irrevocably and permanently reduced, by an amount equal to such amount in excess of a Substantial Portion. (e) The Borrower shall repay the Loans, together with all accrued interest on the amount so repaid, as and when necessary to cause the aggregate principal amount of the Loans and Net L/C Obligations outstanding at any time not to exceed the Total Commitment. (f) All prepayments of the Loans shall be made together with payment of all interest accrued on the amount prepaid, but without premium or penalty (but subject to the provisions of Section 2.27 hereof). SECTION 2.9 USE OF PROCEEDS OF LOANS. The proceeds of the Loans hereunder may be used by the Borrower solely to provide funds for (a) to the extent permitted hereunder, Capital Expenditures incurred in connection with the Borrower's "Business Strategy" as described in that certain common stock offering prospectus of the Borrower dated May 23, 1996 previously delivered to the Banks (the "Prospectus") and (b) the Borrower's general corporate and ongoing working capital needs. SECTION 2.10 COMPUTATIONS. Interest on all Base Rate Loans shall be computed on the basis of a year of 365 days and actual days elapsed (including the first day but excluding the last) occurring in the period for which payable. Interest on all Eurodollar Loans, Unreimbursed Drawings and each Fee shall be computed on the basis of a year of 360 days and actual days elapsed (including the first day but excluding the last) occurring in the period for which payable. SECTION 2.11 MINIMUM AMOUNTS OF BORROWINGS, CONVERSIONS, PREPAYMENTS AND INTEREST PERIODS. Except for borrowings, conversions and prepayments that exhaust the full remaining amount of the Commitments (in the case of borrowings) or result in the conversion or 26 prepayment of all Loans of a particular type (in the case of conversions or prepayments) or conversions made pursuant to Section 2.21, subsection 2.22(b) or Section 2.24 hereof, and except for Mandatory L/C Borrowings and mandatory prepayments of the Loans pursuant hereto, each borrowing from the Banks, each conversion of Loans of one type into Loans of another type and each prepayment of principal of Loans hereunder shall be in an amount at least equal to $500,000 in the case of Base Rate Loans and $1,000,000 in the case of Eurodollar Loans or an integral multiple thereof (borrowings, conversions and prepayments of different types of Loans at the same time hereunder to be deemed separate borrowings, conversions and prepayments for purposes of the foregoing, one for each type). SECTION 2.12 TIME AND METHOD OF PAYMENTS. All payments of principal, interest, Fees and other amounts (including indemnities) payable by the Borrower hereunder shall be made in Dollars, in immediately available funds, to the Agent at the Principal U.S. Office not later than 11:00 a.m., New York City time, on the date on which such payment shall become due (and the Agent or any Bank for whose account any such payment is to be made may, but shall not be obligated to, debit the amount of any such payment that is not made by such time to any ordinary deposit account of the Borrower with the Agent or such Bank, as the case may be). Additional provisions relating to payments are set forth in Section 10.3 hereof. Each payment received by the Agent hereunder for the account of a Bank shall be paid promptly to such Bank, in like funds, for the account of such Bank's Applicable Lending Office for the Loan in respect of which such payment is made. SECTION 2.13 LENDING OFFICES. The Loans of each type made by each Bank shall be made and maintained at such Bank's Applicable Lending Office for Loans of such type. SECTION 2.14 SEVERAL OBLIGATIONS. The failure of any Bank to make any Loan to be made by it on the date specified therefor shall not relieve the other Banks of their respective obligations to make their Loans on such date, but no Bank shall be responsible for the failure of the other Banks to make Loans to be made by such other Banks. SECTION 2.15 GUARANTIES. The due payment and performance of the Obligations shall be guaranteed by the execution and delivery to the Agent, on behalf of itself, the Banks and the Issuing Banks, simultaneously with the execution and delivery of this Agreement, by ResNet of a guaranty substantially in the form of Exhibit D hereto (the "ResNet Guaranty") and by LodgeNet Canada of a guaranty substantially in the form of Exhibit E hereto (the "LodgeNet Canada Guaranty"). SECTION 2.16 LETTERS OF CREDIT. (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 NatWest Canada in its individual capacity (in the case of Documentary L/Cs) issue one or more L/Cs (in such capacity, each of NatWest Plc and NatWest Canada is herein referred to as "THE ISSUING 27 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 Loans then outstanding would exceed the Total 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 2.16, repay any drawings thereunder and request the issuance of additional L/Cs under this Section 2.16. 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 Commitment Termination Date. No L/C may by its terms be automatically renewable, unless consented to in writing by the 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 United States dollars. (b) NOTICE AND ISSUANCE. (i) The Borrower shall give notice to the Issuing Bank and to the 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 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 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 2.16(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. (ii) Upon acceptance of the form of the proposed L/C by the Issuing Bank and the Agent and upon fulfillment of the conditions set forth above in this subsection 2.16(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 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: 28 (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 Bank prior to the issuance of such L/C that one or more of the applicable conditions specified in this Section 2.16 or 4.2 are not then satisfied, or that the issuance of such L/C would violate subsection 2.16(a) above. (iv) The Issuing Bank shall promptly give written notice to each of the other Banks of the information specified in subsections 2.16(b)(i)(A) through (E) above. (C) REIMBURSEMENT OBLIGATIONS. (i) The Borrower shall be obligated to reimburse the Agent, for the account of the Issuing Bank, in immediately available funds at the Principal U.S. 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 Banks PRO RATA based on each Bank's Percentage. The Issuing Bank shall promptly notify the Agent of the amount of any Unreimbursed Drawings and the Agent shall promptly notify the Banks 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 Bank hereby irrevocably agrees to make Loans 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 Total Commitment after any such L/C was issued. In the event that the Agent delivers the above-described notice to any Bank later than 12:00 noon (New York City time) on the date of the required Mandatory L/C Borrowing, then such Bank 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)). 29 (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 Agent for the account of the Issuing Bank) or sufficient availability to permit creation of Loans sufficient to fund payment of the drafts, any funds advanced by the Issuing Bank (or by the Agent on behalf of the Issuing Bank) and the other Banks 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 Banks in respect of any funds so advanced or to be advanced by the Issuing Bank (or by the Agent on behalf of the Issuing Bank) under this subsection (c) shall be as more particularly described in subsections 2.16(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 Issuing Bank, any other Bank, the 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; 30 (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 BANKS. (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 Bank (excluding, for all purposes of this subsection (e), NatWest Plc as the Issuing Bank, which shall retain a portion equal to its PRO RATA share of the Total Commitment, but for such purposes not so excluding NatWest Canada as the Issuing Bank, which shall have no Commitment) without recourse or warranty, and each Bank 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 Bank's PRO RATA share of the Total 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 Bank, upon request, copies of any L/C and any Application Documents as may be requested by such Bank. (ii) In the event that any reimbursement obligation under subsection 2.16(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 Banks PRO RATA pursuant to paragraph 2.16(c)(i), the Issuing Bank shall promptly notify the Agent to that effect, and the Agent shall promptly notify the Banks of the amount of such reimbursement obligation and each such Bank shall immediately pay to the 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 Bank's ratable portion of the amount of such unpaid reimbursement obligation. (iii) The obligation of each Bank to make Loans in respect of each Mandatory L/C Borrowing and to make payments under the preceding subsection (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 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 Bank; (D) any set-off, counterclaim, recoupment, defense or other right which such Bank or the Borrower may have at any time against the Issuing Bank, any other Bank, 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 31 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 Bank 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 Bank were the direct creditor of such Borrower in the amount of such participation. (iv) Promptly after the Issuing Bank (or the 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 Bank has funded its participation pursuant to subsection 2.16(e)(ii) above, the Issuing Bank (or the Agent acting on behalf of the Issuing Bank) shall promptly pay to the Agent, and the Agent shall promptly pay to each Bank 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 Bank'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 Bank as a participant under subsection 2.16(e)(iv) is thereafter recovered from the Issuing Bank in connection with any bankruptcy or insolvency proceeding relating to the Borrower or otherwise, each Bank which received such distribution shall, upon demand by the Agent, repay to the Issuing Bank such Bank's ratable share of the amount so recovered together with an amount equal to such Bank's ratable share (according to the proportion of (i) the amount of such Bank'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 Agent, the Issuing Bank nor any other Bank, 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 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 32 in order to make a drawing under any such Letter of Credit 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 2.16 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 Agent and each Bank 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 Agent or Bank 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 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 Commitment Termination Date. SECTION 2.17 FINANCING DOCUMENTS. The Borrower shall deliver to the Agent, upon the execution thereof, true and complete copies of (i) each material document relating to any equity financing or Permitted Debt not previously delivered hereunder and (ii) each amendment or other modification to any of the Senior Note Documents, each of the foregoing certified as such in a certificate executed by the president, chief financial officer or chief operating officer of the Borrower. SECTION 2.18 PRO RATA TREATMENT AMONG BANKS. Except as otherwise provided herein: (i) each borrowing from the Banks under Section 2.1 hereof will be made from the Banks and each payment of each Fee shall be made for the account of the Banks PRO RATA according to their respective Unused Commitments; (ii) each partial reduction of the Total Commitment shall be applied to the Commitments of the Banks PRO RATA according to each Bank's respective Commitment; (iii) each conversion of Loans of a particular type under Section 2.21 hereof (other than conversions provided for by Section 2.24 or 2.25 hereof) will be made PRO RATA among the Banks holding Loans of such type according to the respective principal amounts of such Loans held by such Banks; (iv) each payment and prepayment of principal of or interest on Loans of a particular type will be made to the Agent for the account of the Banks holding Loans of such type PRO RATA in accordance with the respective unpaid principal amounts of such Loans held by such Banks; and (v) Interest 33 Periods for Eurodollar Loans shall be allocated among the Banks holding Eurodollar Loans PRO RATA according to the respective principal amounts of Eurodollar Loans held by such Banks; PROVIDED, HOWEVER, that notwithstanding anything to the contrary contained in this Agreement (including the provisions of this Section 2.18 and Section 2.20 hereafter), differing payments may be made to Non-Defaulting Banks as opposed to Defaulting Banks and no Defaulting Bank shall be entitled to receive PRO RATA payments or repayments of Loans or other amounts hereunder unless and until it shall become a Non-Defaulting Bank. SECTION 2.19 NON-RECEIPT OF FUNDS BY THE AGENT. Unless the Agent shall have been notified by a Bank or the Borrower (the "PAYOR") prior to the date on which such Bank is to make payment to the Agent of the proceeds of a Loan to be made by it hereunder or the Borrower is to make a payment to the Agent for the account of one or more of the Banks, as the case may be (such payment being herein called the "REQUIRED PAYMENT"), which notice shall be effective upon receipt, that the Payor does not intend to make the Required Payment to the Agent, the Agent may assume that the Required Payment has been made and may, in reliance upon such assumption (but shall not be required to), make the amount thereof available to the intended recipient on such date and, if the Payor has not in fact made the Required Payment to the Agent, the recipient of such payment shall, on demand, repay to the Agent the amount made available to it together with interest thereon in respect of each day during the period commencing on the date such amount was so made available by the Agent until the date the Agent recovers such amount at a rate per annum equal to the Federal Funds Rate for such day (when the recipient is a Bank) or equal to the rate of interest applicable to such Loan (when the recipient is the Borrower). SECTION 2.20 SHARING OF PAYMENTS AND SET-OFF AMONG BANKS. The Borrower hereby agrees that, in addition to (and without limitation of) any right of set-off, banker's lien or counterclaim a Bank may otherwise have, each Bank shall be entitled, at its option, to offset balances held by it at any of its offices against any principal of or interest on any of its Loans hereunder, or any Fee payable to it, that is not paid when due (regardless of whether such balances are then due to the Borrower), in which case it shall promptly notify the Borrower and the Agent thereof, PROVIDED THAT its failure to give such notice shall not affect the validity thereof. If a Bank shall effect payment of any principal of or interest on Loans held by it under this Agreement through the exercise of any right of set-off, banker's lien, counterclaim or similar right, it shall promptly purchase from the other Banks participations in the Loans held by the other Banks in such amounts, and make such other adjustments from time to time as shall be equitable, to the end that all the Banks shall share the benefit of such payment PRO RATA in accordance with the unpaid principal and interest on the Loans held by each of them. To such end all the Banks shall make appropriate adjustments among themselves (by the resale of participations sold or otherwise) if such payment is rescinded or must otherwise be restored. The Borrower agrees that any Bank so purchasing a participation in the Loans held by the other Banks may exercise all rights of set-off, banker's lien, counterclaim or similar rights with respect to such participation as fully as if such Bank were a direct holder of Loans in the amount of such participation. Nothing contained herein shall require any Bank to exercise any such right or shall affect the right of any Bank to exercise and retain the benefits of exercising, any such right with respect to any other indebtedness or obligation of the Borrower. 34 SECTION 2.21 CONVERSIONS OF LOANS. The Borrower shall have the right to convert Loans of one type into Loans of another type from time to time, PROVIDED THAT: (i) the Borrower shall give the Agent notice of each such conversion as provided in Section 2.2 hereof; (ii) Eurodollar Loans may be converted only on the last day of an Interest Period for such Loans; and (iii) except as required by Sections 2.22 or 2.25 hereof, no Base Rate Loan may be converted into a Eurodollar Loan if on the proposed date of conversion a Default or an Event of Default exists. The Agent shall use its best efforts to notify the Borrower of the effectiveness of such conversion, and the new interest rate to which the converted Loans are subject, as soon as practicable after the conversion; PROVIDED, HOWEVER, that any failure to give such notice shall not affect the Borrower's obligations, or the Agent's or the Banks' rights and remedies, hereunder in any way whatsoever. SECTION 2.22 ADDITIONAL COSTS; CAPITAL REQUIREMENTS. (a) In the event that any existing or future law or regulation, guideline or interpretation thereof by any court or administrative or governmental authority charged with the administration thereof, or compliance by any Bank with any request or directive (whether or not having the force of law) of any such authority shall impose, modify or deem applicable or result in the application of, any capital maintenance, capital ratio or similar requirement against loan or letter of credit commitments made by any Bank hereunder, or against letters of credit or guaranties issued by or participations therein of, or assets held by or deposits in or for the account of, any Bank or any corporation controlling such Bank or impose on any Bank any other condition regarding this Agreement or any L/C or participation therein or the issuance or acquisition of or participation in such Bank's Commitment including in relation to L/Cs or similar contingent obligations or the obligation of any Bank or the Borrower hereunder with respect to such Commitment and the result of any event referred to above is to impose upon any Bank or increase any capital requirement applicable as a result of the making or maintenance of, such Bank's Commitment or issuing, maintaining or participating in L/Cs or L/C Obligations or the obligation of the Borrower hereunder with respect to such Commitment (which imposition of capital requirements may be determined by each Bank's reasonable allocation of the aggregate of such capital increases or impositions), then, upon demand made by such Bank as promptly as practicable after it obtains knowledge that such law, regulation, guideline, interpretation, request or directive exists and determines to make such demand, the Borrower shall immediately pay to such Bank from time to time as specified by such Bank additional commitment fees which shall be sufficient to compensate such Bank for such imposition of or increase in capital requirements together with interest on each such amount from the date demanded until payment in full thereof at the Post-Default Rate. A certificate setting forth in reasonable detail the amount necessary to compensate such Bank as a result of an imposition of or increase in capital requirements submitted by such Bank to the Borrower shall be conclusive, absent manifest error, as to the amount thereof. For purposes of this Section 2.22, all references to any "Bank" shall be deemed to include any participant in such Bank's Commitment. (b) In the event that any Regulatory Change shall: (i) change the basis of taxation of any amounts payable to any Bank under this Agreement or the Notes or in respect of any Loans or L/C Obligations or L/Cs (other than taxes imposed on the overall net income of such Bank for any such Loans by the United States of America or the jurisdiction in which such Bank has its principal office); or (ii) impose or modify any reserve, Federal Deposit Insurance Corporation premium or assessment, special deposit or similar requirements relating to any extensions of credit, 35 letters of credit or guarantees issued by or participations therein of or other assets of, or any deposits with or other liabilities of, such Bank; or (iii) impose any other conditions affecting this Agreement in respect of Loans or L/C Obligations or L/Cs (or any of such extensions of credit, letters of credit, guarantees, participations, assets, deposits or liabilities); and the result of any event referred to in clause (i), (ii) or (iii) above shall be to (i) increase such Bank's costs of making or maintaining, participating in or acquiring any Loans or L/Cs or L/C Obligations or its Commitment or reduce any amount receivable by such Bank hereunder in respect of any of the foregoing or (ii) reduce the rate of return on such Bank's capital or assets as a consequence of its commitments or obligations hereunder to a level below that which the Bank could have achieved (taking into consideration such Bank's policies with respect to capital adequacy) but for the occurrence of any such event (such increases in costs and reductions in amounts receivable are hereinafter referred to as "ADDITIONAL COSTS"), then, upon demand made by such Bank as promptly as practicable after it obtains knowledge that such a Regulatory Change exists and determines to make such demand (a copy of which demand shall be delivered to the Agent), the Borrower shall pay to such Bank from time to time as specified by such Bank, additional commitment fees or other amounts which shall be sufficient to compensate such Bank for such Additional Costs from the date of such change, together with interest on each such amount from the date demanded until payment in full thereof at the Post-Default Rate. All references to any "Bank" shall be deemed to include any participant in such Bank's Commitment. (c) Each Bank, if any, that is not organized under the laws of the United States of America or any State agrees (i) prior to the first payment to such Bank of any amounts due to such Bank under the Loan Documents, upon request by Borrower, to execute and deliver to Borrower and the Agent completed counterparts of IRS Form W-8, 1001, or 4224 (or any successor thereto or substitute therefor), as applicable, and (ii) thereafter, upon request by Borrower from time to time in order to maintain the effectiveness and accuracy of such tax forms and otherwise to comply with United States tax laws, to execute and deliver to the Agent and Borrower additional or supplemental tax forms with respect to amounts due to such Bank under the Loan Documents. (d) Determinations by any Bank for purposes of this Section 2.22 of the effect of any Regulatory Change on its costs of making or maintaining Loans or L/Cs or L/C Obligations or on amounts receivable by it in respect of Loans or L/Cs or L/C Obligations, and of the additional amounts required to compensate such Bank in respect of any Additional Costs, shall be set forth in writing in reasonable detail and shall be conclusive, absent manifest error. SECTION 2.23 LIMITATION ON TYPES OF LOANS. Anything herein to the contrary notwithstanding, if, on or prior to the determination of an interest rate for any Eurodollar Loans for any Interest Period therefor, the Agent determines (which determination shall be conclusive): (a) by reason of any event affecting the money markets in the United States of America or the Eurodollar interbank market, quotations of interest rates for the relevant deposits are not being provided in the relevant amounts or for the relevant maturities for purposes of determining the rate of interest for such Loans under this Agreement; or 36 (b) the rate of interest referred to in the definition of "Eurodollar Rate" upon the basis of which the rate of interest on any Eurodollar Loans for such period is determined, does not accurately reflect the cost to the Banks of making or maintaining such Loans for such period, then the Agent shall give the Borrower and each Bank prompt notice thereof (and shall thereafter give the Borrower and each Bank prompt notice of the cessation, if any, of such condition), and so long as such condition remains in effect, the Banks shall be under no obligation to make Loans of such type or to convert Loans of any other type into Loans of such type and the Borrower shall, on the last day(s) of the then current Interest Period(s) for the outstanding Loans of the affected type either prepay such Loans in accordance with Section 2.8 hereof or convert such Loans into Loans of another type in accordance with Section 2.21 hereof. SECTION 2.24 ILLEGALITY. Notwithstanding any other provision in this Agreement, in the event that it becomes unlawful for any Bank or its Applicable Lending Office to: (i) honor its obligation to make Eurodollar Loans hereunder, or (ii) maintain Eurodollar Loans hereunder, then such Bank shall promptly notify the Borrower thereof (with a copy to the Agent), describing such illegality in reasonable detail (and shall thereafter promptly notify the Borrower and the Agent of the cessation, if any, of such illegality), and such Bank's obligation to make Eurodollar Loans and to convert other types of Loans into Eurodollar Loans hereunder shall, upon written notice given by such Bank to the Borrower, be suspended until such time as such Bank may again make and maintain Eurodollar Loans and such Bank's outstanding Eurodollar Loans shall be converted into Base Rate Loans (as shall be designated in a notice from the Borrower to the Agent pursuant to Section 2.2 hereof) in accordance with Sections 2.21 and 2.25 hereof. SECTION 2.25 CERTAIN CONVERSIONS PURSUANT TO SECTIONS 2.22 AND 2.24. If the Loans of any Bank of a particular type (Loans of such type are hereinafter referred to as "AFFECTED LOANS" and such type is hereinafter referred to as the "AFFECTED TYPE") are to be converted pursuant to Section 2.22 or 2.24 hereof, such Bank's Affected Loans shall be converted into Base Rate Loans, or Eurodollar Loans of another type, as the case may be (the "NEW TYPE LOANS") on the last day(s) of the then current Interest Period(s) for the Affected Loans (or, in the case of a conversion required by subsection 2.22(b) or Section 2.24 hereof, on such earlier date as such Bank may specify to the Borrower with a copy to the Agent) and, until such Bank gives notice as provided below that the circumstances specified in Section 2.22 or 2.24 hereof that gave rise to such conversion no longer exist: (a) to the extent that such Bank's Affected Loans have been so converted, all payments and prepayments of principal that would otherwise be applied to such Affected Loans shall be applied instead to its New Type Loans; (b) all Loans that would otherwise be made by such Bank as Loans of the Affected Type shall be made instead as New Type Loans and all Loans of such Bank that would otherwise be converted into Loans of the Affected Type shall be converted instead into (or shall remain as) New Type Loans; and 37 (c) if Loans of any of the Banks other than such Bank that are the same type as the Affected Type are subsequently converted into Loans of another type (which type is other than New Type Loans), then such Bank's New Type Loans shall be automatically converted on the conversion date into Loans of such other type to the extent necessary so that, after giving effect thereto, all Loans held by such Bank and the Banks whose Loans are so converted are held PRO RATA (as to principal amounts, types and, to the extent applicable, Interest Periods) in accordance with their respective Commitments. SECTION 2.26 ALTERNATE LENDING INSTALLATION. Each Bank agrees that as promptly as practicable after it becomes aware of an event or the existence of a condition that would entitle it to exercise any rights under Sections 2.22 or 2.24 hereof, such Bank shall use commercially reasonable efforts to make, fund or maintain the affected Loans of such Bank through a different lending installation of such Bank if (i) as a result thereof, the additional monies which would otherwise be required to be paid in respect of such Loans would be materially reduced or the illegality or other adverse circumstances which would otherwise affect such Loans would cease to exist or the increased cost which would otherwise be required to be paid in respect of such Loans would be materially reduced and (ii) the making, funding or maintaining of such Loans through such other lending installation would not, in the judgement of such Bank, adversely affect such Loans or such Bank. The Borrower hereby agrees to pay all reasonable expenses incurred by each Bank in utilizing a different lending installation pursuant to this Section 2.26. SECTION 2.27 INDEMNIFICATION. The Borrower shall pay to the Agent for the account of each Bank, upon the request of such Bank through the Agent, such amount or amounts as shall compensate such Bank for any loss (including loss of profit), cost or expense incurred by such Bank (as reasonably determined by such Bank) as a result of: (a) any payment or prepayment or conversion of a Eurodollar Loan held by such Bank on a date other than the last day of an Interest Period for such Eurodollar Loan; or (b) any failure by the Borrower to borrow a Eurodollar Loan held by such Bank on the date for such borrowing specified in the relevant Borrowing Notice under Section 2.2 hereof, such compensation to include, without limitation, an amount equal to: (i) any loss or expense suffered by such Bank during the period from the date of receipt of such early payment or prepayment or the date of such conversion to the last day of such Interest Period if the rate of interest obtainable by such Bank upon the redeployment of an amount of funds equal to such Bank's PRO RATA share of such payment, prepayment or conversion or failure to borrow or convert is less than the rate of interest applicable to such Eurodollar Loan for such Interest Period, or (ii) any loss or expense suffered by such Bank in liquidating Eurodollar deposits prior to maturity that correspond to such Bank's PRO RATA share of such payment, prepayment, conversion, failure to borrow or failure to convert. The determination by each such Bank of the amount of any such loss or expense, when set forth in a written notice to the Borrower, containing such Bank's calculation thereof in reasonable detail, shall be presumed correct, in the absence of manifest error. 38 ARTICLE 3. REPRESENTATIONS AND WARRANTIES. The Borrower hereby represents and warrants to the Banks and the Agent that: 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, 39 no waiver of any Lien or right of distraint or other similar right and no consent, 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, bureau or agency, 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. Except as set forth on Schedule 3.6 hereto, there are no outstanding judgments, actions or proceedings, including, without limitation, any Environmental Proceeding, pending before any court or governmental authority, bureau or agency, with respect to 40 or, to the best of the Borrower's knowledge, 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. (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 41 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 the 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 the 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 as set forth in Section 2.9 hereof, 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. Except as set forth on Schedule 3.13 hereto, 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 Prospectus, Borrower's Annual Report on Form 10-K dated March 27, 1996 relating to the fiscal year ended December 31, 1995 filed by the Borrower with the SEC and previously delivered to the Banks (the "1995 10-K Report"), Borrower's Quarterly Report on Form 10-Q dated November 7, 1996 relating to the period ending September 30, 1996 filed by the Borrower with the SEC and previously delivered to the Banks (the "Third Quarter 10-Q Report"), the Projections, nor any certificate, opinion, or any other statement made or furnished in writing to the Agent or any Bank by or on 42 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 the Subsidiaries or any other Loan Party, which fact has not been set forth herein, in the Financial Statements, the Prospectus, the 1995 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 Agent or the Banks. SECTION 3.15 LICENSES AND APPROVALS. The Borrower and each of the 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 the 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 the 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 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. 43 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, residential and other customers relating to the provision of the Borrower's video and video-related services (guest-pay, free-to-guest, right-of-entry 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 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 Agent, for the benefit of itself, the Banks 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 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 Agent, for the benefit of itself, the Banks 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 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 44 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 and the Senior Note Documents. ARTICLE 4. CONDITIONS TO THE LOANS. SECTION 4.1 CONDITIONS TO INITIAL LOANS. The obligation of each Bank to make the initial Loan to be made by it hereunder shall be subject to the fulfillment (to the satisfaction of the Agent and the Banks) 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 Agent, the Issuing Banks and each of the Banks; the Notes shall have been executed by the Borrower; ResNet and LodgeNet Canada shall each have executed its Guaranty; and each other Loan Document shall have been executed by the parties thereto. (b) COLLATERAL. The Borrower and the 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 filed, registered or recorded to perfect the security interests of the Agent for the benefit of the Banks, or other evidence satisfactory to the 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 Agent for the benefit of the Banks in accordance with applicable law; (ii) written advice relating to such Lien and judgment searches as the 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 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 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 Agent's ability to preserve and protect its interest in and access to the Collateral, have been taken; 45 (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) SENIOR NOTE REFINANCING. (i) the Senior 1996 Notes in an aggregate principal amount of not less than $150,000,000 shall have been issued on terms and conditions acceptable to the Agent; (ii) the Borrower's 9.95% and 10.35% Senior Notes due August 1, 2003 shall have been repaid in full, and the Agent shall have received evidence that all indebtedness, obligations and liabilities in connection therewith have been discharged at an aggregate cost to the Borrower not exceeding $33,000,000; (iii) Amendment No. 1 to the Securities Purchase Agreement relating to the Senior 1995 Notes shall have been executed and delivered by the parties thereto; and (iv) the Notes hereunder shall be outstanding and there shall not have occurred (and consummation of the transactions contemplated hereby, including the issuance of the Senior 1996 Notes, shall not cause) any event of default or event, which, with notice or lapse of time, or both, would constitute an event of default under the Senior 1995 Note Agreement or any other Senior Note Document. (d) PAYMENT OF FEES. The Borrower shall have paid to the Agent the Agency Fees due on the Closing Date and shall have executed and delivered to the Agent the Letter Agreement. (e) LEGAL OPINIONS. Eric R. Jacobsen, Vice President, General Counsel and Secretary of the Borrower, and Pillsbury Madison & Sutro LLP, counsel to the Borrower and ResNet, shall have delivered their opinions to the Agent substantially in the composite form of Exhibit I hereto; Mark G. Baker, LL.M. & Associates, special counsel to LodgeNet Canada, shall have delivered its opinion in form and substance satisfactory to the Agent. (f) FINANCIALS AND SENIOR NOTE DOCUMENTS. The 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) The Financial Statements and the Projections; and (ii) The Senior Note Documents, each as amended and in effect on the date hereof. (g) CORPORATE ORGANIZATION, AUTHORIZATION, GOOD STANDING. The Agent shall have received copies of the following: (i) Any consents, approvals and waivers referred to in Section 3.2 hereof; 46 (ii) The certificate of incorporation of the Borrower and of ResNet, 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 and LodgeNet Canada certified by their respective corporate secretaries; (iv) All corporate action taken by the Borrower, ResNet 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 fifteen (15) 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; with respect to ResNet, from the States of Arizona, California, Colorado, Delaware, Florida, Illinois, Michigan, Missouri, New Jersey, New York, South Dakota, Tennessee, Texas and Virginia; and (vi) Incumbency certificates (with specimen signatures) with respect to officers of the Borrower, ResNet and LodgeNet Canada. (h) 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; (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 December 31, 1995, 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 Agent shall have received a certificate of the chief financial officer dated the Closing Date certifying, INTER ALIA, that the conditions set forth in this subsection 4.1(h) are satisfied on such date. (i) EXCHANGE OF NOTES. The Loans represented by the Notes outstanding under the Original Loan Agreement (the "Original Notes") shall be repaid, and the Original Notes shall be exchanged for Notes hereunder in substantially the form of Exhibit B hereto. 47 (j) OTHER DOCUMENTS. The 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 Agent and its counsel may request. SECTION 4.2 CONDITIONS TO SUBSEQUENT LOANS AND L/CS. The obligation of each Bank to make each Loan subsequent to its initial Loan and the obligation of the Issuing Bank to issue each L/C shall be subject to the fulfillment (to the satisfaction of the Agent) of the following conditions precedent: (a) In respect of each Loan, the Agent shall have received a Borrowing Notice in accordance with Section 2.2 hereof. (b) In respect of each requested L/C, the Issuing Bank and the Agent shall have received a Notice of Issuance in accordance with Section 2.16 hereof, together with all other documents required to be delivered in connection with a Notice of Issuance and all Application Documents, and the Issuing Bank shall have been paid any and all fees then due in accordance with the terms of Section 2.16 hereof. (c) The Agent shall have received a Compliance Certificate dated the date of such 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 Agent nor any Bank nor an 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 Loan or L/C (as the case may be) shall be satisfactory to counsel for the Agent. ARTICLE 5. DELIVERY OF FINANCIAL REPORTS, DOCUMENTS AND OTHER INFORMATION. While the 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 Banks or the 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 Bank: 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 the 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 48 without qualification by Arthur Andersen & Co. or another firm of independent certified public accountants satisfactory to the 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 the 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 the 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 the 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, 2002, 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 Bank 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 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. 49 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 Banks; (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; (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; 50 (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 Agent or the Majority Banks may from time to time reasonably request, including, without limitation, as soon as available, but in any event not later than forty-five (45) 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 (i) the number of Guest-Pay Rooms served by the Borrower and its Subsidiaries and (ii) the number of residential units served by ResNet (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 Agent or the Majority Banks may reasonably request from time to time. 51 ARTICLE 6. AFFIRMATIVE COVENANTS. While the 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 Banks or the 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 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 Banks 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 Bank 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 Banks' investment in the then outstanding Notes. The Agent and each Bank 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 Agent and the Banks 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 Agent or the Banks under the Loan Documents, (d) in connection with assignments or participations and the solicitation thereof pursuant to Section 10.13 hereof, provided that each such actual or prospective assignees 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 Agent, the Banks or such participant or assignee, or by any applicable law, rule, regulation or judicial process. 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. 52 SECTION 6.5 COPIES OF CORPORATE DOCUMENTS. Subject to the prohibitions set forth in Section 7.12 hereof, promptly deliver to the 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 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 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-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 Agent as loss payee and as additional insured (in the case of general liability), for the benefit of itself, the Banks and the Issuing Banks, as their interests may appear. Upon request of the Agent or any Bank, the Borrower shall furnish the Agent, with sufficient copies for each Bank, at reasonable intervals (but not more than once per policy year), a certificate of an officer of the Borrower (and, if requested by the 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: 53 (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 December 31, 1997 5.75 to 1 from January 1, 1998 through December 31, 1998 5.25 to 1 from January 1, 1999 and continuing thereafter 4.50 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 ----------------- ------------------------- One fiscal quarter ending March 31, 1997 1.25 to 1 Two fiscal quarters ending June 30, 1997 1.50 to 1 Three fiscal quarters ending September 30, 1997 1.50 to 1 Four fiscal quarters ending December 31, 1997 1.75 to 1 Four fiscal quarters ending at each of the following dates: March 31, June 30, September 30 and December 31 in each of the fiscal years 1998, 1999, 2000, 2001 and 2002 2.00 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) 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. 54 SECTION 6.10 NOTICE OF CERTAIN EVENTS. (a) Promptly notify the 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 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 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 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 Agent, set aside reserves in an amount satisfactory to the 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 Agent or the Banks do not and will not 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 Agent and the Banks and correct any defect or error that may be discovered therein or in any Loan Document or in the execution, acknowledgment or recordation thereof. 55 (b) PROTECTION OF EXISTING INTERESTS. Promptly upon request by the Agent or the Majority Banks, 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 Agent or such Banks, 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 Agent and the Banks the rights granted or now or hereafter intended to be granted to the Banks under any Loan Document or under any other document executed in connection therewith. (c) HEADQUARTERS PROPERTY. Within 180 days after completion of construction on the real property constituting Borrower's new chief executive offices, if the Borrower shall not have refinanced such property with a third party lender as permitted by subsection 7.1(b) hereof, then the Borrower shall execute and deliver a mortgage, in form and substance satisfactory to the Agent, granting the Agent a perfected Lien (subject only to Permitted Liens and other security interests permitted under the Loan Documents), together with any such surveys, title insurance policies, environmental reports, appraisals or other instruments and documents as the Agent may require. (d) SECURITY INTEREST IN ADDITIONAL COLLATERAL. Promptly, and in any event within 30 days after the acquisition or construction by the Borrower, ResNet or any other Restricted Subsidiary 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 Agent does not have a perfected security interest under the Collateral Documents (other than (x) property of the type covered by the Pledge Agreement which is provided for in subsection 6.13(e) hereof, (y) property subject to Liens permitted under subsection 7.2(d) 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 Agent with respect to any other property of the Borrower or its Restricted Subsidiaries deemed material by the Agent or the Majority Banks (the "ADDITIONAL COLLATERAL"), the Borrower will, and will cause each of its Restricted Subsidiaries 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 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. 56 (e) ADDITIONAL PLEDGE. The Borrower shall, and shall cause each Restricted Subsidiary to, pursuant to and in accordance with the Pledge Agreement, pledge and deliver to the Agent for the benefit of itself, the Banks and the Issuing Banks, all shares of stock, intercompany promissory notes and other property that would have constituted Collateral under the Pledge Agreement on the date hereof that are acquired by the Borrower or any Restricted Subsidiary after the date hereof. (f) GRANT OF SECURITY BY NEW RESTRICTED SUBSIDIARIES. The Borrower will cause each Restricted Subsidiary of the Borrower established or created after the Closing Date to grant to the 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 Restricted Subsidiary by executing and delivering an appropriate supplement to the Security Agreement and an appropriate supplement to the Pledge Agreement, or on other terms satisfactory in form and substance to the Agent. The Borrower shall cause each such Restricted Subsidiary, 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 Agent to be necessary or desirable for the creation and perfection of the foregoing Liens. The Borrower will cause each of its Restricted Subsidiaries to take all actions requested by the Agent (including, without limitation, the filing of UCC-1s) in connection with the granting of such security interests. (g) ADDITIONAL GUARANTORS. The Borrower will cause (i) each Wholly-Owned Subsidiary of the Borrower established or created after the Closing Date, (ii) ResNet LLC or any other Subsidiary of ResNet Communications, Inc., and (iii) any other Subsidiary of the Borrower designated by the Borrower as a Guarantor, to execute an appropriate Guaranty satisfactory in form and substance to the Agent pursuant to which such Subsidiary shall guarantee the Obligations of the Borrower hereunder. ARTICLE 7. NEGATIVE COVENANTS. So long as any Bank shall have any Commitment hereunder, or any Loan or any other Obligation shall remain outstanding, unpaid or unsatisfied to the Banks, the Issuing Banks or the 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 Banks and the Agent under this Agreement and the Notes; (b) Indebtedness of the Borrower incurred pursuant to the Senior 1995 Notes and the Senior 1996 Notes; (c) Permitted Debt and the TCI Convertible Debt; 57 (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 $5,000,000, 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) As set forth on Schedule 7.1 hereto; (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 $15,000,000 in the aggregate incurred by the Borrower in connection with its purchase and construction of improvements on real property constituting the Borrower's new chief executive 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; (i) Refinancings of Indebtedness permitted pursuant hereto in accordance with Section 7.8 hereof; and (j) Permitted Intercompany Debt, 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 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; PROVIDED, HOWEVER, that ResNet LLC may make such distributions as are permitted by subsection 7.5(c) 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; (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 58 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) As set forth on Schedule 7.2 hereto; (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; and (f) 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. 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. 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 59 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) 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 (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 and (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 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"); 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 pay pro rata dividends or distributions on its outstanding membership 60 interests, including the interests of its minority member(s), for the purpose of enabling its members to meet their federal, state and local estimated tax obligations. 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, (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, and (d) for issuances of securities in any Restricted Subsidiary at a price equal to the greater of book value or fair value (as determined in good faith by the Borrower's board of directors), which issuances do not exceed, in the aggregate, 40% of the issued and outstanding capital stock of such Restricted Subsidiary (or 50% of the issued and outstanding capital stock, in the case of ResNet) and subject to the further condition that no restriction shall be imposed or permitted to exist on Borrower's right or ability to receive dividend payments or other cash flow from such Restricted Subsidiary or to exercise its voting rights as to such Restricted Subsidiary in each case in an amount or percentage at least proportionate to its ownership interest in such Restricted Subsidiary; PROVIDED, HOWEVER, that all issuances of securities or other ownership interests permitted under clauses (c) and (d) above shall not exceed a Substantial Portion in regard to Restricted Subsidiaries other than ResNet. 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 thereof and (6) the aggregate net proceeds thereof are applied as required by subsection 2.8(d) 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 61 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 Agent's determination, the Banks, 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; 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 loans to employees of the Borrower or any Subsidiary, PROVIDED THAT the outstanding principal amount of all such loans to any one employee shall at no time exceed $60,000 and that the aggregate outstanding principal amount of all such loans shall at no time exceed $250,000; 62 (c) Investments by the Borrower in any Subsidiary and by any Subsidiary in the Borrower or another 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 consisting of Permitted Intercompany Debt or intercompany Investments between the Borrower and any of its Wholly-Owned Subsidiaries or between any such Wholly-Owned Subsidiaries and the Borrower or any other Wholly-Owned Subsidiary; and (e) (A) Investments in ResNet which consist of Permitted Intercompany Debt, (B) Investments in Restricted Subsidiaries other than ResNet, (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 Credit Period 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: (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) to the extent any such Investment constitutes, or otherwise results in the creation of, a direct or indirect Wholly-Owned Subsidiary of the Borrower, upon the creation of such Subsidiary, such Subsidiary shall execute and deliver to the Agent an appropriate Guaranty of the Obligations satisfactory in form and substance to the Agent; (v) no such Investment shall be of the nature which would subject the Agent or any Bank to regulatory or third party approval in connection with the exercise of their rights and remedies under this Agreement, the Guaranties or any other Loan Document; and 63 (vi) 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 (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 64 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 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 Agent's determination, to the Banks, 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 Agent's determination, would be adverse to the Banks, or, together with all other amendments, 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 Agent's determination, the Banks. 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, 1997 of capital stock and/or Permitted Debt, PLUS (iii) the amount of any increase in the Total Commitment effected by the Borrower during such fiscal year pursuant to an election under subsection 2.8(a) hereof, MINUS (iv) any scheduled reduction pursuant to subsection 2.5(a) hereof as it relates to all such prior increases: 65 Fiscal Year Ending Base Maximum Capital December 31, Expenditures Amount ------------ -------------------- 1996 $100,000,000 1997 $130,000,000 1998 $60,000,000 1999 $30,000,000 2000 $35,000,000 2001 $40,000,000 2002 $25,000,000 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 USE OF CASH. Use, or permit to be used, in any manner or to any extent, any of the Borrower's Cash for the benefit of any Person, except: (a) in connection with the payment or prepayment of expenses (other than Capital Expenditures) incurred for the benefit of the Borrower in the maintenance and operation of its business, in each case only in the ordinary course of its business, (b) for Capital Expenditures permitted by Section 7.13 hereof, (c) for the payment (but not prepayment, except to the extent permitted by this Agreement) of scheduled, required payments of principal and interest on Indebtedness of the Borrower permitted to exist hereunder, and (d) for uses that are otherwise specifically permitted by this Agreement. SECTION 7.16 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 7.17 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 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 66 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 to the Borrower shall be deemed to be a permitted transaction hereunder). SECTION 7.18 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 Agent and the Banks 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. If any one or more of the following events ("EVENTS OF DEFAULT") shall occur and be continuing, the Commitments shall terminate (except for the obligations of the Banks under Section 2.16 hereof in respect of the purchase of participations in the L/Cs from the Issuing Bank) and the entire unpaid balance of the principal of and interest on the Notes outstanding and all other obligations and Indebtedness of the Borrower to the Banks and the Agent arising hereunder and under the other Loan Documents shall immediately become due and payable upon written notice to that effect given to the Borrower by the Agent (except that in the case of the occurrence of any Event of Default described in Section 8.6 no such notice shall be required), without presentment or demand for payment, notice of non-payment, protest or further notice or demand of any kind, all of which are expressly waived by the Borrower: SECTION 8.1 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 SECTION 8.2 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 67 SECTION 8.3 OTHER COVENANTS. (a) 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 Agent; or (b) 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 Agent; or SECTION 8.4 OTHER DEFAULTS. (a) 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 (b) 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 (c) 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 8.4 shall not be applicable to (i) any Debt Instrument other than a guarantee (as defined in Section 7.3 hereof) that, on the date this Section 8.4 would otherwise be applicable thereto, relates to or evidences Indebtedness in a principal amount of less than $2,500,000 or (ii) Debt Instruments which constitute guaranties (as defined in Section 7.3 hereof) that, on the date this Section 8.4 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 SECTION 8.5 REPRESENTATIONS AND WARRANTIES. Any representation or warranty made in writing to the Banks or the 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 68 SECTION 8.6 BANKRUPTCY. (a) 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 (b) The Borrower or any Subsidiary shall generally not pay its debts as such debts become due; or (c) 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 SECTION 8.7 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 SECTION 8.8 ERISA. (a) 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 (b) 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 SECTION 8.9 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 thirty-seven percent (37%) 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 69 fifty percent (50%) of the Persons constituting the Borrower's 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. SECTION 8.10 COLLATERAL. (a) 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 (b) 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. ARTICLE 9. THE AGENT. SECTION 9.1 APPOINTMENT, POWERS AND IMMUNITIES. Each Bank hereby irrevocably appoints and authorizes the Agent to act as its agent hereunder and under the other Loan Documents with such powers as are specifically delegated to the Agent by the terms of this Agreement and the other Loan Documents together with such other powers as are reasonably incidental thereto. The 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 Bank. The Agent shall not be responsible to the Banks 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 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 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. SECTION 9.2 RELIANCE BY AGENT. The 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 70 the proper person or persons, and upon advice and statements of legal counsel, independent accountants and other experts selected by the Agent. As to any matters not expressly provided for by this Agreement or the other Loan Documents, the 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 Majority Banks, and such instructions of the Majority Banks and any action taken or failure to act pursuant thereto shall be binding on all of the Banks. SECTION 9.3 EVENTS OF DEFAULT. The 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 Agent has received notice from a Bank or the Borrower specifying such Default and stating that such notice is a "Notice of Default". In the event that the Agent receives such a notice of the occurrence of a Default, the Agent shall give notice thereof to the Banks (and shall give each Bank notice of each such non-payment). The Agent shall (subject to Section 9.7 hereof) take such action with respect to such Default as shall be directed by the Majority Banks. SECTION 9.4 RIGHTS AS A BANK. With respect to its Commitment and the Loans made by it, the Agent in its capacity as a Bank hereunder shall have the same rights and powers hereunder as any other Bank and may exercise the same as though it were not acting as the Agent, and the term "Bank" or "Banks" shall, unless the context otherwise indicates, include the Agent in its individual capacity. The Agent and its Affiliates may (without having to account therefor to any Bank) 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 Agent, and the 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 Banks. SECTION 9.5 INDEMNIFICATION. The Banks shall indemnify the 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 Banks (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 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 the enforcement of any of the terms hereof or of any such other documents, PROVIDED THAT no Bank 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 AGENT AND OTHER BANKS. Each Bank agrees that it has, independently and without reliance on the Agent or any other Bank, and based on such documents and information as it has deemed appropriate, made its own credit analysis of the 71 Borrower and decision to enter into this Agreement and that it will, independently and without reliance upon the Agent or any other Bank, 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 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 Banks by the Agent hereunder or under the other Loan Documents, the Agent shall not have any duty or responsibility to provide any Bank with any credit or other information concerning the affairs, financial condition or business of the Borrower, that may come into the possession of the Agent or any of its Affiliates. SECTION 9.7 FAILURE TO ACT. Except for action expressly required of the Agent hereunder, the 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 Banks 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 AGENT. Subject to the appointment and acceptance of a successor Agent as provided below, the Agent may resign at any time by giving not less than thirty (30) days' prior written notice thereof to the Banks and the Borrower, and the Agent may be removed at any time with or without cause by the Majority Banks. Upon any such resignation or removal, the Majority Banks shall have the right to appoint a successor Agent. If no successor Agent shall have been so appointed by the Majority Banks and shall have accepted such appointment within 30 days after the retiring Agent's giving of notice of resignation or the Majority Banks' removal of the retiring Agent, then the retiring Agent may, on behalf of the Banks, after consultation with the Borrower, appoint a successor Agent which shall be a bank with a combined capital and surplus of at least $100,000,000. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations hereunder. After any retiring Agent's resignation or removal hereunder as Agent, the provisions of this Article 9 shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as the Agent. SECTION 9.9 SHARING OF PAYMENTS. (a) Prior to any acceleration by the Agent and the Banks of the Obligations: (i) in the event that any Bank 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 Bank in respect of the corresponding Note held by it, then the Bank so receiving such greater proportionate payment shall purchase for cash from the other Bank or Banks such portion of each such other Bank's or 72 Banks' Loan as shall be necessary to cause such Bank receiving the proportionate overpayment to share the excess payment with each Bank; and (ii) in the event that any Bank shall obtain payment in respect of any Interest Rate Contract to which such Bank 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 Bank shall be permitted to retain the full amount of such payment and shall not be required to share such payment with any other Bank. (b) Upon or following any acceleration by the Agent and the Banks of the Obligations, in the event that any Bank shall obtain payment in respect of a Note, or interest thereon, or in respect of an Interest Rate Contract to which such Bank 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 Bank in respect of the aggregate amount of the corresponding Note held by such Bank and any Interest Rate Contract to which such Bank is a party, then the Bank so receiving such greater proportionate payment or such greater proportionate amount of collateral, shall purchase for cash from the other Bank or Banks such portion of each such other Bank's or Banks' Loan, or shall provide the other Banks with the benefits of any such collateral, or the proceeds thereof, as shall be necessary to cause such Bank receiving the proportionate overpayment to share the excess payment or benefits of such collateral or proceeds ratably with each Bank. For the purposes of this subsection 9.9(b), payments on Notes received by each Bank and receipt of collateral by each Bank shall be in the same proportion as the proportion of: (A) the sum of: (x) the Obligations owing to such Bank in respect of the Note held by such Bank, plus (y) the Obligations owing to such Bank in respect of Interest Rate Contracts to which such Bank is party, if any, to (B) the sum of: (x) the Obligations owing to all of the Banks in respect of all of the Notes, plus (y) the Obligations owing to all of the Banks in respect of all Interest Rate Contracts to which any Bank 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 Bank 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 Agent is authorized on behalf of all the Banks, without the necessity of any notice to or further consent from the Banks, 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. 73 (b) The Banks irrevocably authorize the Agent, at its option and in its discretion, to release any Lien granted to or held by the 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 Majority Banks or all the Banks, as the case may be, as provided in Section 10.6 hereof. Upon request by the Agent at any time, the Banks will confirm in writing the Agent's authority to release particular types or items of Collateral pursuant to this subsection 9.10(b). ARTICLE 10. MISCELLANEOUS PROVISIONS. SECTION 10.1 FEES AND EXPENSES; INDEMNITY. The Borrower will promptly pay all costs of the 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 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 Banks and the 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 Banks or the 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 Agent and/or the Banks). 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 Bank 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 hereunder or thereunder. In addition to the foregoing, the Borrower shall indemnify each Bank and the Agent 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 74 connection with the Loans (other than as a result of the gross negligence, willful misconduct or intentional violation of law by the Agent and/or the Banks), including, without limitation, losses, liabilities, damages, claims, costs and expenses suffered or incurred by any Bank or the 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 Agent, the Banks 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 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 Agent and the Banks 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 Banks and the 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 Bank or any other holder of a Note, such Bank, 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 75 be made to the Agent at the Principal U.S. Office of the Agent, in lawful money of the United States of America in immediately available funds, by wire transfer or otherwise, not later than 11:00 A.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 Bank to which any such payment is due pursuant to applicable federal, state and local income tax laws, and (ii) deduction of amounts equal to the taxes on or measured by the net income of such Bank payable by such Bank 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 Bank 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 Agent for the ratable benefit of the Banks a Lien on any and all deposits or other sums at any time credited by or due from the Agent or any Bank 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 Bank or the 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 Bank or the Agent against any of the Obligations, whether or not any of such Obligations is then due or is secured by any Collateral, all as set forth in and pursuant to Section 2.20 hereof. 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 Majority Banks (and, if the rights or duties of the Agent are affected thereby, by the Agent); PROVIDED THAT no such amendment or waiver shall, unless signed by all the Non-Defaulting Banks, (i) increase the Commitment of any Bank or amend subsection 2.8(a) hereof or subject any Bank to any additional 76 obligation (it being understood that a waiver of any Default or Event of Default or of a non-scheduled reduction in the Total Commitment shall not constitute a change in the terms of any Commitment of any Bank), (ii) reduce the principal of or rate of interest on any Loan or Fees hereunder (other than as a result of waiving the applicability of any Post-Default Rate), (iii) amend subsection 2.5(a) hereof or 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 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 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 Majority Banks or the percentage of the Commitments or of the aggregate unpaid principal amount of the Loans and Net L/C Obligations which shall be required for the Banks 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 the Letter Agreements embody the entire agreement and understanding among the Banks, the 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 Agent and the Banks 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 Agent or any Bank 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 Bank or the Agent and without regard to any other obligation of any nature whatsoever that any Bank or the 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 Bank or the 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 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 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: 77 (a) If to the Borrower: LodgeNet Entertainment Corporation 808 West Avenue North Sioux Falls, South Dakota 57104 Attention: Mr. Jeffrey T. Weisner Vice President, Finance Telecopier No.: (605) 330-1323 with a copy to: Eric R. Jacobsen, Esq. Vice President, General Counsel and Secretary LodgeNet Entertainment Corporation 808 West Avenue North Sioux Falls, South Dakota 57104 Telecopier No.: (605) 330-1323 (b) If to any Bank: To its address set forth below its name on the signature pages hereof, with a copy to the Agent; and (c) If to the Agent: National Westminster Bank Plc, as Agent 175 Water Street New York, New York 10038 Attention: Mr. Phillip Krall Telecopier No.: (212) 602-4319 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 78 (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 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 Banks. (b) Any Bank 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 Bank of a participating interest to a Participant, whether or not upon notice to the Borrower and the Agent, such Bank shall remain responsible for the performance of its obligations hereunder, and the Borrower and the Agent shall continue to deal solely and directly with such Bank in connection with such Bank's rights and obligations under this Agreement. Any agreement pursuant to which any Bank may grant such a participating interest shall provide that such Bank 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 Bank 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 2.22, 2.23, 2.24 and 2.25 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 79 effect for purposes of this Agreement only to the extent of a participating interest granted in accordance with this subsection (b). (c) Any Bank may at any time assign to one or more banks or other institutions (each an "Assignee") all, or a proportionate part (comprising equal percentages of such Bank's Loans and Note(s)) 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 B hereto executed by such Assignee and such transferor Bank, with (and subject to) the subscribed consent of the Borrower, which shall not be unreasonably withheld, and the Agent; PROVIDED that if (i) an Assignee is an affiliate of such transferor Bank or was a Bank 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 Banks hereunder, be in an aggregate amount less than $5,000,000 unless the entire Commitment of the assigning Bank is so assigned. Upon execution and delivery of such instrument and payment by such Assignee to such transferor Bank of an amount equal to the purchase price agreed between such transferor Bank and such Assignee, such Assignee shall be a Bank party to this Agreement and shall have all the rights and obligations of a Bank with a Commitment as set forth in such instrument of assumption, and the transferor Bank 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 Bank, the Agent and the Borrower shall make appropriate arrangements so that, if required, a new Note is issued to the Assignee. In connection with any such assignment, the transferor Bank shall pay to the 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 Agent certification as to exemption from deduction or withholding of any United States federal income taxes in accordance with subsection 2.22(c) hereof. (d) Any Bank 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 Bank from its obligations hereunder. (e) No Assignee, Participant or other transferee of any Bank's rights shall be entitled to receive any greater payment under Sections 2.22, 2.24 or 10.3 hereof than such Bank 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 2.22 or 2.24 hereof requiring such Bank 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 GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, 80 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 10.9 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 10.15 SHALL AFFECT OR IMPAIR IN ANY MANNER OR TO ANY EXTENT THE RIGHT OF ANY BANK 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 BANKS AND THE 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. [signature page follows] 81 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed on the date first above written. LODGENET ENTERTAINMENT CORPORATION By /s/ Jeffrey T. Welsner --------------------------------------- Jeffrey T. Welsner Title Vice President - Finance, Treasurer ------------------------------------ NATIONAL WESTMINSTER BANK PLC, AS AGENT, ISSUING BANK AND AS A BANK By /s/ Phillip Krall --------------------------------------- Title V.P. ------------------------------------ Lending Office for Base Rate and Eurodollar Loans: 175 Water Street 19th Floor, Agency Division New York, New York 10038 Attention: Shawn Bernard Telephone: (212) 602-4250 Telecopier: (212) 602-4118 Address for Notices: National Westminster Bank Plc 175 Water Street, 26th Floor New York, New York 10038 Attention: Phillip Krall Telephone: (212) 602-4568 Telecopier: (212) 602-4319 82 NATIONAL WESTMINSTER BANK OF CANADA, AS AN ISSUING BANK By /s/ Glen Bays ----------------------------------- Title Vice President -------------------------------- Global Structured Trade Finance Address for Notices: National Westminster Bank of Canada 200 Bay Street, South Tower Suite 2060 Toronto, Ontario M5J 2J1 Attention: Glen Bays Telephone: (416) 865-0170 Telecopier: (416) 865-0934 83 EXHIBITS AND SCHEDULES EXHIBITS A Commitments and Percentages B Promissory Note C Assignment and Assumption Agreement D ResNet Guaranty E LodgeNet Canada Guaranty F Security Agreement G Pledge Agreement H Patent and Trademark Security Agreement I Borrower U.S. Legal Opinion SCHEDULES 3.1 Organization and Capitalization 3.5 Real Estate 3.6 Litigation 3.11 Intellectual Property 3.13 Name Changes, Mergers 3.19 Material Agreements 7.1 Outstanding Indebtedness 7.2 Permitted Liens EXHIBIT A COMMITMENTS AND PERCENTAGES BANK COMMITMENT PERCENTAGE National Westminster Bank Plc $100,000,000 100% EXHIBIT B PROMISSORY NOTE $__________ New York, New York December __, 1996 FOR VALUE RECEIVED, LODGENET ENTERTAINMENT CORPORATION, a Delaware corporation (the "BORROWER"), hereby promises to pay to the order of______________________________(the "BANK") the principal sum of _______________ DOLLARS ($__________) or such lesser amount as shall equal the aggregate unpaid principal amount of the Loans made by the Bank under the Credit Agreement (defined below), at such rates and on such dates and in such amounts as are specified in, and in accordance with, the provisions of the Amended and Restated Credit Agreement dated as of December __, 1996 by and among the Borrower, the Banks signatory thereto and National Westminster Bank Plc, as Agent (as it may from time to time be amended, modified and/or supplemented, the "CREDIT AGREEMENT"). This Note is one of the Notes referred to in, was executed and delivered pursuant to, and evidences obligations of the Borrower under 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 prepaid and repaid and for a statement of the Agent's and the Banks' remedies upon the occurrence of an Event of Default (as defined therein). The Credit Agreement is incorporated herein by reference in its entirety. Capitalized terms used but not otherwise defined herein are used in this Note as defined in the Credit Agreement. All indebtedness outstanding under this Note shall bear interest (computed in the same manner as interest on this Note prior to the relevant due date) at the applicable Post-Default Rate (as such term is defined in the Credit Agreement) for all periods when an Event of Default has occurred and is continuing, 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 Agent, and all of such interest shall be payable on demand. Anything herein 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 the Bank to the extent that the Bank's receipt thereof would not be permissible under the law or laws applicable to the Bank limiting rates of interest which may be charged or collected by the Bank. Any such payments of interest which are not made as a result of the limitation referred to in the preceding sentence shall be made by the Borrower to the Bank on the earliest interest payment date or dates on which the receipt thereof would be permissible under such laws applicable to the Bank limiting rates of interest which may be charged or collected by the Bank. Payments of both principal and interest on this Note are to be made at the office of the Agent at 175 Water Street, New York, New York 10038 or such other place as the holder hereof shall designate to the Borrower in writing, in lawful money of the United States of America in immediately available funds. The Bank is hereby authorized by the Borrower to record on the schedule to this Note (or on a supplemental schedule thereto) the amount of each Loan made by the Bank to the Borrower and the amount of each payment or prepayment of principal of such Loans received by the Bank, it being understood, however, that failure to make any such notation shall not affect the rights of the Bank or the obligations of the Borrower hereunder in respect of this Note. The Bank may, at its option, record such matters in its internal records rather than on such schedule. Upon the occurrence of any Event of Default, as defined in the Credit Agreement, the principal amount of and interest on this Note may be declared due and payable in the manner and with the effect provided in the Credit Agreement. The Borrower shall pay costs and expenses of collection, including, without limitation, attorneys' fees and disbursements in the event that any action, suit or proceeding is brought by the holder hereof to collect this Note. THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS AND DECISIONS OF THE STATE OF NEW YORK WITHOUT REGARD TO ITS RULES PERTAINING TO CONFLICTS OF LAWS. LODGENET ENTERTAINMENT CORPORATION By --------------------------------- Title ------------------------------ 2 SCHEDULE TO NOTE This Note evidences the Loans made under the within described Credit Agreement, in the principal amounts, and on the dates set forth below, subject to the payments or prepayments of principal set forth below: PRINCIPAL PRINCIPAL AMOUNT OF AMOUNT PAID BALANCE DATE MADE LOAN OR PREPAID OUTSTANDING INITIALS - --------- --------- ----------- ----------- -------- EXHIBIT C ASSIGNMENT AND ASSUMPTION AGREEMENT Dated ___________ Reference is hereby made to the Amended and Restated Credit Agreement dated as of December __, 1996 (the "CREDIT AGREEMENT") by and among LodgeNet Entertainment Corporation, a Delaware corporation (the "BORROWER"), the Banks signatory thereto (collectively, the "BANKS") and National Westminster Bank Plc in its capacity as agent for the Banks (in such capacity, the "AGENT"). 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 Commitment as in effect on the Effective Date, and the Loans owing to the Assignor on the Effective Date, and the Note(s) held by the Assignor). 2. The Assignor: (i) represents and warrants that as of the date hereof its Commitment (without giving effect to assignments thereof that have not yet become effective) is $__________ and the aggregate outstanding principal amount of Loans owing to it (without giving effect to assignments thereof that have not yet become effective) is $__________; (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 Note(s) referred to in paragraph 1 above and requests that the Agent exchange such Note(s) for new Note(s) as follows: a 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 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 Acceptance; (ii) agrees that it will, independently and without reliance upon the Agent, the Assignor or any other Bank 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 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 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 Bank; 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 pages 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 Agent for acceptance by the 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 Bank 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 Agent shall make all payments under the Credit Agreement and the Note(s) 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 Note(s) 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. 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 Loans: Lending Office for Eurodollar Loans: Attention: Address for Notices: Attention: Telephone No.: Telex No.: Accepted this ___ day Accepted this ___ day of ______________, ___ of _____________, ____ NATIONAL WESTMINSTER BANK PLC, LODGENET ENTERTAINMENT as Agent CORPORATION By By --------------------------- --------------------------- Title Title ------------------------ ------------------------ 3 EXHIBIT D GUARANTY THIS GUARANTY, made this 19th day of December, 1996 by RESNET COMMUNICATIONS, INC., a Delaware corporation (the "GUARANTOR"), in favor of NATIONAL WESTMINSTER BANK PLC, New York branch, as Agent, for the benefit of itself, the Issuing Banks and the Banks signatory to the hereinafter defined Credit Agreement (in such capacity, together with its successors in such capacity, the "AGENT"). W I T N E S S E T H: WHEREAS, simultaneously with the execution and delivery of this Guaranty, LodgeNet Entertainment Corporation, a Delaware corporation (the "BORROWER"), has entered into an Amended and Restated Credit Agreement dated the date hereof (such agreement, including all exhibits thereto, as it may from time to time be amended, modified or supplemented, is hereinafter referred to as the "CREDIT AGREEMENT") with the Agent and the Banks, pursuant to which the Banks have agreed to make a revolving loan and letter of credit facility available to the Borrower in the aggregate principal sum of up to One Hundred Million Dollars ($100,000,000), subject to adjustment, upon and subject to the terms and conditions of the Credit Agreement (the "FACILITY"); WHEREAS, the Guarantor will derive benefits, both directly and indirectly, from the Borrower's obtaining the Facility from the Banks pursuant to the Credit Agreement; WHEREAS, it is a condition precedent to the obligation of the Banks to make the Facility available to the Borrower that the Guarantor shall have executed and delivered this Guaranty; and WHEREAS, all capitalized terms used herein that are defined in the Credit Agreement and that are not otherwise defined herein shall have the respective meanings ascribed thereto therein, unless the context otherwise requires; if at any time no Agent shall exist under the Credit Agreement, each reference herein to the Agent shall be deemed to refer to the Majority Banks until such time as a successor Agent shall be appointed under the Credit Agreement; NOW, THEREFORE, in order to induce the Agent, the Issuing Banks and the Banks to execute and deliver the Credit Agreement and to make the Facility available to the Borrower, and in consideration of the benefits expected to accrue to the Guarantor by reason thereof, and for other good and valuable consideration, receipt of which is hereby acknowledged, the Guarantor hereby represents and warrants to, and covenants and agrees with the Agent, for the benefit of itself, the Banks and the Issuing Banks, as follows: 1. The Guarantor hereby irrevocably and unconditionally guarantees to the Agent, for the benefit of itself, the Banks and the Issuing Banks, the punctual payment of the full amount, when due (whether by demand, acceleration or otherwise), of: (a) the principal of and interest on, and fees and expenses due pursuant to, the promissory notes issued by the Borrower pursuant to the Credit Agreement (hereinafter referred to, together with any and all amendments, modifications, substitutions and/or replacements thereof and thereto, as the "NOTES"), and (b) all other Indebtedness, liabilities and obligations of the Borrower to the Banks, the Issuing Banks and the Agent, whether under the Credit Agreement or otherwise created, whether now or hereafter existing, and whether or not currently contemplated, due or to become due, direct or contingent, joint, several or independent, secured or unsecured and whether matured or unmatured (all of the Indebtedness, liabilities and obligations included in clauses (a) and (b) of this paragraph 1 are hereinafter referred to collectively as the "GUARANTEED OBLIGATIONS"); subject, however, to the provisions of subparagraph 14(a)(ii) hereof and subject, further, to the limitation that in no event shall the obligation of the Guarantor for payment of Guaranteed Obligations exceed Permitted Intercompany Debt at the time outstanding. This is a guaranty of payment and not of collection, and is the primary obligation of the Guarantor; and the Agent, on behalf of itself, the Banks and the Issuing Banks, may enforce this Guaranty against the Guarantor without any prior enforcement of the Guaranteed Obligations against the Borrower. 2. All payments made by the Guarantor under or by virtue of this Guaranty shall be paid to the Agent at its office at 175 Water Street, New York, New York 10038 or such other place as the Agent may hereafter designate in writing. The Guarantor hereby agrees to make all payments under or by virtue of this Guaranty to the Agent as aforesaid. The Agent shall not be required otherwise to establish its authority to receive any payment made under or by virtue hereof. 3. The Guarantor hereby waives notice of acceptance of this Guaranty, notice of the creation, renewal or accrual of any of the Guaranteed Obligations and notice of any other liability to which this Guaranty may apply, and notice or proof of reliance by the Agent and/or the Banks upon this Guaranty, and waives diligence, protest, notice of protest, presentment, demand of payment, notice of dishonor or nonpayment of any of the Guaranteed Obligations, suit or taking other action or making any demand against, and any other notice to the Borrower or any other party liable thereon. 4. So far as the Guarantor is concerned, the Agent, on behalf of itself, the Banks and the Issuing Banks, may, at any time and from time to time, without the consent of, or notice to the Guarantor, and without impairing or releasing any of the obligations of the Guarantor hereunder, upon or without any terms or conditions and in whole or in part: (a) modify or change the manner, place or terms of, and/or change or extend the time of payment of, renew or alter, any of the Guaranteed Obligations, any security therefor, or any liability incurred directly or indirectly in respect thereof, provided that such modification, change, extension, renewal or alteration, or the manner in which it was implemented, does not violate the provisions of the Credit Agreement, and this Guaranty shall apply to the Guaranteed Obligations as so modified, changed, extended, renewed or altered; (b) sell, exchange, release, surrender, realize upon or otherwise deal with, in any manner and in any order, any property by whomsoever at any time pledged or mortgaged to secure, or howsoever securing the Guaranteed Obligations or any liabilities (including any of those hereunder) incurred directly or indirectly in respect thereof or hereof, and/or any offset or right with respect thereto; 2 (c) exercise or refrain from exercising any rights against the Borrower or others (including, without limitation any other guarantor of payment of the Guaranteed Obligations) or otherwise act or refrain from acting; and when making any demand hereunder against the Guarantor, the Agent, on behalf of the Banks, may, but shall be under no obligation to, make a similar demand on any other guarantor of payment of the Guaranteed Obligations, and any failure by the Agent or the Banks to make any such demand or to collect any payments from, or release of any other guarantor of payment of the Guaranteed Obligations shall not relieve the Guarantor of its obligations and liabilities hereunder, and shall not release, impair or affect the rights and remedies, express or implied, or as a matter of law, of the Agent or the Banks against the Guarantor (for the purposes hereof, "demand" shall include the commencement and continuance of any legal proceedings); (d) settle or compromise any of the Guaranteed Obligations, any security therefor or any liability (including any of those hereunder) incurred directly or indirectly in respect thereof or hereof, and subordinate the payment of all or any part thereof to the payment of any liability (whether due or not) of the Borrower to creditors of the Borrower other than the Banks and the Guarantor; (e) apply any sums by whomsoever paid or howsoever realized to any of the Guaranteed Obligations, regardless of what liability or liabilities of the Borrower remain unpaid; and (f) amend or otherwise modify the Credit Agreement, consent to or waive any breach of, or any act, omission or default or Event of Default under the Credit Agreement, the Notes, or any agreements, instruments or documents referred to therein or executed and delivered pursuant thereto or in connection therewith, and this Guaranty shall apply to the Guaranteed Obligations as set forth in each of such documents as so amended and modified. Any such action, shall not impair or release any of the obligations of the Guarantor hereunder. 5. No invalidity, irregularity or unenforceability of all or any part of the Guaranteed Obligations or of any security therefor shall affect, impair or be a defense to this Guaranty, and this Guaranty shall be construed as a continuing, absolute and unconditional guarantee of payment without regard to the validity, regularity or enforceability of the Credit Agreement, the Notes or any of the other Guaranteed Obligations or any collateral security therefor or guaranty thereof or rights of offset with respect thereto at any time or from time to time held by the Agent or the Banks and without regard to any defense, offset or counterclaim that may at any time be available to or be asserted by the Borrower against the Agent or the Banks and that constitutes, or might be construed to constitute, an equitable or legal discharge of the Borrower for the Guaranteed Obligations or any part thereof, or of the Guarantor under this Guaranty, in bankruptcy or in any other instance. 6. Until all of the Guaranteed Obligations have been indefeasibly paid in full in cash, the Guarantor hereby irrevocably waives, for the benefit of the Banks, any and all rights that it presently has, or may hereafter have, whether by virtue of any payment or payments hereunder or otherwise, to be subrogated to the rights of the Agent or the Banks against the Borrower with respect to any such indebtedness of the Borrower to the Banks. 3 7. The Guarantor agrees to be bound by, and to comply with all of the terms, covenants and provisions of, the Credit Agreement to the extent that the same impose obligations in respect of or grant rights against it as a Guarantor or otherwise. 8. The Guarantor makes the following representations and warranties, which shall survive the execution and delivery of this Guaranty: (a) The Guarantor has examined the Credit Agreement, including the exhibits and schedules thereto, and all of the representations and warranties set forth in the Credit Agreement, to the extent the same relate to the Guarantor, are true and correct. (b) The Guarantor is a corporation, duly organized, validly existing and in good standing under the laws of Delaware. The Guarantor has all requisite power and authority, corporate or otherwise, to execute, deliver and perform this Guaranty, and has taken all necessary action, corporate or otherwise, to authorize the execution, delivery and performance of this Guaranty. This Guaranty has been duly executed and delivered and constitutes the valid and legally binding obligation of the Guarantor, enforceable in accordance with its terms, except as such enforcement may be limited by applicable bankruptcy, insolvency, reorganization or moratorium laws, now or hereafter in effect, relating to or affecting the enforcement of creditors' rights generally, and further subject to the discretion of the court in granting the remedy of specific performance and other equitable remedies. (c) No consent or approval of any Person (including, without limitation, stockholders of the Guarantor), 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, license, approval, authorization or declaration of, any governmental authority, bureau or agency, is or will be required in connection with the execution, delivery, performance, validity, enforcement or priority of this Guaranty, or any other agreements, instruments or documents to be executed or delivered pursuant hereto or thereto. (d) The execution and delivery of this Guaranty and any other agreements, instruments or documents to be executed and delivered hereunder, and performance hereunder and thereunder will not violate any provision of law, statute, rule or regulation to which the Guarantor is subject or conflict with or result in a breach of any judgment, decree, writ, injunction, ordinance, resolution, award, franchise, order, permit or other similar document or instrument of any court or governmental authority, bureau or agency, domestic or foreign, or the charter or by-laws of the Guarantor, or create (with or without the giving of notice or lapse of time, or both) a default under any agreement, bond, note or indenture to which the Guarantor is a party or by which it is bound. 9. All notices, requests, demands or other communications hereunder shall be in writing, either by letter (delivered by hand or commercial messenger service or sent by certified mail, return receipt requested) or telegram or telecopy, addressed as follows: 4 (a) if to the Guarantor: c/o LodgeNet Entertainment Corporation 808 West Avenue North Sioux Falls, South Dakota 57104 Attention: Jeffrey T. Weisner/Eric R. Jacobsen Telecopier No.: (605) 330-1323 (b) If to the Agent: National Westminster Bank Plc, as Agent 175 Water Street New York, New York 10038 Attention: Phillip Krall Telecopier No.: (212) 602-4319 with a copy to: Winston & Strawn 35 West Wacker Drive Chicago, Illinois 60601 Attention: James M. Reum Telecopier No.: (312) 558-5700 Any notice, request, demand or other communication hereunder shall be deemed to have been given on the day on which it is telecopied to such party at the telecopier number specified above or delivered by hand or by such commercial messenger service to such party at its address specified above, or, if sent by mail, on the third Business Day after the day deposited in the mail, postage prepaid, or in the case of telegraphic notice, when delivered to the telegraph company, addressed as aforesaid. The Agent or the Guarantor may change the Person, address or telecopier number to whom or which notices are to be given hereunder, by notice duly 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. 10. No delay on the part of the Agent or the Banks in exercising any of the options, powers or rights of the Agent or the Banks, and no partial or single exercise thereof, whether arising hereunder, under the Credit Agreement, the Notes, or otherwise, shall constitute a waiver thereof or affect any right hereunder. No waiver of any of such rights and no modification, amendment or discharge of this Guaranty shall be deemed to be made by the Agent or the Banks or shall be effective unless the same shall be in a writing executed and delivered in accordance with the provisions of the Credit Agreement and then such waiver shall apply only with respect to the specific instance involved and shall in no way impair the rights of the Agent or the Banks or the obligations of the Guarantor to the Agent or the Banks in any other respect at any other time. 11. THIS GUARANTY AND THE RIGHTS AND OBLIGATIONS OF THE AGENT, THE BANKS AND THE GUARANTOR HEREUNDER SHALL BE GOVERNED 5 BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO ITS RULES PERTAINING TO CONFLICTS OF LAWS. THE GUARANTOR WAIVES TRIAL BY JURY IN ANY LITIGATION IN ANY COURT WITH RESPECT TO, IN CONNECTION WITH, OR ARISING OUT OF THIS GUARANTY. IN THE EVENT THE AGENT OR THE BANKS BRING ANY ACTION OR SUIT IN ANY COURT OF RECORD IN THE STATE OF NEW YORK TO ENFORCE ANY OR ALL LIABILITIES OF THE GUARANTOR HEREUNDER, SERVICE OF PROCESS MAY BE MADE UPON THE GUARANTOR BY MAILING A COPY OF THE SUMMONS TO THE GUARANTOR BY CERTIFIED OR REGISTERED MAIL, AT THE ADDRESS SPECIFIED IN PARAGRAPH 9 HEREOF, AND THE GUARANTOR HEREBY CONSENTS TO THE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK, COUNTY OF NEW YORK, AND THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK OVER THE PERSON OF THE GUARANTOR AND HEREBY WAIVES ANY CLAIM THAT NEW YORK COUNTY OR THE SOUTHERN DISTRICT OF NEW YORK IS AN INCONVENIENT FORUM. THE GUARANTOR HEREBY WAIVES THE RIGHT TO INTERPOSE COUNTERCLAIMS OR SET-OFFS OF ANY KIND AND DESCRIPTION IN ANY SUCH ACTION OR SUIT ARISING HEREUNDER OR IN CONNECTION HEREWITH. 12. If claim is ever made upon the Agent or the Banks for repayment or recovery of any amount or amounts received by it in payment or on account of any of the Guaranteed Obligations and it repays all or part of such amount by reason of any: (a) judgment, decree or order of any court or administrative body having jurisdiction over it or any of its property, or (b) settlement or compromise of any such claim effected by it with any such claimant (including the Borrower), then, and in either such event, the Guarantor agrees that any such judgment, decree, order, settlement or compromise shall be binding upon the Guarantor, notwithstanding the cancellation of any instrument evidencing any of the Guaranteed Obligations, and the Guarantor shall be and remain liable hereunder for the amount so repaid or recovered to the same extent as if such amount had never originally been received by the Agent or the Banks, as applicable. 13. This Guaranty shall be binding upon the Guarantor and its successors and assigns, and shall inure to the benefit of the Agent and the Banks and their respective successors and assigns; PROVIDED, HOWEVER, that the Guarantor shall not be entitled to assign or delegate any of its rights or obligations under this Guaranty without the prior written consent of the Majority Banks, and any purported assignment in the absence of such consent shall be void. This Guaranty embodies the entire agreement and understanding between the Agent, on behalf of itself and the Banks, and the Guarantor relating to the subject matter hereof and supersedes all prior agreements and understandings relating to the subject matter hereof. 14. (a) The provisions of this Guaranty are severable, and in an action or proceeding involving any state, federal or applicable foreign bankruptcy, insolvency or other law affecting the rights of creditors generally: (i) If any clause or provision 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 6 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 Guaranty in any jurisdiction, or any other clause or provision in this Guaranty in any jurisdiction. (ii) If the guaranty hereunder by the Guarantor would be held or determined to be void, invalid or unenforceable on account of the amount of the Guarantor's aggregate liability under this Guaranty, then, notwithstanding any other provision of this Guaranty to the contrary, the aggregate amount of such liability shall, without any further action by any of the Agent, the Banks, the Guarantor or any other Person, be automatically limited and reduced to the highest amount that is valid and enforceable as determined in such action or proceeding, which (without limiting the generality of the foregoing) may be an amount that is not greater than the greater of: (A) the fair consideration actually received by the Guarantor under the terms of and as a result of the Credit Agreement and any and all predecessor credit agreements which the Credit Agreement amends and restates (including, without limiting the generality of the foregoing, and to the extent not inconsistent with applicable federal, state and applicable foreign laws affecting the enforceability of guaranties, investments made in, and capital contributions or advances made to, the Guarantor by the Borrower with the proceeds of any credit extended under the Credit Agreement whether or not any such investments, capital contributions or advances were direct or indirect, and the release of the Guarantor from its obligations under any other guaranty or collateral security documents, or both) in exchange for its guaranty of the Obligations; or (B) the excess of: (1) the amount of the fair saleable value of the consolidated assets of the Guarantor as of the date of this Guaranty as determined in accordance with applicable federal, state and applicable foreign laws governing determinations of the insolvency of debtors as in effect on the date hereof, over (2) the amount of all consolidated liabilities of the Guarantor as of the date of this Guaranty, also as determined on the basis of applicable federal, state and applicable foreign laws governing the insolvency of debtors as in effect on the date hereof. (b) If any other guaranty by any one or more other guarantors of the Guaranteed Obligations is held or determined to be void, invalid or unenforceable, in whole or in part, such holding or determination shall not impair or affect the validity and enforceability of: (i) the guaranty hereunder by the Guarantor, which shall continue in full force and effect in accordance with its terms; or (ii) any clause or provision not so held to be void, invalid or unenforceable. [signature page follows] 7 IN WITNESS WHEREOF, the undersigned has caused this Guaranty to be duly executed and delivered on the day and year first above written. RESNET COMMUNICATIONS, INC. By --------------------------------- Title ------------------------------ 8 EXHIBIT E GUARANTY THIS GUARANTY, made this 19th day of December, 1996 by LODGENET ENTERTAINMENT (CANADA) CORPORATION, a Canadian corporation (the "GUARANTOR"), in favor of NATIONAL WESTMINSTER BANK PLC, New York branch, as Agent, for the benefit of itself, the Issuing Banks and the Banks signatory to the hereinafter defined Credit Agreement (in such capacity, together with its successors in such capacity, the "AGENT"). W I T N E S S E T H: WHEREAS, simultaneously with the execution and delivery of this Guaranty, LodgeNet Entertainment Corporation, a Delaware corporation (the "BORROWER"), has entered into an Amended and Restated Credit Agreement dated the date hereof (such agreement, including all exhibits thereto, as it may from time to time be amended, modified or supplemented, is hereinafter referred to as the "CREDIT AGREEMENT") with the Agent and the Banks, pursuant to which the Banks have agreed to make a revolving loan and letter of credit facility available to the Borrower in the aggregate principal sum of up to One Hundred Million Dollars ($100,000,000), subject to adjustment, upon and subject to the terms and conditions of the Credit Agreement (the "FACILITY"); WHEREAS, the Guarantor will derive benefits, both directly and indirectly, from the Borrower's obtaining the Facility from the Banks pursuant to the Credit Agreement; WHEREAS, it is a condition precedent to the obligation of the Banks to make the Facility available to the Borrower that the Guarantor shall have executed and delivered this Guaranty; and WHEREAS, all capitalized terms used herein that are defined in the Credit Agreement and that are not otherwise defined herein shall have the respective meanings ascribed thereto therein, unless the context otherwise requires; if at any time no Agent shall exist under the Credit Agreement, each reference herein to the Agent shall be deemed to refer to the Majority Banks until such time as a successor Agent shall be appointed under the Credit Agreement; NOW, THEREFORE, in order to induce the Agent, the Issuing Banks and the Banks to execute and deliver the Credit Agreement and to make the Facility available to the Borrower, and in consideration of the benefits expected to accrue to the Guarantor by reason thereof, and for other good and valuable consideration, receipt of which is hereby acknowledged, the Guarantor hereby represents and warrants to, and covenants and agrees with the Agent, for the benefit of itself, the Banks and the Issuing Banks, as follows: 1. The Guarantor hereby irrevocably and unconditionally guarantees to the Agent, for the benefit of itself, the Banks and the Issuing Banks, the punctual payment of the full amount, when due (whether by demand, acceleration or otherwise), of: (a) the principal of and interest on, and fees and expenses due pursuant to, the promissory notes issued by the Borrower pursuant to the Credit Agreement (hereinafter referred to, together with any and all amendments, modifications, substitutions and/or replacements thereof and thereto, as the "NOTES"), and (b) all other Indebtedness, liabilities and obligations of the Borrower to the Banks, the Issuing Banks and the Agent, whether under the Credit Agreement or otherwise created, whether now or hereafter existing, and whether or not currently contemplated, due or to become due, direct or contingent, joint, several or independent, secured or unsecured and whether matured or unmatured (all of the Indebtedness, liabilities and obligations included in clauses (a) and (b) of this paragraph 1 are hereinafter referred to collectively as the "GUARANTEED OBLIGATIONS"); subject, however, to the provisions of subparagraph 14(a)(ii) hereof. This is a guaranty of payment and not of collection, and is the primary obligation of the Guarantor; and the Agent, on behalf of itself, the Banks and the Issuing Banks, may enforce this Guaranty against the Guarantor without any prior enforcement of the Guaranteed Obligations against the Borrower. 2. All payments made by the Guarantor under or by virtue of this Guaranty shall be paid to the Agent at its office at 175 Water Street, New York, New York 10038 or such other place as the Agent may hereafter designate in writing. The Guarantor hereby agrees to make all payments under or by virtue of this Guaranty to the Agent as aforesaid. The Agent shall not be required otherwise to establish its authority to receive any payment made under or by virtue hereof. 3. The Guarantor hereby waives notice of acceptance of this Guaranty, notice of the creation, renewal or accrual of any of the Guaranteed Obligations and notice of any other liability to which this Guaranty may apply, and notice or proof of reliance by the Agent and/or the Banks upon this Guaranty, and waives diligence, protest, notice of protest, presentment, demand of payment, notice of dishonor or nonpayment of any of the Guaranteed Obligations, suit or taking other action or making any demand against, and any other notice to the Borrower or any other party liable thereon. 4. So far as the Guarantor is concerned, the Agent, on behalf of itself, the Banks and the Issuing Banks, may, at any time and from time to time, without the consent of, or notice to the Guarantor, and without impairing or releasing any of the obligations of the Guarantor hereunder, upon or without any terms or conditions and in whole or in part: (a) modify or change the manner, place or terms of, and/or change or extend the time of payment of, renew or alter, any of the Guaranteed Obligations, any security therefor, or any liability incurred directly or indirectly in respect thereof, provided that such modification, change, extension, renewal or alteration, or the manner in which it was implemented, does not violate the provisions of the Credit Agreement, and this Guaranty shall apply to the Guaranteed Obligations as so modified, changed, extended, renewed or altered; (b) sell, exchange, release, surrender, realize upon or otherwise deal with, in any manner and in any order, any property by whomsoever at any time pledged or mortgaged to secure, or howsoever securing the Guaranteed Obligations or any liabilities (including any of those hereunder) incurred directly or indirectly in respect thereof or hereof, and/or any offset or right with respect thereto; (c) exercise or refrain from exercising any rights against the Borrower or others (including, without limitation any other guarantor of payment of the Guaranteed Obligations) or otherwise act or refrain from acting; and when making any demand hereunder against the Guarantor, the Agent, on behalf of the Banks, may, but shall be under no obligation to, make a similar demand 2 on any other guarantor of payment of the Guaranteed Obligations, and any failure by the Agent or the Banks to make any such demand or to collect any payments from, or release of any other guarantor of payment of the Guaranteed Obligations shall not relieve the Guarantor of its obligations and liabilities hereunder, and shall not release, impair or affect the rights and remedies, express or implied, or as a matter of law, of the Agent or the Banks against the Guarantor (for the purposes hereof, "demand" shall include the commencement and continuance of any legal proceedings); (d) settle or compromise any of the Guaranteed Obligations, any security therefor or any liability (including any of those hereunder) incurred directly or indirectly in respect thereof or hereof, and subordinate the payment of all or any part thereof to the payment of any liability (whether due or not) of the Borrower to creditors of the Borrower other than the Banks and the Guarantor; (e) apply any sums by whomsoever paid or howsoever realized to any of the Guaranteed Obligations, regardless of what liability or liabilities of the Borrower remain unpaid; and (f) amend or otherwise modify the Credit Agreement, consent to or waive any breach of, or any act, omission or default or Event of Default under the Credit Agreement, the Notes, or any agreements, instruments or documents referred to therein or executed and delivered pursuant thereto or in connection therewith, and this Guaranty shall apply to the Guaranteed Obligations as set forth in each of such documents as so amended and modified. Any such action, shall not impair or release any of the obligations of the Guarantor hereunder. 5. No invalidity, irregularity or unenforceability of all or any part of the Guaranteed Obligations or of any security therefor shall affect, impair or be a defense to this Guaranty, and this Guaranty shall be construed as a continuing, absolute and unconditional guarantee of payment without regard to the validity, regularity or enforceability of the Credit Agreement, the Notes or any of the other Guaranteed Obligations or any collateral security therefor or guaranty thereof or rights of offset with respect thereto at any time or from time to time held by the Agent or the Banks and without regard to any defense, offset or counterclaim that may at any time be available to or be asserted by the Borrower against the Agent or the Banks and that constitutes, or might be construed to constitute, an equitable or legal discharge of the Borrower for the Guaranteed Obligations or any part thereof, or of the Guarantor under this Guaranty, in bankruptcy or in any other instance. 6. Until all of the Guaranteed Obligations have been indefeasibly paid in full in cash, the Guarantor hereby irrevocably waives, for the benefit of the Banks, any and all rights that it presently has, or may hereafter have, whether by virtue of any payment or payments hereunder or otherwise, to be subrogated to the rights of the Agent or the Banks against the Borrower with respect to any such indebtedness of the Borrower to the Banks. 7. The Guarantor agrees to be bound by, and to comply with all of the terms, covenants and provisions of, the Credit Agreement to the extent that the same impose obligations in respect of or grant rights against it as a Guarantor or otherwise. 8. The Guarantor makes the following representations and warranties, which shall survive the execution and delivery of this Guaranty: 3 (a) The Guarantor has examined the Credit Agreement, including the exhibits and schedules thereto, and all of the representations and warranties set forth in the Credit Agreement, to the extent the same relate to the Guarantor, are true and correct. (b) The Guarantor is a corporation, duly organized, validly existing and in good standing under the laws of Canada. The Guarantor has all requisite power and authority, corporate or otherwise, to execute, deliver and perform this Guaranty, and has taken all necessary action, corporate or otherwise, to authorize the execution, delivery and performance of this Guaranty. This Guaranty has been duly executed and delivered and constitutes the valid and legally binding obligation of the Guarantor, enforceable in accordance with its terms, except as such enforcement may be limited by applicable bankruptcy, insolvency, reorganization or moratorium laws, now or hereafter in effect, relating to or affecting the enforcement of creditors' rights generally, and further subject to the discretion of the court in granting the remedy of specific performance and other equitable remedies. (c) No consent or approval of any Person (including, without limitation, stockholders of the Guarantor), 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, license, approval, authorization or declaration of, any governmental authority, bureau or agency, is or will be required in connection with the execution, delivery, performance, validity, enforcement or priority of this Guaranty, or any other agreements, instruments or documents to be executed or delivered pursuant hereto or thereto. (d) The execution and delivery of this Guaranty and any other agreements, instruments or documents to be executed and delivered hereunder, and performance hereunder and thereunder will not violate any provision of law, statute, rule or regulation to which the Guarantor is subject or conflict with or result in a breach of any judgment, decree, writ, injunction, ordinance, resolution, award, franchise, order, permit or other similar document or instrument of any court or governmental authority, bureau or agency, domestic or foreign, or the charter or by-laws of the Guarantor, or create (with or without the giving of notice or lapse of time, or both) a default under any agreement, bond, note or indenture to which the Guarantor is a party or by which it is bound. 9. All notices, requests, demands or other communications hereunder shall be in writing, either by letter (delivered by hand or commercial messenger service or sent by certified mail, return receipt requested) or telegram or telecopy, addressed as follows: (a) if to the Guarantor: c/o LodgeNet Entertainment Corporation 808 West Avenue North Sioux Falls, South Dakota 57104 Attention: Jeffrey T. Weisner/Eric R. Jacobsen Telecopier No.: (605) 330-1323 4 (b) If to the Agent: National Westminster Bank Plc, as Agent 175 Water Street New York, New York 10038 Attention: Phillip Krall Telecopier No.: (212) 602-4319 with a copy to: Winston & Strawn 35 West Wacker Drive Chicago, Illinois 60601 Attention: James M. Reum Telecopier No.: (312) 558-5700 Any notice, request, demand or other communication hereunder shall be deemed to have been given on the day on which it is telecopied to such party at the telecopier number specified above or delivered by hand or by such commercial messenger service to such party at its address specified above, or, if sent by mail, on the third Business Day after the day deposited in the mail, postage prepaid, or in the case of telegraphic notice, when delivered to the telegraph company, addressed as aforesaid. The Agent or the Guarantor may change the Person, address or telecopier number to whom or which notices are to be given hereunder, by notice duly 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. 10. No delay on the part of the Agent or the Banks in exercising any of the options, powers or rights of the Agent or the Banks, and no partial or single exercise thereof, whether arising hereunder, under the Credit Agreement, the Notes, or otherwise, shall constitute a waiver thereof or affect any right hereunder. No waiver of any of such rights and no modification, amendment or discharge of this Guaranty shall be deemed to be made by the Agent or the Banks or shall be effective unless the same shall be in a writing executed and delivered in accordance with the provisions of the Credit Agreement and then such waiver shall apply only with respect to the specific instance involved and shall in no way impair the rights of the Agent or the Banks or the obligations of the Guarantor to the Agent or the Banks in any other respect at any other time. 11. THIS GUARANTY AND THE RIGHTS AND OBLIGATIONS OF THE AGENT, THE BANKS AND THE GUARANTOR HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO ITS RULES PERTAINING TO CONFLICTS OF LAWS. THE GUARANTOR WAIVES TRIAL BY JURY IN ANY LITIGATION IN ANY COURT WITH RESPECT TO, IN CONNECTION WITH, OR ARISING OUT OF THIS GUARANTY. IN THE EVENT THE AGENT OR THE BANKS BRING ANY ACTION OR SUIT IN ANY COURT OF RECORD IN THE STATE OF NEW YORK TO ENFORCE ANY OR ALL LIABILITIES OF THE GUARANTOR HEREUNDER, SERVICE OF PROCESS MAY BE MADE UPON THE GUARANTOR BY MAILING A 5 COPY OF THE SUMMONS TO THE GUARANTOR BY CERTIFIED OR REGISTERED MAIL, AT THE ADDRESS SPECIFIED IN PARAGRAPH 9 HEREOF, AND THE GUARANTOR HEREBY CONSENTS TO THE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK, COUNTY OF NEW YORK, AND THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK OVER THE PERSON OF THE GUARANTOR AND HEREBY WAIVES ANY CLAIM THAT NEW YORK COUNTY OR THE SOUTHERN DISTRICT OF NEW YORK IS AN INCONVENIENT FORUM. THE GUARANTOR HEREBY WAIVES THE RIGHT TO INTERPOSE COUNTERCLAIMS OR SET-OFFS OF ANY KIND AND DESCRIPTION IN ANY SUCH ACTION OR SUIT ARISING HEREUNDER OR IN CONNECTION HEREWITH. 12. If claim is ever made upon the Agent or the Banks for repayment or recovery of any amount or amounts received by it in payment or on account of any of the Guaranteed Obligations and it repays all or part of such amount by reason of any: (a) judgment, decree or order of any court or administrative body having jurisdiction over it or any of its property, or (b) settlement or compromise of any such claim effected by it with any such claimant (including the Borrower), then, and in either such event, the Guarantor agrees that any such judgment, decree, order, settlement or compromise shall be binding upon the Guarantor, notwithstanding the cancellation of any instrument evidencing any of the Guaranteed Obligations, and the Guarantor shall be and remain liable hereunder for the amount so repaid or recovered to the same extent as if such amount had never originally been received by the Agent or the Banks, as applicable. 13. This Guaranty shall be binding upon the Guarantor and its successors and assigns, and shall inure to the benefit of the Agent and the Banks and their respective successors and assigns; PROVIDED, HOWEVER, that the Guarantor shall not be entitled to assign or delegate any of its rights or obligations under this Guaranty without the prior written consent of the Majority Banks, and any purported assignment in the absence of such consent shall be void. This Guaranty embodies the entire agreement and understanding between the Agent, on behalf of itself and the Banks, and the Guarantor relating to the subject matter hereof and supersedes all prior agreements and understandings relating to the subject matter hereof. 14. (a) The provisions of this Guaranty are severable, and in an action or proceeding involving any state, federal or applicable foreign bankruptcy, insolvency or other law affecting the rights of creditors generally: (i) If any clause or provision 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 Guaranty in any jurisdiction, or any other clause or provision in this Guaranty in any jurisdiction. (ii) If the guaranty hereunder by the Guarantor would be held or determined to be void, invalid or unenforceable on account of the amount of the Guarantor's aggregate liability under this Guaranty, then, notwithstanding any other provision of this Guaranty to the contrary, the aggregate amount of such liability shall, without any further action by any of the Agent, the Banks, 6 the Guarantor or any other Person, be automatically limited and reduced to the highest amount that is valid and enforceable as determined in such action or proceeding, which (without limiting the generality of the foregoing) may be an amount that is not greater than the greater of: (A) the fair consideration actually received by the Guarantor under the terms of and as a result of the Credit Agreement and any and all predecessor credit agreements which the Credit Agreement amends and restates (including, without limiting the generality of the foregoing, and to the extent not inconsistent with applicable federal, state and applicable foreign laws affecting the enforceability of guaranties, investments made in, and capital contributions or advances made to, the Guarantor by the Borrower with the proceeds of any credit extended under the Credit Agreement whether or not any such investments, capital contributions or advances were direct or indirect, and the release of the Guarantor from its obligations under any other guaranty or collateral security documents, or both) in exchange for its guaranty of the Obligations; or (B) the excess of: (1) the amount of the fair saleable value of the consolidated assets of the Guarantor as of the date of this Guaranty as determined in accordance with applicable federal, state and applicable foreign laws governing determinations of the insolvency of debtors as in effect on the date hereof, over (2) the amount of all consolidated liabilities of the Guarantor as of the date of this Guaranty, also as determined on the basis of applicable federal, state and applicable foreign laws governing the insolvency of debtors as in effect on the date hereof. (b) If any other guaranty by any one or more other guarantors of the Guaranteed Obligations is held or determined to be void, invalid or unenforceable, in whole or in part, such holding or determination shall not impair or affect the validity and enforceability of: (i) the guaranty hereunder by the Guarantor, which shall continue in full force and effect in accordance with its terms; or (ii) any clause or provision not so held to be void, invalid or unenforceable. [signature page follows] 7 IN WITNESS WHEREOF, the undersigned has caused this Guaranty to be duly executed and delivered on the day and year first above written. LODGENET ENTERTAINMENT (CANADA) CORPORATION By: --------------------------------- Title: ------------------------------ 8 EXHIBIT F SECURITY AGREEMENT This SECURITY AGREEMENT (this "AGREEMENT"), dated as of December 19, 1996, is made between NATIONAL WESTMINSTER BANK PLC, a United Kingdom public limited company, as agent for the Banks and the Issuing Banks (as defined below) (in such capacity, and together with its successors as agent for the Banks and the Issuing Banks, the "AGENT"), LODGENET ENTERTAINMENT CORPORATION, a Delaware corporation (the "BORROWER"), RESNET COMMUNICATIONS, INC., a Delaware corporation ("RESNET"), LODGENET ENTERTAINMENT (CANADA) CORPORATION, a Canadian corporation ("LODGENET CANADA", and collectively with the Borrower and ResNet, the "GRANTORS", and each individually, a "GRANTOR"). RECITALS WHEREAS, reference is hereby made to that certain Amended and Restated Credit Agreement dated as of December 19, 1996 by and among the Borrower, the several financial institutions from time to time party thereto (the "BANKS"), the Agent (also in its capacity as an Issuing Bank and Bank), and National Westminster Bank of Canada, as an Issuing Bank (as amended, restated, modified, renewed, supplemented or extended from time to time, the "CREDIT AGREEMENT"). WHEREAS, it is a condition precedent to each Bank's obligation to make its initial Loan under the Credit Agreement and for the Issuing Banks to issue letters of credit that the Borrower enter into this Agreement and grant to the Agent, for the benefit of itself, the Banks and the Issuing Banks, the security interests hereinafter provided to secure the obligations of the Borrower described below. WHEREAS, ResNet and LodgeNet Canada each is a direct or indirect subsidiary of the Company and will derive substantial and direct benefits (which benefits are hereby acknowledged by each such Grantor) from the Loans and the letters of credit and other benefits to be provided to the Borrower under the Credit Agreement. WHEREAS, in order to secure the performance of the obligations of the Borrower under the Credit Agreement and the other Loan Documents, ResNet and LodgeNet Canada have executed those certain guaranties dated the date hereof (as amended, restated, supplemented or otherwise modified from time to time, the "GUARANTIES"). WHEREAS, it is a condition precedent to each Bank's obligation to make its initial Loan under the Credit Agreement and for the Issuing Banks to issue letters of credit that ResNet and LodgeNet Canada enter into this Agreement and grant to the Agent, for the benefit of itself, the Banks and the Issuing Banks, the security interests hereinafter provided to secure the obligations of Grantors and the Borrower described below. Accordingly, the parties hereto agree as follows: SECTION 1 DEFINITIONS; INTERPRETATION. (a) TERMS DEFINED IN CREDIT AGREEMENT. All capitalized terms used in this Agreement and not otherwise defined herein have the meanings specified in the Credit Agreement. (b) CERTAIN DEFINED TERMS. As used in this Agreement, the following terms have the following meanings: "ACCOUNTS" means any and all "accounts," as such term is defined in the UCC, whether now existing or hereafter arising or acquired by any Grantor, and in any event includes all accounts receivable, contract rights, rights to payment and other obligations of any kind owed to such Grantor arising out of or in connection with the sale or lease of merchandise, goods or commodities or the rendering of services or arising from any other transaction, however evidenced, and whether or not earned by performance, all guaranties, indemnities and security with respect to the foregoing, and all letters of credit relating thereto, in each case whether now existing or hereafter acquired or arising. "BANK PARTY" means, as the context may require, any Bank (including any Bank in its capacity as a counterparty to an Interest Rate Contract or currency hedging agreement), any Issuing Bank or the Agent, and each of their respective successors, transferees or assigns. "BOOKS" means all books, records and other written, electronic or other documentation in whatever form maintained now or hereafter by or for any Grantor in connection with the ownership of its assets or the conduct of its business or evidencing or containing information relating to the Collateral, including: (i) ledgers; (ii) records indicating, summarizing, or evidencing such Grantor's assets (including Inventory and Rights to Payment), business operations or financial condition; (iii) computer programs and software; (iv) computer discs, tapes, files, manuals, spreadsheets; (v) computer printouts and output of whatever kind; (vi) any other computer prepared or electronically stored, collected or reported information and equipment of any kind; and (vii) any and all other rights now or hereafter arising out of any contract or agreement between such Grantor and any service bureau, computer or data processing company or other Person charged with preparing or maintaining any of such Grantor's books or records or with credit reporting, including with regard to such Grantor's Accounts. "CHATTEL PAPER" means any "chattel paper," as such term is defined in the UCC, whether now existing or hereafter arising or acquired by any Grantor. "COLLATERAL" has the meaning specified in Section 2. "CONTRACTS" means all the contracts, undertakings or agreements (other than rights evidenced by Chattel Paper, Documents or Instruments) in or under which any Person may now or hereafter have any right, title or interest, including any agreement relating to the terms of payment or the terms of performance of any Accounts, and including, without limitation, all of each Grantor's -2- right, title and interest in, to and under all of its Leases, contracts, permits, licenses (to the extent permitted by applicable law or regulation), franchises, certificates and other agreements including, without limitation, all film and program license agreements, agreements for the provision of management, engineering or other similar services and agreements relating to the provision of video on-demand, network-based video games, basic and premium cable television programming and other interactive multimedia entertainment and information services. "DEPOSIT ACCOUNT" means any demand, time, savings, passbook or like account now or hereafter maintained by or for the benefit of any Grantor with a bank, savings and loan association, credit union or like organization (including the Agent) and all funds and amounts therein, whether or not restricted or designated for a particular purpose. "DOCUMENTS" means any and all "documents," as such term is defined in the UCC, including without limitation all documents of title, bills of lading, dock warrants, dock receipts, warehouse receipts and other documents of any Grantor, whether or not negotiable, and includes all other documents which purport to be issued by a bailee or agent and purport to cover goods in any bailee's or agent's possession which are either identified or are fungible portions of an identified mass, including such documents of title made available to such Grantor for the purpose of ultimate sale or exchange of goods or for the purpose of loading, unloading, storing, shipping, transshipping, manufacturing, processing or otherwise dealing with goods in a manner preliminary to their sale or exchange, in each case whether now existing or hereafter acquired or arising. "EQUIPMENT" means all "equipment," as such term is defined in the UCC (other than automobiles, trucks, tractors, rolling stock and other vehicles), whether now existing or hereafter acquired by any Grantor in all of its forms, wherever located, and in any event includes any and all machinery, furniture, equipment, furnishings and fixtures in which such Grantor now or hereafter acquires any right, and all other goods and tangible personal property (other than Inventory), including tools, parts and supplies, computer and other electronic data processing equipment and other office equipment, computer programs and related data processing software, and all additions, substitutions, replacements, parts, accessories, and accessions to and for the foregoing, now owned or hereafter acquired, and including any of the foregoing which are or are to become fixtures on real property. "FINANCING STATEMENTS" has the meaning specified in Section 3. "FIXTURES" shall mean any "fixtures" as such term is defined in the UCC, whether now owned or hereafter acquired by any Grantor. "GENERAL INTANGIBLES" means any "general intangibles," as such term is defined in the UCC, whether now existing or hereafter arising or acquired by any Grantor, and in any event includes: (i) all tax and other refunds, rebates or credits of every kind and nature to which such Grantor is now or hereafter may become entitled; (ii) all goodwill, choses in action and causes of action, whether legal or equitable, whether in contract or tort and however arising; (iii) all Intellectual Property Collateral; (iv) all uncertificated securities and interests in limited and general partnerships; (v) all rights of stoppage in transit, replevin and reclamation; (vi) all licenses, permits, -3- consents, indulgences and rights of whatever kind issued in favor of or otherwise recognized as belonging to such Grantor by any Governmental Authority; and (vii) all indemnity agreements, guaranties, insurance policies and other contractual, equitable and legal rights of whatever kind or nature; in each case whether now existing or hereafter acquired or arising. "INSTRUMENTS" means any and all negotiable instruments, certificated securities and every other writing which evidences a right to the payment of money, in each case whether now existing or hereafter acquired by any Grantor. "INTELLECTUAL PROPERTY COLLATERAL" means the following properties and assets owned or held by any Grantor or in which such Grantor otherwise has any interest, now existing or hereafter acquired or arising: (i) all patents and patent applications, domestic or foreign, all licenses relating to any of the foregoing and all income and royalties with respect to any licenses (including without limitation such patents, patent applications and patent licenses as described in SCHEDULE E), present or future infringement thereof, all rights arising therefrom and pertaining thereto and all reissues, divisions, continuations, renewals, extensions and continuations-in-part thereof; (ii) all copyrights and applications for copyright, domestic or foreign, together with the underlying works of authorship (including titles), whether or not the underlying works of authorship have been published and whether said copyrights are statutory or arise under the common law, and all other rights and works of authorship, all rights, claims and demands in any way relating to any such copyrights or works, including royalties and rights to sue for past, present or future infringement, and all rights of renewal and extension of copyright; (iii) all state (including common law), federal and foreign trademarks, service marks and trade names, and applications for registration of such trademarks, service marks and trade names, all licenses relating to any of the foregoing and all income and royalties with respect to any licenses (including without limitation such marks, names, applications and licenses as described in SCHEDULE E), whether registered or unregistered and wherever registered, all rights to sue for past, present or future infringement or unconsented use thereof, all rights arising therefrom and pertaining thereto and all reissues, extensions and renewals thereof; (iv) all trade secrets, confidential information, customer lists, license rights, advertising materials, operating manuals, methods, processes, know-how, sales literature, drawings, specifications, blue prints, descriptions, inventions, name plates and catalogs; and (v) the entire goodwill of or associated with the businesses now or hereafter conducted by such Grantor connected with and symbolized by any of the aforementioned properties and assets. "INVENTORY" means any "inventory," as such term is defined in the UCC, wherever located, whether now owned or hereafter acquired by any Grantor, and in any event includes all goods (including goods in transit) which are held for sale, lease or other disposition, including those -4- held for display or demonstration or out on lease or consignment or to be furnished under a contract of service, or which are raw materials, work in process, finished goods or materials used or consumed in such Grantor's business, and the resulting product or mass, and all repossessed, returned, rejected, reclaimed and replevied goods, together with all parts, components, supplies, packing and other materials used or usable in connection with the manufacture, production, packing, shipping, advertising, selling or furnishing of such goods; and all other items hereafter acquired by such Grantor by way of substitution, replacement, return, repossession or otherwise, and all additions and accessions thereto, and any Document representing or relating to any of the foregoing at any time. "INVESTMENT PROPERTY" shall have the meaning ascribed thereto in Section 9-115 of the UCC in those jurisdictions in which such definition has been adopted and shall include without limitation (i) all securities, whether certificated or uncertificated, stocks, bonds, interests in limited liability companies, partnership interests, treasuries, certificates of deposit, and mutual fund shares; (ii) all securities entitlements of any Grantor including without limitation, the rights of such Grantor to any securities account of such Grantor and financial assets held by a securities intermediary in such securities account and any fee, credit balance or other money owing by any securities intermediary with respect to that account; (iii) all securities accounts held by any Grantor; (iv) all commodity contracts held by any Grantor and (v) all commodity accounts held by any Grantor. "PROCEEDS" means "proceeds," as such term is defined in the UCC, and in any event, includes whatever is receivable or received from or upon the sale, lease, license, collection, use, exchange or other disposition, whether voluntary or involuntary, of any Collateral or other assets of any Grantor, any and all proceeds of any insurance, indemnity, warranty or guaranty payable to or for the account of such Grantor from time to time with respect to any of the Collateral, any and all payments (in any form whatsoever) made or due and payable to such Grantor from time to time in connection with any requisition, confiscation, condemnation, seizure or forfeiture of all or any part of the Collateral by any governmental authority (or any Person acting under color of governmental authority), any and all other amounts from time to time paid or payable under or in connection with any of the Collateral or for or on account of any damage or injury to or conversion of any Collateral by any Person, any and all other tangible or intangible property received upon the sale or disposition of Collateral, and all proceeds of proceeds. "RIGHTS TO PAYMENT" means all Accounts, and any and all rights and claims to the payment or receipt of money or other forms of consideration of any kind in, to and under all Contracts, Chattel Paper, Documents, General Intangibles, Instruments and Proceeds. "SECURED OBLIGATIONS" means all Obligations of the Borrower under the Credit Agreement and all obligations of ResNet and LodgeNet Canada under the Guaranties and all obligations of each Grantor under each other Loan Document to which any Grantor is or may become a party, whether for principal, interest, costs, fees, expenses, indemnities or otherwise, and all obligations of each Grantor existing under this Agreement, in each case whether now existing or hereafter arising, and whether due or to become due, absolute or contingent, liquidated or unliquidated, determined or undetermined. -5- "UCC" means the Uniform Commercial Code as the same may, from time to time, be in effect in the State of New York; PROVIDED, HOWEVER, in the event that, by reason of mandatory provisions of law, any or all of the attachment, perfection or priority of the security interest in any Collateral is governed by the Uniform Commercial Code as in effect in a jurisdiction other than the State of New York or by the Personal Property Security Act (the "PPSA") as in effect in the Canadian provinces of Ontario or British Columbia, the term "UCC" shall mean the Uniform Commercial Code or the PPSA as in effect in such other jurisdiction for purposes of the provisions hereof relating to such attachment, perfection or priority and for purposes of definitions related to such provisions. (c) TERMS DEFINED IN UCC. Where applicable and except as otherwise defined herein, terms used in this Agreement shall have the meanings assigned to them in the UCC or, if not defined in the UCC, such terms shall have the meanings assigned to them in the UCC in effect in the State of New York. (d) AFFILIATES OF BANKS AS SECURED PARTIES. Notwithstanding anything herein to the contrary, the pledge and security interests granted hereby shall be deemed to be for the benefit of the Bank Parties and Affiliates of the Banks that are parties to Interest Rate Contracts and currency hedging agreements with the Company, and accordingly, references herein to any Bank shall, to such extent, be deemed to include such Affiliates. SECTION 2 SECURITY INTEREST. (a) GRANT OF SECURITY INTEREST. As security for the payment and performance of the Secured Obligations, and to induce the Agent and the Banks to enter into the Credit Agreement and to make the Loans as provided therein and for the Issuing Banks to issue the letters of credit in accordance with the terms and conditions thereof, each Grantor hereby grants, pledges, assigns, transfers, hypothecates and sets over to the Agent, for the benefit of itself, the Banks and the Issuing Banks, a security interest in all of such Grantor's right, title and interest in, to and under the following property, wherever located and whether now existing or owned or hereafter acquired or arising (collectively, the "COLLATERAL"): (i) all Accounts; (ii) all Chattel Paper; (iii) all Deposit Accounts; (iv) all Documents; (v) all Contracts and General Intangibles; (vi) all Instruments; (vii) all Books;(viii) all Fixtures;(ix) all Investment Property;(x) all Equipment;(xi) all Inventory; (xii) all money, cash or cash equivalents; and (xiii) all products and Proceeds of any and all of the foregoing. (b) GRANTOR REMAINS LIABLE. Anything herein to the contrary notwithstanding, (i) each Grantor shall remain liable under any Contracts, agreements and other documents included in the Collateral, to the extent set forth therein, to perform all of its duties and obligations thereunder to the same extent as if this Agreement had not been executed, (ii) the exercise by the Agent of any of the rights hereunder shall not release any Grantor from any of its duties or obligations under such contracts, agreements and other documents included in the Collateral, and (iii) neither the Agent nor any other Bank Party shall have any obligation or liability under any Contracts, agreements and other documents included in the Collateral by reason of this Agreement, nor shall the Agent or any other Bank Party be obligated to perform any of the obligations or duties of any Grantor thereunder -6- or to take any action to collect or enforce any such contract, agreement or other document included in the Collateral hereunder. (c) CONTINUING SECURITY INTEREST. Each Grantor agrees that this Agreement shall create a continuing security interest in the Collateral which shall remain in effect until terminated in accordance with Section 25. SECTION 3 FINANCING STATEMENTS, ETC. Each Grantor shall execute and deliver to the Agent concurrently with the execution of this Agreement, and at any time and from time to time thereafter, all financing statements, continuation financing statements, termination statements, security agreements, chattel mortgages, assignments, patent, copyright and trademark collateral assignments, fixture filings, blocked account agreements, warehouse receipts, documents of title, affidavits, reports, notices, schedules of account, letters of authority and all other documents and instruments, in form satisfactory to the Agent (the "FINANCING STATEMENTS"), and take all other action, as may be necessary or as the Agent may reasonably request, to perfect and continue perfected, maintain the priority of or provide notice of the Agent's security interest in the Collateral and to accomplish the purposes of this Agreement. SECTION 4 REPRESENTATIONS AND WARRANTIES. In addition to and not in limitation of the representations and warranties of any Grantor set forth in any other Loan Document which such Grantor is a party to, each Grantor represents and warrants to the Agent that: (a) LOCATION OF CHIEF EXECUTIVE OFFICE AND COLLATERAL. Each Grantor's chief executive office, corporate office and principal place of business is located at the address set forth in SCHEDULE A, and all other locations where such Grantor conducts business or Collateral is kept are set forth in SCHEDULE A. (b) LOCATIONS OF BOOKS. All locations where Books pertaining to the Rights to Payment are kept, including all equipment necessary for accessing such Books and the names and addresses of all service bureaus, computer or data processing companies and other Persons keeping any Books or collecting Rights to Payment for any Grantor, are set forth in SCHEDULE B. (c) TRADE NAMES AND TRADE STYLES. All trade names and trade styles under which each Grantor presently conducts its business operations are set forth in SCHEDULE C, and, except as set forth in SCHEDULE C, such Grantor has not, at any time during the preceding five (5) years: (i) been known as or used any other corporate, trade or fictitious name; (ii) changed its name; (iii) been the surviving or resulting corporation in a merger or consolidation; or (iv) acquired through asset purchase or otherwise any business of any Person. (d) OWNERSHIP OF COLLATERAL. Each Grantor is, and, except as permitted by Section 5(i), will continue to be, the legal and beneficial owner of the Collateral (or, in the case of after-acquired Collateral, at the time such Grantor acquires rights in such Collateral, will be the legal and beneficial owner thereof), and has good, indefeasible and merchantable title to the Collateral free and clear of any and all Liens other than Permitted Liens. -7- (e) ENFORCEABILITY; PRIORITY OF SECURITY INTEREST. (i) This Agreement creates a valid and continuing security interest which is enforceable against the Collateral in which each Grantor now has rights and will create a security interest which is enforceable against the Collateral in which such Grantor hereafter acquires rights at the time such Grantor acquires any such rights; and (ii) subject to Permitted Liens, the Agent has a perfected and first priority security interest in the Collateral in which each Grantor now has rights, and will have a perfected and first priority security interest in the Collateral in which such Grantor hereafter acquires rights at the time such Grantor acquires any such rights, in each case for the Agent's own benefit, the Banks and the Issuing Banks, and in each case securing the payment and performance of the Secured Obligations. All action necessary or desirable to protect and perfect such security interest in the existing Collateral has been duly taken. (f) OTHER FINANCING STATEMENTS. Other than (i) financing statements or similar filings naming the owner of the asset to which such lien relates as debtor, under the UCC or any comparable law ("UCC FINANCING STATEMENTS") disclosed to the Agent and filed in connection with the Permitted Liens and (ii) UCC Financing Statements in favor of the Agent in its capacity as Agent for the benefit of itself, the Banks and the Issuing Banks under the Credit Agreement and any other Loan Documents, no effective UCC Financing Statement naming any Grantor as debtor, assignor, grantor, mortgagor, pledgor or the like and covering all or any part of the Collateral is on file in any filing or recording office in any jurisdiction. (g) RIGHTS TO PAYMENT. (i) The Rights to Payment represent valid, binding and enforceable obligations of the account debtors or other Persons obligated thereon, representing undisputed, bona fide transactions completed in accordance with the terms and provisions contained in any documents related thereto, and are and will be genuine, free from Liens other than Permitted Liens, and not subject to any adverse claims, counterclaims, setoffs, defaults, disputes, defenses, discounts, retainages, holdbacks or conditions precedent of any kind of character, except to the extent permitted under the Credit Agreement or to the extent, if any, that such account debtors or other Persons may be entitled to normal and ordinary course trade discounts, returns, adjustments and allowances in accordance with Section 5(n), or as otherwise disclosed to the Agent in writing; (ii) no Grantor has assigned any of its rights under the Rights to Payment except as provided in this Agreement or as set forth in the Credit Agreement or other Loan Documents; and (iii) no Grantor has knowledge of any fact or circumstance which would impair the validity or collectibility of any of the Rights to Payment. (h) CONTRACTS. The Contracts to which such Grantor is a party included in the Collateral constitute valid and legally binding obligations of such Grantor and, to the best of such Grantor's knowledge, the other parties thereto enforceable in accordance with their terms. (i) INVENTORY. With respect to any Inventory in which the Agent is granted a security interest pursuant to the terms of this Agreement, (i) such Inventory is located at the locations set forth on SCHEDULE A hereto, (ii) no Inventory is now, or shall at any time or times hereafter be stored with a bailee, warehouseman or similar party (except as disclosed on SCHEDULE -8- D) without the Agent's prior written consent, and if the Agent gives such written consent, the applicable Grantor will concurrently therewith at the Agent's reasonable request use its best efforts to cause any such bailee, warehouseman or similar party to issue and deliver to the Agent in form and substance acceptable to the Agent, warehouse receipts therefor in the Agent's name, (iii) such Inventory is of good and merchantable quality, free from any defects, (iv) such Inventory is not subject to any licensing, patent, royalty, trademark, trade name or copyright agreements with any third parties which would require any consent of any third party upon sale or disposition of that Inventory or the payment of any monies to any third party as a precondition of such sale or other disposition, and (v) the completion of manufacture, sale or other disposition of such Inventory by the Agent following an Event of Default will not require the consent of any Person and will not constitute a breach or default under any contract or agreement to which any Grantor is a party or to which such Inventory is subject. (j) INTELLECTUAL PROPERTY. (i) Except as set forth in SCHEDULE E, each Grantor does not own, possess or use under any licensing arrangement any patents, copyrights, trademarks, service marks or trade names, nor is there currently pending before any governmental authority any application for registration of any patent, copyright, trademark, service mark or trade name; (ii) all patents, copyrights, trademarks, service marks and trade names are subsisting and none have been adjudged invalid or unenforceable in whole or in part; (iii) all maintenance fees required to be paid on account of any patents have been timely paid for maintaining such patents in force, and, to each Grantor's knowledge, each of the patents is valid and enforceable; (iv) to each Grantor's knowledge after due inquiry, no material infringement or unauthorized use presently is being made of any Intellectual Property Collateral by any Person; (v) each Grantor is the sole and exclusive owner of the Intellectual Property Collateral identified on SCHEDULE E (other than Intellectual Property Collateral licensed by such Grantor) and the past, present and contemplated future use of such Intellectual Property Collateral by such Grantor has not, does not and will not infringe or violate any right, privilege or license agreement of or with any other Person; and (vi) each Grantor either owns, has material rights under, is a party to, or an assignee of a party to all material licenses, patents, patent applications, copyrights, service marks, trademarks, trademark applications, trade names and all other Intellectual Property Collateral necessary to continue to conduct its business as heretofore conducted. (k) EQUIPMENT. None of the Equipment or other Collateral is affixed to real property, except Collateral with respect to which each Grantor has supplied the Agent with all information and documentation necessary to make all fixture filings required to perfect and protect the priority of the Agent's security interest in all such Collateral which may be fixtures as against all Persons having an interest in the premises to which such property may be affixed. -9- (l) DEPOSIT ACCOUNTS. The names and addresses of all financial institutions at which each Grantor maintains its Deposit Accounts, and the account numbers and account names of such Deposit Accounts, are set forth in SCHEDULE F. (m) CHATTEL PAPER AND INSTRUMENTS. All action necessary to protect and perfect the security interest of the Agent in all Instruments and Chattel Paper (including the delivery of all originals thereof to the Agent and the legending of all Chattel Paper) has been duly taken. (n) CORPORATE EXISTENCE AND POWER. Each Grantor (i) is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation; (ii) has the power and authority to own its assets, carry on its business, and execute, deliver, and perform its obligations under this Agreement and any other Loan Document to which it is a party; (iii) is duly qualified as a foreign corporation, and licensed and in good standing, under the laws of each jurisdiction where its ownership, lease or operation of property or the conduct of its business requires such qualification or license except where the failure to be so qualified or licensed will not have a Material Adverse Effect; (iv) has all necessary governmental licenses, authorizations, consents and approvals to own its assets and carry on its business, and in all material respects is in compliance with all applicable requirements of law. (o) CORPORATE AUTHORIZATION; NO CONTRAVENTION. The execution, delivery and performance by each Grantor of this Agreement and each other Loan Document to which it is a party, have been duly authorized by all necessary corporate action, and do not and will not: (i) contravene the terms of any of such Grantor's charter documents; (ii) conflict with or result in any breach or contravention of, or the creation of any Lien under, any document evidencing any contractual obligation to which such Grantor is a party or any order, injunction, writ or decree of any governmental authority to which such Grantor or its property is subject; or (iii) violate any requirement of law. (p) GOVERNMENTAL AUTHORIZATION. No approval, consent, exemption, authorization, or other action by, or notice to, or filing with, any governmental authority (except for the filing of the Financing Statements) is necessary or required in connection with the execution, delivery or performance by, or enforcement against, each Grantor of this Agreement or any other Loan Document to which it is a party or the transactions contemplated hereby or thereby. (q) This Agreement constitutes the legal, valid and binding obligation of each Grantor enforceable against such Grantor in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, or similar laws affecting the enforcement of creditors' rights generally or by equitable principles relating to enforceability. SECTION 5 COVENANTS. In addition to and not in limitation of the covenants of each Grantor set forth in any other Loan Document which such Grantor is a party to, which are incorporated herein by reference, so long as any of the Secured Obligations remain unsatisfied or any Bank shall have outstanding any Commitment or any Loan, or any letter of credit shall be outstanding and not cash collateralized, or any Bank shall be a counterparty to any Interest Rate Contract or currency hedging agreement with the Borrower, each Grantor agrees that: -10- (a) DEFENSE OF COLLATERAL. Each Grantor will defend the Collateral against all claims and demands of all Persons at any time claiming the same or any interest therein adverse to the Agent. (b) PRESERVATION OF COLLATERAL. Each Grantor shall maintain, preserve and protect the Collateral which is used or useful in its business in good working order and condition, ordinary wear and tear excepted and make all necessary repairs thereto and remedies and replacements thereof except where the failure to do so could not reasonably be expected to have a Material Adverse Effect, except as permitted by the Credit Agreement. (c) COMPLIANCE WITH LAWS, ETC. Each Grantor will comply in all material respects with all requirements of law of any governmental authority having jurisdiction over it or its business (including the Federal Fair Labor Standards Act) relating in a material way to the possession, operation, maintenance and control of the Collateral, except such as may be contested in good faith or as to which a bona fide dispute may exist. (d) LOCATION OF BOOKS AND CHIEF EXECUTIVE OFFICE. Each Grantor will: (i) keep all Books pertaining to the Rights to Payment at the locations set forth in SCHEDULE B; and (ii) give at least thirty (30) days' prior written notice to the Agent of (A) any changes in any such location where Books pertaining to the Rights to Payment are kept, including any change of name or address of any service bureau, computer or data processing company or other Person preparing or maintaining any Books or collecting Rights to Payment for such Grantor or (B) any changes in the location of such Grantor's chief executive office or principal place of business. (e) LOCATION OF COLLATERAL. Each Grantor will: (i) keep the Collateral at the locations set forth in SCHEDULE A or SCHEDULE D and not remove the Collateral from such locations (other than Collateral in transit between locations set forth in SCHEDULE A or SCHEDULE D in the ordinary course of business and disposals of Collateral permitted by subsection (i) below) except upon at least thirty (30) days' prior written notice of any removal to the Agent; (ii) give the Agent written notice of the locations where Collateral is kept within thirty (30) days after the end of each fiscal quarter of such Grantor; (iii) give the Agent at least thirty (30) days' prior written notice of any hereinafter acquired or arising Collateral which will be located other than at the locations set forth in SCHEDULE A or SCHEDULE D; and (iv) give the Agent at least thirty (30) days' prior written notice of the creation and maintenance of any Deposit Account not set forth on SCHEDULE F. (f) CHANGE IN NAME, IDENTITY OR STRUCTURE. Each Grantor will give the Agent at least thirty (30) days' prior written notice of (i) any change in name, (ii) any changes in, additions to or other modifications of its trade names and trade styles set forth in SCHEDULE C, and (iii) any changes in its identity or structure in any manner which might make any Financing Statement filed hereunder incorrect or misleading. (g) MAINTENANCE OF RECORDS. Each Grantor will keep accurate and complete Books with respect to the Collateral, and at the Agent's request such Grantor shall legend the Books pertaining to such Collateral with an appropriate disclosure of the Agent's security interest hereunder. -11- (h) DISPOSITION OF COLLATERAL. No Grantor will surrender or lose possession of (other than to the Agent), sell, lease, rent, or otherwise dispose of or transfer any of the Collateral or any right or interest therein, except to the extent permitted by the Credit Agreement. (i) LIENS. Other than liens in favor of the Agent in its capacity as Agent under the Credit Agreement and Permitted Liens, each Grantor will keep the Collateral free of all liens and security interests of any kind. (j) EXPENSES. Each Grantor will maintain, keep and preserve the Collateral at its own cost and expense in accordance with its customary business practices. (k) LEASED PREMISES. At the Agent's request, each Grantor will use its best efforts to obtain from each Person from whom such Grantor leases any premises at which Collateral is at any time present such subordination, waiver, consent and estoppel agreements as the Agent may reasonably require, in form and substance reasonably satisfactory to the Agent. (l) RIGHTS TO PAYMENT. Each Grantor will: (i) with such frequency as the Agent may reasonably require upon the occurrence and during the continuance of an Event of Default, furnish to the Agent (A) master customer listings, including all names and addresses, together with copies or originals (as requested by the Agent) of documents, customer statements, repayment histories and present status reports relating to the Accounts; (B) accurate records and summaries of Accounts, including detailed agings specifying the name, face value and date of each invoice, and listings of Accounts that are disputed or have been cancelled; and (C) such other matters and information relating to the Accounts as the Agent shall from time to time reasonably request; (ii) in accordance with its sound business judgment perform and comply in all material respects with its obligations in respect of the Accounts and other Rights to Payment; (iii) upon the request of the Agent (A) at any time, notify all or any designated portion of the account debtors and other obligors on the Rights to Payment of the security interest hereunder, and (B) if an Event of Default has occurred and is continuing, notify the account debtors and other obligors on the Rights to Payment or any designated portion thereof that payment shall be made directly to the Agent or to such other Person or location as the Agent shall specify; and (iv) establish such lockbox, blocked account or similar arrangements for the payment of the Accounts and other Rights to Payment as the Agent shall require. (m) CONTRACTS. Each Grantor will: (i) at its sole cost and expense, appear in and defend any action or proceeding which arises under, grows out of or is in any manner connected with the obligations, covenants, conditions, duties, agreements or liabilities of such Grantor under the Contracts included in the Collateral, and which is material to the operations or financial condition of such Grantor; and -12- (ii) comply with, perform and discharge each and every obligation, covenant, condition, duty and agreement that the Contracts included in the Collateral provide are to be performed by such Grantor. (n) DOCUMENTS, ETC. Each Grantor will: (i) immediately deliver to the Agent, or an agent designated by it, appropriately endorsed or accompanied by appropriate instruments of transfer or assignment, all Documents, Instruments and Chattel Paper, and all other Rights to Payment at any time evidenced by promissory notes, trade acceptances or other instruments, and (ii) at the reasonable request of the Agent mark all Documents and Chattel Paper with the following legend: "This writing and the obligations evidenced or secured hereby are subject to the security interest of National Westminster Bank Plc, as agent, for the benefit of itself and certain other Banks." (o) INVENTORY. Each Grantor will: (i) at such times as the Agent shall reasonably request but in any event not more than once each fiscal year, prepare and deliver to the Agent a report of all Inventory, in form and substance satisfactory to the Agent; and (ii) upon the request of the Agent after an Event of Default has occurred and is continuing, take a physical listing of the Inventory and promptly deliver a copy of such physical listing to the Agent. (p) EQUIPMENT. Each Grantor will: (i) upon the Agent's reasonable request but in any event not more than once each fiscal year, prepare and deliver to the Agent a report of each item of Equipment, in form and substance satisfactory to the Agent; and (ii) upon the request of the Agent after an Event of Default has occurred and is continuing, take a physical listing of the Equipment and promptly delivery a copy of such physical listing to the Agent. (q) INTELLECTUAL PROPERTY COLLATERAL. Each Grantor will: (i) not enter into any agreements or transactions (including any license or royalty agreement) pertaining to any Intellectual Property Collateral except in the ordinary course of business; (ii) if reasonably within such Grantor's abilities, not allow or suffer any Intellectual Property Collateral to become abandoned, nor any registration thereof to be terminated, forfeited, -13- expired or dedicated to the public unless such Intellectual Property Collateral is no longer useful or necessary to the operation of its business; (iii) diligently prosecute all applications for patents, copyrights and trademarks useful and necessary to the operation of its business, and file and prosecute any and all continuations, continuations-in-part, applications for reissue, applications for certificate of correction and like matters as shall be reasonable and appropriate in accordance with prudent business practice, and promptly and timely pay any and all maintenance, license, registration and other fees, taxes and expenses incurred in connection with any Intellectual Property Collateral; and (iv) provide the Agent on a quarterly basis with a list of all new applications and registrations for United States and foreign patents, copyrights, trademarks, service marks or trade names, which such new applications and registrations shall be subject to the terms and conditions of the Credit Agreement and this Agreement. (r) NOTICES, REPORTS AND INFORMATION. Each Grantor will (i) notify the Agent of any material claim made or asserted against the Collateral by any Person and of any change in the composition of the Collateral or other event which could materially adversely affect the value of the Collateral or the Agent's Lien thereon; (ii) furnish to the Agent such statements and schedules further identifying and describing the Collateral and such other reports and other information in connection with the Collateral as the Agent may reasonably request, all in reasonable detail; and (iii) upon the reasonable request of the Agent make such demands and requests for information and reports as such Grantor is entitled to make in respect of the Collateral. (s) FURTHER ASSURANCES; PLEDGE OF INSTRUMENTS. At any time and from time to time upon the written consent of the Agent and at the sole expense of each Grantor, each Grantor shall promptly and duly execute and deliver any and all such further instruments and documents and take such further actions as the Agent may deem desirable to obtain the full benefits of this Agreement and of the rights and powers herein granted, including without limitation (i) using its best efforts to secure all consents and approvals necessary or appropriate for the assignment to or for the benefit of the Agent, for the benefit of itself, the Banks and the Issuing Banks, of any license or contract held by such Grantor or to which such Grantor has any rights not heretofore assigned, (ii) filing any financing or continuation statements under the UCC with respect to the Liens and security interests granted hereunder or under any other Loan Document, (iii) transferring Collateral to the Agent's possession for the benefit of itself, the Banks and the Issuing Banks (if such Collateral consists of Chattel Paper or if a security interest in such Collateral can be perfected only by possession), and (iv) using its best efforts to obtain waivers of Liens, if any exist, from landlords and mortgagees. Each Grantor also hereby authorizes the Agent, for the benefit of itself, the Banks and the Issuing Banks, to file any such financing or continuation statements without the signature of such Grantor to the extent permitted by applicable law. If any amount payable under or in connection with any of the Collateral is or shall become evidenced by any Instrument, such Instruments, other than checks and notes received in the ordinary course of business, shall be duly endorsed in a manner satisfactory to the Agent immediately upon such Grantor's receipt thereof. -14- (t) RIGHT OF INSPECTION. The Agent shall have the right to inspect the Collateral and the corporate, financial and operating records of each Grantor in accordance with the terms of SECTION 6.2 of the Credit Agreement. SECTION 6 COLLECTION OF RIGHTS TO PAYMENT. Until the Agent exercises its rights hereunder to collect Rights to Payment, each Grantor shall endeavor in the first instance diligently to collect all amounts due or to become due on or with respect to the Rights to Payment. At the request of the Agent, upon and after the occurrence of any Event of Default, all remittances received by such Grantor shall be held in trust for the Agent and, in accordance with the Agent's instructions, remitted to the Agent or deposited to an account with the Agent in the form received (with any necessary endorsements or instruments of assignment or transfer). SECTION 7 AUTHORIZATION; AGENT APPOINTED ATTORNEY-IN-FACT. Each Grantor hereby irrevocably constitutes and appoints the Agent, for the benefit of itself, the Banks and the Issuing Banks, and any officer or agent thereof, with full power of substitution, as its true and lawful attorney-in-fact with full irrevocable power and authority in the place and stead of such Grantor and in the name of such Grantor or in its own name, from time to time in the Agent's sole discretion for the purpose of carrying out the terms of this Agreement, to take any and all appropriate action and to execute and deliver any and all documents which may be necessary or desirable to accomplish the purposes of this Agreement and, without limiting the generality of the foregoing, hereby grants to the Agent, for the benefit of itself, the Banks and the Issuing Banks, the power and right, on behalf of such Grantor, without notice to or assent by such Grantor, and at any time, to do the following: (i) sign any of the Financing Statements which must be executed or filed to perfect or continue perfected, maintain the priority of or provide notice of the Agent's security interest in the Collateral; (ii) take possession of and endorse any notes, acceptances, checks, drafts, money orders or other forms of payment or security and collect any Proceeds of any Collateral; (iii) sign and endorse any invoice or bill of lading relating to any of the Collateral, warehouse or storage receipts, drafts against customers or other obligors, assignments, notices of assignment, verifications and notices to customers or other obligors; (iv) notify the Postal Service authorities to change the address for delivery of mail addressed to any Grantor to such address as the Agent may designate and, without limiting the generality of the foregoing, establish with any Person lockbox or similar arrangements for the payment of the Rights to Payment; (v) receive, open and dispose of all mail addressed to any Grantor; (vi) send requests for verification of Rights to Payment to the customers or other obligors of any Grantor; -15- (vii) contact, or direct any Grantor to contact, all account debtors and other obligors on the Rights to Payment and instruct such account debtors and other obligors to make all payments directly to the Agent; (viii) assert, adjust, sue for, compromise or release any claims under any policies of insurance; (ix) exercise dominion and control over, and refuse to permit further withdrawals from, Deposit Accounts maintained with the Agent; (x) notify each Person maintaining lockbox or similar arrangements for the payment of the Rights to Payment to remit all amounts representing collections on the Rights to Payment directly to the Agent; (xi) ask, demand, collect, receive and give acquittances and receipts for any and all Rights to Payment, enforce payment or any other rights in respect of the Rights to Payment and other Collateral, grant consents, agree to any amendments, modifications or waivers of the agreements and documents governing the Rights to Payment and other Collateral, and otherwise file any claims, take any action or institute, defend, settle or adjust any actions, suits or proceedings with respect to the Collateral, as the Agent may deem necessary or desirable to maintain, preserve and protect the Collateral, to collect the Collateral or to enforce the rights of the Agent with respect to the Collateral; (xii) execute any and all applications, documents, papers and instruments necessary for the Agent to use the Intellectual Property Collateral and grant or issue any exclusive or non-exclusive license or sublicense with respect to any Intellectual Property Collateral; (xiii) execute any and all endorsements, assignments or other documents and instruments necessary to sell, lease, assign, convey or otherwise transfer title in or dispose of the Collateral; (xiv) execute any and all such other documents and instruments, and do any and all acts and things for and on behalf of each Grantor, which the Agent may deem necessary or advisable to maintain, protect, realize upon and preserve the Collateral; and (xv) execute any and all such other documents and instruments, and do any and all acts and things for and on behalf of each Grantor, which the Agent may deem necessary or advisable to maintain, protect, and preserve the Agent's security interest in the Collateral. The Agent agrees that, except upon and after the occurrence of an Event of Default, it shall not exercise the power of attorney, or any rights granted to the Agent, pursuant to clauses (ii) through (xiv). The foregoing power of attorney is coupled with an interest and irrevocable so long as any Bank has outstanding any Commitment or Loan, or any letter of credit remains outstanding, or the Secured Obligations have not been paid and performed in full or any Bank is a counterparty to an Interest Rate Contract or a currency hedging agreement with the Borrower. Each -16- Grantor hereby ratifies, to the extent permitted by law, all that the Agent shall lawfully and in good faith do or cause to be done by virtue of and in compliance with this Section 7. SECTION 8 AGENT PERFORMANCE OF GRANTORS' OBLIGATIONS. After an Event of Default has occurred and is continuing, the Agent may perform or pay any obligation which each Grantor has agreed to perform or pay under or in connection with this Agreement, and such Grantor shall reimburse the Agent on demand for any amounts paid by the Agent pursuant to this Section 8. SECTION 9 AGENT'S DUTIES. Notwithstanding any provision contained in this Agreement, but subject to the following sentence, the Agent shall have no duty to exercise any of the rights, privileges or powers afforded to it and shall not be responsible to any Grantor or any other Person for any failure to do so or delay in doing so. Beyond the exercise of reasonable care to assure the safe custody of Collateral in the Agent's possession and the accounting for moneys actually received by the Agent hereunder, the Agent shall have no duty or liability to exercise or preserve any rights, privileges or powers pertaining to the Collateral. SECTION 10 REMEDIES. (a) REMEDIES. After an Event of Default has occurred and is continuing, the Agent shall have, in addition to all other rights and remedies granted to it in this Agreement, the Credit Agreement or any other Loan Document, all rights and remedies of a secured party under the UCC and other applicable laws. Without limiting the generality of the foregoing, each Grantor agrees that the Agent may: (i) peaceably and without notice enter any premises of such Grantor, take possession of any the Collateral, remove or dispose of all or part of the Collateral on any premises or elsewhere, or, in the case of Equipment, render it nonfunctional, and otherwise collect, receive, appropriate and realize upon all or any part of the Collateral, and demand, give receipt for, settle, renew, extend, exchange, compromise, adjust, or sue for all or any part of the Collateral, as the Agent may determine; (ii) require such Grantor to assemble all or any part of the Collateral and make it available to the Agent at any place and time designated by the Agent; (iii) use or transfer any of such Grantor's rights and interests in any Intellectual Property Collateral, by license, by sublicense (to the extent permitted by an applicable license) or otherwise, on such conditions and in such manner as the Agent may determine; (iv) secure the appointment of a receiver of the Collateral or any part thereof to the extent and in the manner provided by applicable law; (v) withdraw (or cause to be withdrawn) any and all funds from Deposit Accounts; (vi) sell, resell, lease, use, assign, transfer or otherwise dispose of any or all of the Collateral in its then condition or following any commercially reasonable preparation or processing (utilizing in connection therewith any of such Grantor's assets, without charge or liability to the Agent therefor) at public or private sale, by one or more contracts, in one or more parcels, at the -17- same or different times, for cash or credit, or for future delivery without assumption of any credit risk, all as the Agent deems advisable; PROVIDED, HOWEVER, that such Grantor shall be credited with the net proceeds of sale only when such proceeds are finally collected by the Agent. The Agent shall have the right upon any such public sale, and, to the extent permitted by law, upon any such private sale, to purchase the whole or any part of the Collateral so sold, free of any right or equity of redemption, which right or equity of redemption such Grantor hereby releases, to the extent permitted by law. Each such Grantor hereby agrees that the sending of notice by ordinary mail, postage prepaid, to the address of such Grantor set forth on the signature page hereto, of the place and time of any public sale or of the time after which any private sale or other intended disposition is to be made, shall be deemed reasonable notice thereof if such notice is sent ten (10) days prior to the date of such sale or other disposition or the date on or after which such sale or other disposition may occur, PROVIDED that the Agent may provide such Grantor shorter notice or no notice, to the extent permitted by the UCC or other applicable law; and (vii) at its sole option and discretion, be entitled to assume any and all of the obligations of such Grantor under any of the Contracts included in the Collateral and to perform any and all acts that such Grantor is required or entitled to perform thereunder including, without limitation, enforcement of such Grantor's rights pursuant to the terms thereof. (b) LICENSE. For the purpose of enabling the Agent to exercise its rights and remedies under this Section 10, each Grantor hereby grants to the Agent an irrevocable, non-exclusive and assignable license (exercisable without payment or royalty or other compensation to such Grantor) to use, license or sublicense any Intellectual Property Collateral. (c) PROCEEDS ACCOUNT. To the extent that any of the Secured Obligations may be contingent, unmatured or unliquidated (including with respect to undrawn amounts under any letter of credit), at such time as there may exist an Event of Default, the Agent may, at its election, (i) retain the proceeds of any sale, collection, disposition or other realization upon the Collateral (or any portion thereof) in a special purpose non-interest-bearing restricted deposit account (the "PROCEEDS ACCOUNT") created and maintained by the Agent for such purpose (which shall constitute a Deposit Account included within the Collateral hereunder) until such time as the Agent may elect to apply such proceeds to the Secured Obligations, and each Grantor agrees that such retention of such proceeds by the Agent shall not be deemed strict foreclosure with respect thereto; (ii) in any manner elected by the Agent, estimate the liquidated amount of any such contingent, unmatured or unliquidated claims and apply the proceeds of the Collateral against such amount; or (iii) otherwise proceed in any manner permitted by applicable law. Each Grantor agrees that the Proceeds Account shall be a blocked account and that upon the irrevocable deposit of funds into the Proceeds Account, such Grantor shall not have any right of withdrawal with respect to such funds. Accordingly, such Grantor irrevocably waives until the termination of the security interests granted under this Agreement in accordance with Section 25 the right to make any withdrawal from the Proceeds Account and the right to instruct the Agent to honor drafts against the Proceeds Account. (d) APPLICATION OF PROCEEDS. Subject to subsection (c) immediately above, the cash proceeds actually received from the sale or other disposition or collection of Collateral upon the exercise of any remedy by the Agent under this SECTION 10, and any other amounts received in -18- respect of the Collateral the application of which is not otherwise provided for herein, shall be distributed to the Banks pro rata and applied as follows: FIRST: to the payment of the costs and expenses of such sale, including reasonable compensation to the Agent and its agents and attorneys, and of any judicial or private proceedings in which such sale may be made, and of all other expenses, liabilities and advances made or incurred by the Agent, together with interest on such costs, expenses and liabilities and on all advances made by the Agent from the date any such cost, expense or liability is past due or unpaid or any such advance is made, in each case until paid in full; SECOND: to the payment of any other fees, costs or other expenses constituting obligations under the Loan Documents other than amounts payable under subparagraph "First" above, together with interest on each such amount at the Post-Default Rate from and after the date such amount is due, owing or unpaid until paid in full; THIRD: to the payment of (i) any interest then due, owing or unpaid in respect of any Loan or any other Secured Obligation; and (ii) with respect to any Interest Rate Contracts or currency hedging agreement with the Borrower to which a Bank is a party, the interest due and owing in respect of any amounts payable thereunder, in each case together with, to the maximum extent permitted by law, interest thereon at the Post-Default Rate from the date such amount is due, owing or unpaid until paid in full to be applied in accordance with the Credit Agreement; FOURTH: to the payment of the whole amount of principal then due, owing or unpaid in respect of any Loan, or any other Secured Obligation secured by this Agreement, to be applied in accordance with the Credit Agreement; and FIFTH: the surplus, if any, to be paid to the applicable Grantor or whomever lawfully may be entitled to receive such surplus. Each Grantor shall remain liable to the Agent for any deficiency which exists after any sale or other disposition or collection of Collateral. SECTION 11 CERTAIN WAIVERS. Each Grantor waives, to the fullest extent permitted by law, (i) any right of redemption with respect to the Collateral, whether before or after sale hereunder, and all rights, if any, of marshalling of the Collateral or other collateral or security for the Secured Obligations; (ii) any right to require the Agent (A) to proceed against any Person, (B) to exhaust any other collateral or security for any of the Secured Obligations, (C) to pursue any remedy in the Agent's power, or (D) to make or give any presentments, demands for performance, notices of nonperformance, protests, notices of protests or notices of dishonor in connection with any of the Collateral; and (iii) all claims, damages, and demands against the Agent arising out of the repossession, retention, sale or application of the proceeds of any sale of the Collateral. -19- SECTION 12 [Intentionally Blank] SECTION 13 NOTICES. All notices or other communications hereunder to the Agent shall be given in the manner and to the addresses specified in the Credit Agreement, and if to a Grantor, as set forth on the signature pages hereto. All such notices and other communications shall be effective (i) if delivered by hand or pre-paid courier service, when delivered; (ii) if sent by mail, upon the earlier of the date of receipt or five (5) Business Days after deposit in the mail, first class, postage prepaid; (iii) if sent by telex, upon receipt by the sender of an appropriate answerback; and (iv) if sent by facsimile transmission, when sent. SECTION 14 NO WAIVER; CUMULATIVE REMEDIES. No failure on the part of the Agent to exercise, and no delay in exercising, any right, remedy, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, remedy, power or privilege preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights and remedies under this Agreement are cumulative and not exclusive of any rights, remedies, powers and privileges that may otherwise be available to the Agent. SECTION 15 COSTS AND EXPENSES; INDEMNIFICATION; OTHER CHARGES. (a) COSTS AND EXPENSES. Each Grantor agrees to pay on demand: (i) the reasonable out-of-pocket costs and expenses of the Agent and any of its Affiliates, and the Agent's reasonable attorney costs, in connection with the negotiation, preparation, execution, delivery and administration of this Agreement, and any amendments, modifications or waivers of the terms thereof, and the custody of the Collateral; (ii) all title, appraisal (including the allocated costs of internal appraisal services), survey, audit, consulting, search, recording, filing and similar costs, fees and expenses incurred or sustained by the Agent or any of its Affiliates in connection with this Agreement or the Collateral; and (iii) all costs and expenses of the Agent and its Affiliates, including attorney costs, in connection with the enforcement or attempted enforcement of, and preservation of any rights or interests under, this Agreement, including in any out-of-court workout or other refinancing or restructuring or in any bankruptcy case, and the protection, sale or collection of, or other realization upon, any of the Collateral, including all expenses of taking, collecting, holding, sorting, handling, preparing for sale, selling, or the like, and other such expenses of sales and collections of Collateral, and any and all losses, costs and expenses sustained by the Agent as a result of any failure by such Grantor to perform or observe its obligations contained herein. (b) INDEMNIFICATION. Each Grantor shall pay, indemnify, and hold the Agent, each Bank, each Issuing Bank and each of their respective Affiliates, officers, directors, employees, counsel, agents and attorneys-in-fact (each, an "INDEMNIFIED PERSON") harmless from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, charges, expenses or disbursements, of any kind or nature whatsoever with respect to the execution, delivery, -20- enforcement, performance and administration of this Agreement (including attorney costs), or the transactions contemplated hereby, and with respect to any investigation, litigation or proceeding (including any insolvency proceeding or appellate proceeding) related to this Agreement, whether or not any Indemnified Person is a party thereto (all the foregoing, collectively, the "INDEMNIFIED LIABILITIES"); PROVIDED, that the Borrower shall have no obligation hereunder to any Indemnified Person with respect to Indemnified Liabilities arising from the gross negligence or willful misconduct of such Indemnified Person. (c) OTHER CHARGES. Each Grantor agrees to indemnify the Agent, each Bank and each Issuing Bank against and hold each harmless from any and all present and future stamp, transfer, 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. (d) INTEREST. Any amounts payable to the Agent, each Bank and each Issuing Bank under this Section 15 or otherwise under this Agreement if not paid upon demand shall bear interest from the date of such demand until paid in full at the Post-Default Rate. SECTION 16 BINDING EFFECT. This Agreement shall be binding upon, inure to the benefit of and be enforceable by each Grantor and the Agent, and their respective successors and assigns, PROVIDED, HOWEVER, that such Grantor may not assign any of its rights hereunder or interests herein without the written consent of the Agent and the Majority Banks. Each Grantor acknowledges that upon any assignment or other transfer by the Agent or any other Bank Party of any of the Secured Obligations, the Agent or such other Bank Party may transfer its interest herein, or any part thereof, to the assignee or transferee, who shall thereupon become vested with all the rights, remedies, powers, security interests and liens herein granted to the Agent or such other Bank Party, or the transferred part thereof, subject, however, to the restrictions contained herein. No Persons other than each of Grantors, the Bank Parties, the Agent and the respective assignees of the Bank Parties and the Agent are intended to be benefited hereby or shall have any rights hereunder, as third-party beneficiaries or otherwise. SECTION 17 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK; PROVIDED THAT THE AGENT AND THE BANKS SHALL RETAIN ALL RIGHTS ARISING UNDER FEDERAL LAW. SECTION 18 FORUM SELECTION AND CONSENT TO JURISDICTION. ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT MAY BE BROUGHT IN THE COURTS OF THE STATE OF NEW YORK OR OF THE UNITED STATES FOR THE SOUTHERN DISTRICT OF NEW YORK, AND BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH OF THE GRANTORS AND THE AGENT FOR THE BENEFIT OF THE BANKS CONSENTS, FOR ITSELF AND IN RESPECT OF ITS PROPERTY, TO THE NON-EXCLUSIVE JURISDICTION OF THOSE COURTS. EACH GRANTOR AND THE AGENT FOR THE BENEFIT OF THE BANKS IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE -21- GROUNDS OF FORUM NON CONVENIENS, WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY ACTION OR PROCEEDING IN SUCH JURISDICTION IN RESPECT OF THIS AGREEMENT OR ANY DOCUMENT RELATED HERETO. EACH OF THE GRANTORS AND THE AGENT FOR THE BENEFIT OF ITSELF, THE BANKS AND THE ISSUING BANKS EACH WAIVE PERSONAL SERVICE OF ANY SUMMONS, COMPLAINT OR OTHER PROCESS, WHICH MAY BE MADE BY ANY OTHER MEANS PERMITTED BY NEW YORK LAW. SECTION 19 WAIVER OF JURY TRIAL. EACH GRANTOR AND THE AGENT FOR THE BENEFIT OF THE BANKS WAIVE THEIR RESPECTIVE RIGHTS TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF OR RELATED TO THIS AGREEMENT, THE OTHER LOAN DOCUMENTS, OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, IN ANY ACTION, PROCEEDING OR OTHER LITIGATION OF ANY TYPE BROUGHT BY ANY OF THE PARTIES AGAINST ANY OTHER PARTY OR PARTIES, WHETHER WITH RESPECT TO CONTRACT CLAIMS, TORT CLAIMS, OR OTHERWISE. THE GRANTORS AND THE AGENT FOR THE BENEFIT OF ITSELF, THE BANKS AND THE ISSUING BANKS EACH AGREE THAT ANY SUCH CLAIM OR CAUSE OF ACTION SHALL BE TRIED BY A COURT TRIAL WITHOUT A JURY. WITHOUT LIMITING THE FOREGOING, THE PARTIES FURTHER AGREE THAT THEIR RESPECTIVE RIGHT TO A TRIAL BY JURY IS WAIVED BY OPERATION OF THIS SECTION AS TO ANY ACTION, COUNTERCLAIM OR OTHER PROCEEDING WHICH SEEKS, IN WHOLE OR IN PART, TO CHALLENGE THE VALIDITY OR ENFORCEABILITY OF THIS AGREEMENT OR ANY PROVISION HEREOF. THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT. SECTION 20 AMENDMENT. This Agreement shall not be amended except by the written agreement of the parties as provided in the Credit Agreement. SECTION 21 SEVERABILITY. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under all applicable laws and regulations. If, however, any provision of this Agreement shall be prohibited by or invalid under any such law or regulation in any jurisdiction, it shall, as to such jurisdiction, be deemed modified to conform to the minimum requirements of such law or regulation, or, if for any reason it is not deemed so modified, it shall be ineffective and invalid only to the extent of such prohibition or invalidity without affecting the remaining provisions of this Agreement, or the validity or effectiveness of such provision in any other jurisdiction. This Agreement is to be read, construed and applied together with the Credit Agreement and the other Loan Documents which, taken together, set forth the complete understanding and agreement of the Agent, the Banks, the Issuing Banks and each Grantor with respect to the matters referred to herein and therein. SECTION 22 COUNTERPARTS. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute but one and the same agreement. -22- SECTION 23 INCORPORATION OF PROVISIONS OF THE CREDIT AGREEMENT. To the extent the Credit Agreement contains provisions of general applicability to the Loan Documents, including any such provisions contained in Article 10 thereof, such provisions are incorporated herein by this reference. SECTION 24 NO INCONSISTENT REQUIREMENTS. Each Grantor acknowledges that this Agreement and the other Loan Documents may contain covenants and other terms and provisions variously stated regarding the same or similar matters, and agrees that all such covenants, terms and provisions are cumulative and all shall be performed and satisfied in accordance with their respective terms; PROVIDED, in the event any terms or conditions contained herein conflict with any term or condition set forth in the Credit Agreement, such term or condition set forth in the Credit Agreement shall control. SECTION 25 TERMINATION. Upon termination of the Commitments of the Banks under the Loan Documents, the surrender of any letters of credit issued by any Issuing Bank for the account of the Borrower, the termination of all Interest Rate Contracts and currency hedging agreements with the Borrower to which any Bank is a counterparty, and payment and performance in full of all Secured Obligations, this Agreement and the security interests granted under this Agreement shall terminate and the Agent shall promptly execute and deliver to each Grantor such documents and instruments reasonably requested by such Grantor as shall be necessary to evidence termination of this Agreement and of all security interests given by such Grantor to the Agent hereunder; PROVIDED, HOWEVER, that the obligations of such Grantor under Section 15 shall survive such termination. SECTION 26 LIMITATION ON SECURED OBLIGATIONS. Notwithstanding any provision herein contained to the contrary, liability hereunder shall be limited to an amount not to exceed the amount which could be claimed by the Agent and Banks from each Grantor under this Agreement without rendering such claim voidable or avoidable under Section 548 of Chapter 11 of the Bankruptcy Code or under any applicable state Uniform Fraudulent Transfer Act, Uniform Fraudulent Conveyance Act or similar statute of common law. -23- IN WITNESS WHEREOF, each Grantor has executed this Agreement as of the day and year first above written. NATIONAL WESTMINSTER BANK PLC, as Agent By:_______________________________________ Name:_____________________________________ Title:______________________________________ LODGENET ENTERTAINMENT CORPORATION By:_______________________________________ Name:_____________________________________ Title:______________________________________ RESNET COMMUNICATIONS, INC. By:_______________________________________ Name:_____________________________________ Title:______________________________________ LODGENET ENTERTAINMENT (CANADA) CORPORATION By:_______________________________________ Name:_____________________________________ Title:______________________________________ SCHEDULE A LOCATIONS OF CHIEF EXECUTIVE OFFICE AND OTHER LOCATIONS, INCLUDING OF COLLATERAL a. Chief Executive Office and Principal Place of Business: Borrower: LodgeNet Entertainment Corporation 808 West Avenue North Sioux Falls, South Dakota 57104 ResNet: ResNet Communications, Inc. 808 West Avenue North Sioux Falls, South Dakota 57104 LodgeNet Canada: LodgeNet Entertainment (Canada) Corporation Suite 3300 130 Adelaide Street West Toronto, Ontario M5H3P5 b. Other locations where Grantor conducts business or Collateral is kept: See attached Exhibit 1. SCHEDULE B LOCATIONS OF BOOKS PERTAINING TO RIGHTS TO PAYMENT Borrower: LodgeNet Entertainment Corporation 808 West Avenue North Sioux Falls, South Dakota 57104 ResNet: ResNet Communications, Inc. 808 West Avenue North Sioux Falls, South Dakota 57104 LodgeNet Canada: LodgeNet Entertainment (Canada) Corporation Suite 3300 130 Adelaide Street West Toronto, Ontario M5H3P5 SCHEDULE C TRADE NAMES AND TRADE STYLES; OTHER CORPORATE, TRADE OR FICTITIOUS NAMES, ETC. None. SCHEDULE D INVENTORY STORED WITH WAREHOUSEMEN OR ON LEASED PREMISES, ETC. None. SCHEDULE E PATENTS, COPYRIGHTS, TRADEMARKS, ETC. BORROWER TRADEMARK REGISTRATIONS MARK REG. NO. ---- -------- LodgeNet 1,378,457 LodgeNet Entertainment Class 41, (and Design) Serial No. 74/669,535 LodgeNet Entertainment Class 38, (and Design) Serial No. 74/669,533 LodgeNet Class 38, Serial No. 74/669,534 BORROWER TRADEMARK APPLICATIONS Traveler's TV Mall, Serial No. 74/615,989 TV Mall, filed November 6, 1995 LodgeNet Passport, filed February 15, 1996, Serial No. 75/058,170 ResNet, Serial No. 75/016091 ResNet Communications, filed March 14, 1996, Serial No. 75/072,868 B-LAN, filed October 31, 1996 BORROWER TRADEMARK LICENSES Name of Agreement Parties Date of Agreement - ----------------- ------- ----------------- Technology License Borrower and ResNet January 10, 1996 Agreement BORROWER PATENTS U.S. Patent No. Date Issued Title - --------------- ----------- ----- 5455619 October 3, 1995 Video Distribution System Addressing Device for Identifying Remote Locations 5,506,572 April 9, 1996 Low Battery Detection System 4,502,098 February 26, 1985 Circuit Assembly 4,920,432 April 24, 1990 System for Random Access to an Audio/Video Data Library with Independent Selection and Display at each of a Plurality of Remote Locations BORROWER PATENT APPLICATIONS Serial No. Date Filed Title - ---------- ---------- ----- 08/288,626 August 10, 1994 System for Collecting and Processing User Inputs RESNET TRADEMARK LICENSES Name of Agreement Parties Date of Agreement - ----------------- ------- ----------------- Technology License Borrower and ResNet January 10, 1996 Agreement SCHEDULE F DEPOSIT ACCOUNTS BANK NAME BANK ADDRESS BANK ACCTS --------- ------------ ---------- Bank of Boston 100 Federal St. 512-83883 Lock Box Boston, MA 02110 Bank of Boston 100 Federal St. CDA - Maine Boston, MA 02110 80-028-0539 Bank of Boston 100 Federal St. Payroll Boston, MA 02110 512-83906 First National Bank P.O. Box 5186 401K Trust Sioux Falls, SD 57117-5186 301-991-1 First National Bank P.O. Box 5186 Checking Sioux Falls, SD 57117-5186 301-645-4 First National Bank P.O. Box 5186 Golf Classic Sioux Falls, SD 57117-5186 302-002-3 First National Bank P.O. Box 5186 Payroll Sioux Falls, SD 57117-5186 301-862-8 First National Bank P.O. Box 5186 Per Diem Sioux Falls, SD 57117-5186 301-870-8 Harris Bank P.O. Box 755 CDA Chicago, IL 60690-0755 04-325-397-8 Harris Bank P.O. Box 755 Lock Box Chicago, IL 60690-0755 325-400-0 Mercantile Bank 8th and Locust P.O. Box 524 Checking St. Louis, MO 63186-0524 100500333-8 EXHIBIT G PLEDGE AGREEMENT This PLEDGE AGREEMENT (this "AGREEMENT"), dated as of December 19, 1996, is made by LODGENET ENTERTAINMENT CORPORATION, a Delaware corporation (the "PLEDGOR"), in favor of NATIONAL WESTMINSTER BANK PLC, a United Kingdom public limited company, as agent for the benefit of itself, the Banks and the Issuing Banks (as defined below) (in such capacity, and together with its successors as agent for the Banks, the "AGENT"). RECITALS WHEREAS, the Pledgor is a party to that certain Amended and Restated Credit Agreement dated as of December 19, 1996 by and among the Pledgor, the several financial institutions from time to time party thereto (the "BANKS"), the Agent (also in its capacity as an Issuing Bank and Bank) and National Westminster Bank of Canada, as an Issuing Bank (as amended, restated, modified, renewed, supplemented or extended from time to time, the "CREDIT AGREEMENT"); and WHEREAS, it is a condition precedent to each Bank's obligation to make its initial Loan under the Credit Agreement and for the Issuing Banks to issue letters of credit that the Pledgor enter into this Agreement and grant to the Agent, for the benefit of itself, the Banks and the Issuing Banks, the security interests hereinafter provided to secure the obligations of the Pledgor described below. NOW, THEREFORE, to induce the Banks to make Loans under the Credit Agreement, and in consideration of such extensions of credit as the Banks have made or may hereafter make to the Pledgor, the Pledgor, intending to be legally bound hereby, covenants and agrees as follows: SECTION 1 DEFINITIONS; INTERPRETATIONS. (a) TERMS DEFINED IN CREDIT AGREEMENT. All capitalized terms used in this Agreement and not otherwise defined herein have the meanings specified in the Credit Agreement. (b) CERTAIN DEFINED TERMS. As used in this Agreement, the following terms have the following meanings: "BANK PARTY" means, as the context may require, any Bank (including any Bank in its capacity as a counterparty to an Interest Rate Contract or currency hedging agreement), any Issuing Bank or the Agent, and each of their respective successors, transferees and assigns. "BOOK-ENTRY SHARES" means any Pledged Shares evidenced or represented by a book-entry on the books of a Clearing Corporation. "CLEARING CORPORATION" means a "clearing corporation", as defined in Section 8-102(3) of the UCC, at which the Agent and the Pledgor each maintains a securities account. "COMMISSION" has the meaning specified in subsection 11(b)(i). "IRREVOCABLE PROXIES" has the meaning specified in subsection 7(c). "PLEDGE AGREEMENT SUPPLEMENT" has the meaning specified in subsection 3(b). "PLEDGED COLLATERAL" has the meaning specified in Section 2. "PLEDGED NOTES" means all intercompany notes referred to in subsection (g) of Section 2. "PLEDGED SHARES" means all shares of capital stock or other equity securities referred to in subsections (a), (b) and (c) of Section 2. "PLEDGED SUBSIDIARIES" means, collectively, the Subsidiaries of the Pledgor listed on SCHEDULE 1 hereto or on any Pledge Agreement Supplement attached hereto. "SECURED OBLIGATIONS" means all Obligations (as defined in the Credit Agreement). "SECURITIES ACT" has the meaning specified in subsection 11(b)(i). "UCC" means the Uniform Commercial Code as the same may, from time to time, be in effect in the State of New York; PROVIDED, HOWEVER, in the event that, by reason of mandatory provisions of law, any or all of the attachment, perfection or priority of the security interest in any Pledged Collateral is governed by the Uniform Commercial Code as in effect in a jurisdiction other than the State of New York, the term "UCC" shall mean the Uniform Commercial Code as in effect in such other jurisdiction for purposes of the provisions hereof relating to such attachment, perfection or priority and for purposes of definitions related to such provisions. (c) TERMS DEFINED IN UCC. Where applicable and except as otherwise defined herein, terms used in this Agreement shall have the meanings assigned to them in the UCC. (d) AFFILIATES OF BANKS AS SECURED PARTIES. Notwithstanding anything herein to the contrary, the pledge and security interests granted hereby shall be deemed to be for the benefit of the Bank Parties and Affiliates of the Banks that are parties to Interest Rate Contracts or currency hedging agreements with the Borrower, and accordingly, references herein to any Bank shall, to such extent, be deemed to include such Affiliates. -2- SECTION 2 PLEDGE. As security for the payment, in full in cash when due, whether at stated maturity, by acceleration or otherwise, and performance of the Secured Obligations, the Pledgor hereby pledges, assigns, transfers, hypothecates and sets over to the Agent, for the benefit of itself, the Banks and the Issuing Banks, and grants to the Agent, for the benefit of itself, the Banks and the Issuing Banks, a security interest in all of the Pledgor's right, title and interest in, to and under the following, whether now existing or owned or hereafter acquired or arising (collectively, the "PLEDGED COLLATERAL"): (a) all shares of capital stock or other equity securities of the Pledged Subsidiaries now owned by the Pledgor, as more fully described in SCHEDULE 1 attached hereto, including, without limitation, any such securities that are Book-Entry Shares; (b) all shares of capital stock or other equity securities of any Pledged Subsidiary hereafter acquired, received or owned by the Pledgor (whether in connection with any recapitalization, reclassification or reorganization of the capital of a Pledged Subsidiary or otherwise), including, without limitation, any such securities that are Book-Entry Shares; (c) all shares of capital stock or other equity securities hereafter acquired, received or owned by the Pledgor of any Person who, after the date hereof, becomes, as a result of any occurrence, a Pledged Subsidiary, including, without limitation, any such securities that are Book-Entry Shares; (d) all certificates, instruments or other writings representing or evidencing the Pledged Shares (other than any Book-Entry Shares or any other Pledged Shares that constitute part of a fungible bulk of securities in the possession of a Clearing Corporation); (e) all warrants, options and other rights entitling the Pledgor to acquire any interest in any Pledged Shares; (f) all dividends, cash, instruments and other property from time to time received, receivable or otherwise distributed or distributable in respect of or in exchange for any or all of the Pledged Shares; (g) all now owned or hereafter acquired intercompany notes owing to the Pledgor by any direct or indirect Subsidiary, together with all other promissory notes, instruments, debt securities or other property hereafter delivered to the Pledgor in substitution for or in addition to the Pledged Notes; and (h) all cash and non-cash proceeds of the foregoing. -3- SECTION 3 DELIVERY OR TRANSFER OF PLEDGED COLLATERAL. (a) All original certificates, instruments or other writings representing or evidencing the Pledged Shares (other than certificated securities that constitute part of a fungible bulk of securities in the possession of a Clearing Corporation) shall be delivered to the Agent concurrently with the execution and delivery of this Agreement (or immediately upon obtaining of any such Pledged Shares hereafter), and shall be in suitable form for transfer by delivery, or shall be accompanied by duly executed instruments of transfer or assignment in blank, all in form and substance satisfactory to the Agent. (b) In the event that any Pledged Shares are Book-Entry Shares which are registered in the name of a Clearing Corporation, concurrently with the execution and delivery of this Agreement (or immediately upon obtaining any such Pledged Shares hereafter), the Pledgor shall cause such Clearing Corporation to make appropriate entries on its books reducing the account of the Pledgor and increasing the account of the Agent by the number of such shares pledged or purported to be pledged hereunder. (c) In the event that any Pledged Shares are certificated securities that constitute part of a fungible bulk of securities in the custody of a Clearing Corporation and are registered in such Clearing Corporation's name, concurrently with the execution and delivery of this Agreement (or immediately upon obtaining any such Pledged Shares hereafter), the Pledgor shall cause such Clearing Corporation to make appropriate entries on its books reducing the account of the Pledgor and increasing the account of the Agent by the number of such shares pledged or purported to be pledged hereunder. (d) All original Pledged Notes outstanding on the date hereof shall be delivered to the Agent concurrently with the execution and delivery of this Agreement (or immediately upon obtaining of any such Pledged Notes hereafter), and shall be in suitable form for transfer by delivery, or shall be accompanied by duly executed instruments of transfer or assignment in blank, all in form and substance satisfactory to the Agent. (e) No later than ten (10) Business Days after obtaining any Pledged Shares or Pledged Notes hereafter, the Pledgor agrees that it will (i) deliver to the Agent a duly executed Pledge Agreement Supplement in substantially the form of SCHEDULE 2 attached hereto (a "PLEDGE AGREEMENT SUPPLEMENT") identifying such additional Pledged Shares or Pledged Notes, and (ii) deliver or otherwise cause the transfer of such additional Pledged Shares or Pledged Notes to the Agent pursuant to subsection (a), (b), (c) or (d) above, as applicable. The Pledgor hereby authorizes the Agent to attach each Pledge Agreement Supplement to this Agreement and agrees that all shares of capital stock, notes or other securities listed thereon shall for all purposes hereunder constitute Pledged Collateral. (f) The Agent shall have the right, at any time in its discretion and without notice to the Pledgor, to transfer to or to register in its name or the name of any of its nominees any or all of the Pledged Shares, subject only to the provisions of Section 7(a). In addition, the -4- Agent shall have the right at any time to exchange certificates, instruments or other writings representing or evidencing Pledged Shares for certificates, instruments or other writings of smaller or larger denominations. As soon as practicable after the purchase or receipt by the Pledgor of any Book-Entry Shares, the Pledgor shall cause the issuer thereof to issue stock certificates with respect to such shares and shall, no later than ten (10) Business Days after receipt thereof, deliver such certificates to the Agent in accordance with this Section. SECTION 4 REPRESENTATIONS AND WARRANTIES. In addition to and not in limitation of the representations and warranties of the Pledgor set forth in the Credit Agreement, the Pledgor represents and warrants to the Agent and the other Bank Parties that: (a) The Pledgor is the sole record legal and beneficial owner of the Pledged Collateral. No other Person, except the Agent pursuant to this Agreement, has any right, title, claim or interest (by way of Lien, purchase option or otherwise) in or against or to the Pledged Collateral, except the restrictions relating to the transfer of Pledgor's shares and membership interests in ResNet and ResNet LLC, respectively, under that certain Stockholders' Agreement dated as of October 21, 1996 between Pledgor and TCI Satellite Entertainment, Inc. (b) The pledge of the Pledged Collateral pursuant to this Agreement creates in favor of the Agent, for the benefit of itself, the Banks and the Issuing Banks, a legally valid, binding and enforceable, first priority perfected, security interest in the Pledged Collateral, securing the payment of the Secured Obligations. The Pledgor acknowledges that, to the extent the Pledged Collateral constitutes "instruments" under the UCC, no filings or recordings (including, without limitation, filings under the UCC) are necessary to be made under present law in order to perfect, protect and preserve the security interest of the Agent, for the benefit of itself, the Banks and the Issuing Banks, in the Pledged Collateral created or intended to be created by this Agreement. (c) All Pledged Shares have been duly authorized, validly issued and fully paid and are non-assessable. (d) No approval, consent, exemption, authorization, or other action by, or notice to, or filing with, any governmental authority is necessary or required in connection with the execution, delivery or performance by, or enforcement against, the Pledgor of this Agreement, the exercise by the Agent of the voting or other rights provided for in this Agreement, or the remedies in respect of the Pledged Collateral pursuant to this Agreement, except as may be required in connection with the disposition of the Pledged Shares by laws affecting the offering and sale of securities generally. (e) The Pledgor has full power, authority and legal right to pledge the Pledged Collateral pursuant to this Agreement. There are and will be no restrictions on the transferability of any Pledged Collateral transferred or delivered by the Pledgor hereunder to the Agent or with respect to the foreclosure, transfer or disposition thereof by the Agent, -5- except the restrictions relating to the transfer of Pledgor's shares and membership interests in ResNet and ResNet LLC, respectively, under that certain Stockholders' Agreement dated as of October 21, 1996 between Pledgor and TCI Satellite Entertainment, Inc. (f) The Pledgor has delivered or otherwise caused the transfer to the Agent, pursuant to subsection 3(a), 3(b), 3(c) or 3(d), as applicable, of all Pledged Shares and Pledged Notes. (g) All Pledged Shares are (i) certificated securities represented or evidenced by certificates, instruments or other writings, the originals of which are in the possession of the Pledgor (prior to delivery to the Agent hereunder),(ii) certificated securities that constitute part of a fungible bulk of securities in the custody of a Clearing Corporation and registered in such Clearing Corporation's name, or (iii) uncertificated securities that are Book-Entry Shares registered in the name of a Clearing Corporation. (h) As of the date hereof, the Pledgor has no Pledged Subsidiaries other than those listed on SCHEDULE 1 attached hereto. Set forth on SCHEDULE 1 attached hereto is a true, compete and accurate list of all Pledged Shares and Pledged Notes. All the information set forth on SCHEDULE 1 attached hereto is true, complete and accurate. (i) None of the Pledged Shares constitutes "margin stock", as such term is defined in Section 221.2(h) of Regulation U of the Board of Governors of the Federal Reserve System, 12 C.F.R., Chapter II, Part 221. (j) The Indebtedness represented by the Pledges Notes comprises all of the Indebtedness owed by any Subsidiary to the Pledgor. The foregoing representations and warranties shall survive the execution and delivery of this Agreement and shall be deemed restated automatically at each such time as any additional Pledged Collateral is delivered hereunder to the Agent. SECTION 5 COVENANTS. In addition to and not in limitation of the covenants of the Pledgor set forth in the Credit Agreement, so long as any of the Secured Obligations remain unsatisfied or any Bank shall have outstanding any Commitment or any Loan, or any letter of credit shall be outstanding and not cash collateralized, or any Bank shall be a counterparty to any Interest Rate Contract or currency hedging agreement with the Borrower, the Pledgor agrees that: (a) The Pledgor, for itself and its successors and assigns, does hereby irrevocably waive and release all preemptive, first-refusal and other similar rights of the Pledgor to purchase any or all of the Pledged Shares upon any sale thereof by the Agent hereunder, whether such right to purchase arises under any of the Pledgor's charter documents, by agreement, by operation of law or otherwise. -6- (b) The Pledgor warrants and covenants to defend the Agent's security interest in and to the Pledged Collateral against the claims and demands of all other Persons at any time claiming the same or any interest therein adverse to the Agent. (c) The Pledgor agrees that it will not (i) sell, assign, transfer, surrender or otherwise dispose of, or grant any option, warrant or other right or interest with respect to, any of the Pledged Collateral, (ii) create or permit to exist any Lien upon or with respect to any of the Pledged Collateral, except for the Lien created by this Agreement and Permitted Liens, or (iii) enter into any shareholder agreement, voting agreement, voting trust, irrevocable proxies (other than the Irrevocable Proxies) or any other similar agreement or instrument with respect to any Pledged Collateral. (d) The Pledgor shall, no later than ten (10) Business Days after its acquisition (directly or indirectly) of any Pledged Shares or Pledged Notes hereafter, pledge such shares or notes hereunder pursuant to subsection 3(e) and deliver or otherwise cause the transfer of such shares to the Agent in accordance with subsection 3(a), 3(b), 3(c) or 3(d), as applicable. The Pledgor shall not cause or permit any issuer of Pledged Shares to issue in favor of any Person other than the Pledgor any shares of capital stock or other equity securities, except as permitted by the Credit Agreement. (e) The Pledgor shall pay promptly when due all taxes and other governmental charges, all Liens and all other charges now or hereafter imposed upon, relating to or affecting any Pledged Collateral to the extent the Pledgor is required to do so under the Credit Agreement. (f) The Pledgor will deliver promptly to the Agent and the other Bank Parties all reports and notices received by the Pledgor in respect of any Pledged Collateral. (g) At the option of the Agent upon the occurrence and during the continuance of an Event of Default, the Pledgor shall not demand, sue for or receive any payments with respect to the Pledged Collateral and in the event that the Pledgor, as record and beneficial owner of the Pledged Collateral, shall have received, or shall have become entitled to receive, any cash dividends or other payments or distributions in the ordinary course, the Pledgor shall deliver to the Agent, and the Agent shall be entitled to receive and retain, all such cash payments or other distributions as additional security for the Secured Obligations. SECTION 6 FURTHER ASSURANCES. The Pledgor agrees that at any time and from time to time, at its own cost and expense, it will promptly procure, execute and deliver all further instruments, documents and agreements, and take all further action, that may be necessary or desirable, or that the Agent may request, in order to establish, maintain, preserve, protect and perfect the Pledged Collateral, any security interest granted or purported to be granted hereby and the priority of such security interest, or to enable the Agent to exercise and enforce its rights and remedies hereunder with respect to any Pledged Collateral. Without limiting the generality of the foregoing, the Pledgor further agrees that it shall, concurrently with the execution of this Agreement -7- and at any time and from time to time thereafter (a) procure, execute and deliver to the Agent all stock powers, endorsements, financing statements, assignments and other instruments of transfer requested by the Agent, (b) deliver to the Agent immediately upon receipt the originals of all Pledged Shares and Pledged Notes and all certificates, instruments and other writings evidencing the Pledged Collateral, and (c) cause the Lien of the Agent to be recorded or registered in the books of any Clearing Corporation requested by the Agent. SECTION 7 VOTING RIGHTS; DIVIDENDS. (a) So long as no Default or Event of Default shall exist or result therefrom: (i) The Pledgor shall be entitled to exercise any and all voting and other consensual rights pertaining to the Pledged Shares or any part thereof for any purpose not inconsistent with the terms of this Agreement or the Credit Agreement. (ii) The Pledgor shall be entitled to receive and retain any and all dividends, distributions or cash payments paid in respect of the Pledged Collateral, in compliance with the terms of the Credit Agreement, except the following: (A) dividends and payments paid or payable other than in cash in respect of, and instruments and other property received, receivable or otherwise distributed in respect of, or in exchange for, any Pledged Collateral; (B) dividends, payments and other distributions paid or payable in cash in respect of any Pledged Shares in connection with a partial or total liquidation or dissolution or in connection with a reduction of capital, capital surplus or paid-in-surplus; and (C) cash paid, payable or otherwise distributed in redemption of, or in exchange for, any Pledged Collateral; all of which shall be, and all of which shall be forthwith delivered to the Agent to hold as, Pledged Collateral and shall, if received by the Pledgor, be received in trust for the benefit of the Agent, be segregated from the other property or funds of the Pledgor, and be forthwith delivered to the Agent as Pledged Collateral in the same form as so received (with any necessary endorsement and indemnity). (iii) The Agent shall execute and deliver (or cause to be executed and delivered) to the Pledgor all such proxies and other instruments as the Pledgor may request for the purpose of enabling the Pledgor to exercise the voting and other rights which it is entitled to exercise pursuant to clause (i) above and to receive the dividends or distributions which it is authorized to receive and retain pursuant to clause (ii) above. -8- (b) Upon the occurrence and during the continuance of a Default or an Event of Default: (i) All rights of the Pledgor to exercise the voting and other consensual rights which it would otherwise be entitled to exercise pursuant to Section 7(a)(i) above shall cease upon written notice thereof from the Agent, and all such rights shall thereupon become vested in the Agent, for the benefit of itself, the Banks and the Issuing Banks, who shall thereupon have the sole right to exercise such voting and other consensual rights. (ii) All rights of the Pledgor to receive the dividends or distributions which it would otherwise be authorized to receive and retain pursuant to Section 7(a)(ii) above shall cease, and all such rights shall thereupon become vested in the Agent, for the benefit of itself, the Banks and the Issuing Banks, who shall thereupon have the sole right to receive and hold as Pledged Collateral such dividends. (iii) All dividends or distributions which are received by the Pledgor contrary to the provisions of paragraph (ii) of this Section 7(b) shall be received in trust for the benefit of the Agent, for the benefit of itself, the Banks and the Issuing Banks, shall be segregated from other funds of the Pledgor and shall be forthwith paid over to the Agent as Pledged Collateral in the same form as so received (with any necessary endorsement or indemnity). (c) In order to permit the Agent to exercise the voting and other rights which it may be entitled to exercise pursuant to Section 7(b)(i) above, and to receive all dividends and distributions which it may be entitled to receive under Section 7(b)(ii) above, the Pledgor shall at any time and from time to time upon the written request of the Agent, execute and deliver such further documents and do such further acts and things as the Agent may reasonably request in order to effect the purposes of this Agreement, including, without limitation, delivering to the Agent on the date hereof or at any time hereafter irrevocable proxies in respect of the Pledged Shares in the form of SCHEDULE 3 hereto (the "IRREVOCABLE PROXIES"). SECTION 8 AUTHORIZATION; AGENT APPOINTED ATTORNEY-IN-FACT. The Agent shall have the right to, in the name of the Pledgor, or in the name of the Agent, or otherwise, without notice to or assent by the Pledgor, and the Pledgor hereby constitutes and appoints the Agent (and any of the Agent's officers, employees or agents designated by the Agent) as the Pledgor's true and lawful attorney-in-fact, with full power and authority to take any action and execute any and all endorsements, assignments, documents, instruments or UCC financing statements which the Agent may deem necessary or desirable to accomplish the purposes of this Agreement, including, without limitation, (a) upon the occurrence and during the continuance of an Event of Default, to receive, endorse and collect all instruments made payable to the Pledgor representing any dividend, interest payment or other distribution in respect of the Pledged Collateral or any part thereof and to give full discharge for the same, (b) to perfect or continue perfected, maintain the priority of or provide notice -9- of the Agent's security interest in, the Pledged Collateral or (c) upon the occurrence and during the continuance of an Event of Default, to maintain, protect, sell, assign, convey or otherwise transfer title in or dispose of the Pledged Collateral. The foregoing power of attorney is coupled with an interest and irrevocable so long as any Bank has outstanding any Commitment or Loan, or a letter of credit remains outstanding, or the Secured Obligations have not been paid and performed in full or any Bank is a counterparty to an Interest Rate Contract or currency hedging agreement with the Borrower. The Pledgor hereby ratifies all that the Agent shall lawfully and in good faith do or cause to be done by virtue of and in compliance with this Section. SECTION 9 AGENT PERFORMANCE OF PLEDGOR'S OBLIGATIONS. Upon the occurrence and during the continuance of an Event of Default, the Agent may perform or pay any obligation which the Pledgor has agreed to perform or pay under or in connection with this Agreement, and the Pledgor shall reimburse the Agent on demand for any amounts paid by the Agent pursuant to Section 16(a). SECTION 10 NO RESPONSIBILITY FOR CERTAIN ACTIONS. Except for the safe custody of the Pledged Collateral in their possession pursuant to Section 9-207 of the UCC and the accounting for monies actually received by them, neither the Agent nor any Bank Party shall have responsibility for (a) ascertaining or taking action with respect to calls, conversions, exchanges, maturities, tenders or other matters relative to any Pledged Collateral, whether or not the Agent or any Bank Party has or is deemed to have knowledge of such matters, or (b) taking any necessary steps to preserve any rights against any parties with respect to any Pledged Collateral. The Agent shall have no duty with respect to the custody, safekeeping and physical preservation of the Pledged Collateral in its possession other than as set forth in Section 9-207 of the UCC. SECTION 11 REMEDIES IN GENERAL. Upon the occurrence and during the continuance of an Event of Default: (a) The Agent may exercise in respect of the Pledged Collateral, in addition to other rights and remedies provided for herein or otherwise available to it under the Credit Agreement or any other Loan Document, all the rights and remedies of a secured party under the UCC and other applicable laws, and the Agent may also, without notice except as specified below, sell the Pledged Collateral or any part thereof in one or more parcels at public or private sale, at any exchange, broker's board or at any of the Agent's offices or elsewhere, for cash, on credit or for future delivery, and upon such other terms as the Agent may deem commercially reasonable. The Pledgor agrees that, to the extent notice of sale shall be required by law, at least ten (10) days' notice to the Pledgor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. The Agent shall not be obligated to make any sale of Pledged Collateral regardless of notice of sale having been given. The Agent may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. The Pledgor hereby waives any claims against the Agent arising by reason of the fact that the price at which any Pledged Collateral may have been sold at such a private sale -10- was less than the price which might have been obtained at a public sale, even if the Agent accepts the first offer received and does not offer such Pledged Collateral to more than one offeree, so long as such sale is conducted in a commercially reasonable manner and made on commercially reasonable terms. (b) If the Agent shall determine to exercise its right to sell all or any of the Pledged Collateral pursuant to this Section, the Pledgor agrees that, upon request of the Agent, the Pledgor will, at its own expense: (i) execute and deliver and cause each issuer of Pledged Collateral to execute and deliver all such instruments and documents, and do or cause to be done all such other acts and things, as may be necessary or, in the opinion of the Agent, advisable to register such Pledged Collateral under the provisions of the Securities Act of 1933, as from time to time amended (the "SECURITIES ACT"), in accordance with the intended method of distribution thereof, and to cause the registration statement relating thereto to become effective and to remain effective for such period as prospectuses are required by law to be furnished, and to make all amendments and supplements thereto and to the related prospectus which, in the opinion of the Agent, are necessary or advisable, all in conformity with the requirements of the Securities Act and the rules and regulations of the Securities and Exchange Commission (the "COMMISSION") applicable thereto; (ii) qualify the Pledged Collateral under the state securities or "Blue Sky" laws and to obtain all necessary governmental approvals for the sale of the Pledged Collateral in any state, as requested by the Agent; (iii) cause each issuer of the Pledged Collateral to enter into customary agreements and take such other actions as are required in order to expedite or facilitate the disposition of such Pledged Collateral, as Agent or the managing underwriter therefor requests, and will cause each issuer of Pledged Collateral otherwise to comply with all applicable rules and regulations of the Commission; and (iv) do or cause to be done all such other acts and things as may be necessary to make such sale of the Pledged Collateral or any part thereof valid and binding and in compliance with applicable law. The Pledgor further acknowledges the impossibility of ascertaining the amount of damages which would be suffered by the Agent or the Bank Parties by reason of the failure by the Pledgor to perform any of the covenants contained in this Section 11(b) and, consequently, agrees that, if the Pledgor shall fail to perform any of such covenants, the Agent shall be entitled to specific performance. (c) The Pledgor recognizes that, by reason of the aforementioned requirements and certain prohibitions contained in the Securities Act and applicable state securities laws, -11- the Agent may, at its option, elect not to require the Pledgor to register the offering or sale of all or any part of the Pledged Collateral under the provisions of the Securities Act and may therefore be compelled, with respect to any sale of all or any part of the Pledged Collateral, to limit purchasers to those who will agree, among other things, to acquire such securities for their own account, for investment, and not with a view to the distribution or resale thereof. The Pledgor acknowledges and agrees that any such sale may result in prices and other terms less favorable to the seller than if such sale were a public sale without such restrictions and notwithstanding such circumstances, agrees that any such sale shall not be deemed to have been made in a manner not commercially reasonable solely by reason of such sale's being conducted in such manner. The Agent shall be under no obligation to delay the sale of any of the Pledged Collateral for the period of time necessary to permit the Pledgor to register such securities for public sale under the Securities Act, or under applicable state securities laws, even if the Pledgor would agree to do so. (d) If the Agent determines to exercise its right to sell any or all of the Pledged Collateral, upon written request, the Pledgor shall, and shall cause each of its Subsidiaries to, from time to time, furnish to the Agent all such information as the Agent may reasonably request in order to determine the number of shares and other instruments included in the Pledged Collateral which may be sold by the Agent as exempt transactions under the Securities Act and rules of the Commission thereunder, as the same are from time to time in effect. (e) In connection with any disposition of the Pledged Collateral, if the Agent elects to obtain the advice of an investment banking firm, such firm shall be selected by the Pledgor from among three (3) nationally known investment banking firms which are member firms of the New York Stock Exchange, which three firms shall be proposed by the Agent to the Pledgor (and may include an Affiliate of any Bank). Such selection by the Pledgor shall be made within five (5) Business Days after receipt by the Pledgor of the names of the firms proposed by the Agent. In the absence of such selection by the Pledgor within such period, the Agent may select any one of such firms. The Pledgor agrees that the sale or other disposition of all or any part of the Pledged Collateral in reliance on the advice of the investment banking firm so selected shall be deemed to be commercially reasonable under the UCC. (f) The Pledgor shall indemnify and hold harmless the Agent, the Bank Parties and any underwriter or financial advisor to the Agent or the Bank Parties (and the officers, directors, shareholders, employees, attorneys, and agents of each of them), from and against any and all loss, liability, claim, damage and expense (including, without limitation, attorney costs) under the Securities Act, any "Blue Sky" law or otherwise insofar as such loss, liability, claim, damage or expense arises out of or is based upon any untrue statement or alleged untrue statements of a material fact contained in a registration statement or prospectus or on any preliminary prospectus or any amendment or supplement thereto (collectively, the "OFFERING DOCUMENTS"), or arises out of or is based upon any omission or alleged omission to state therein a material fact required to be stated or necessary to make -12- the statements therein not misleading, such indemnification to remain operative regardless of any investigation made by or on behalf of the Agent, the Bank Parties or any underwriter or financial advisor or any other person or entity indemnified hereunder. This indemnification does not apply to losses, claims, damages, liabilities or expenses that are caused by any such untrue statement or omission or alleged untrue statement or omission based upon information furnished in writing to the issuer of such Pledged Collateral by the Agent or on the Agent's behalf expressly for use in any of the Offering Documents. (g) Any and all reasonable expenses which may be charged to or for the account of the Agent or the Bank Parties hereunder, including brokers' or underwriters' commissions or discounts, financial advisory fees, accounting fees, attorney costs, costs of printing and other expenses of offering, sale, or transfer shall be reimbursed by or charged to the Pledgor pursuant to Section 16(a). (h) Any cash held by the Agent as Pledged Collateral and all cash proceeds received by the Agent in respect of any sale of, collection from, or other realization upon all or any part of the Pledged Shares or Pledged Notes upon the exercise of any remedy by the Agent under this Section 11 shall be distributed to each Bank pro rata and shall be applied by the Agent as follows: FIRST: to the payment of the costs and expenses of such sale, including reasonable compensation to the Agent and its agents and attorneys, and of any judicial or private proceedings in which such sale may be made, and of all other expenses, liabilities and advanced made or incurred by the Agent, together with interest on such costs, expenses and liabilities and on all advances made by the Agent from the date any such cost, expense or liability is past due or unpaid or any such advance is made, in each case until paid in full; SECOND: to the payment of any other fees, costs or other expenses constituting obligations under the Loan Documents other than amounts payable under subparagraph "First" above, together with interest on each such amount at the Post-Default Rate from and after the date such amount is due, owing or unpaid until paid in full; THIRD: to the payment of (i) any interest then due, owing or unpaid in respect of any Loan or any other Secured Obligation secured by this Agreement; and (ii) and with respect to any Interest Rate Contracts or currency hedging agreements with the Borrower to which a Bank is a party, the interest due and owing in respect of any amounts payable thereunder, in each case together with, to the maximum extent permitted by law, interest thereon at the Post-Default Rate from the date such amount is due, owing or unpaid until paid in full to be applied in accordance with the Credit Agreement; -13- FOURTH: to the payment of the whole amount of principal then due, owing or unpaid in respect of any Loan, or any other Secured Obligation secured by this Agreement, to be applied in accordance with the Credit Agreement; and FIFTH: the surplus, if any, to be paid to the Pledgor or to whomever lawfully may be entitled to receive such surplus. The Pledgor shall remain liable to the Agent for any deficiency which exists after any sale or other disposition or collection of the Pledged Shares. SECTION 12 NOTICES. All notices or other communications hereunder shall be given in the manner and to the addresses as specified, and shall be effective as provided, in the Credit Agreement. SECTION 13 AMENDMENTS; WAIVERS. No amendment or waiver of any provision of this Agreement, nor consent to any departure by the Pledgor herefrom, shall in any event be effective unless the same shall be made as provided in the Credit Agreement. No failure on the part of the Agent or any Bank Party to exercise, and no delay in exercising, any right, remedy, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, remedy, power or privilege preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. Unless otherwise specified in any such waiver or consent, a waiver or consent given hereunder shall be effective only in the specific instance and for the specific purpose for which given. SECTION 14 CUMULATIVE REMEDIES. The rights, powers and remedies of the Agent under this Agreement are cumulative and shall be in addition to all rights, powers and remedies available to the Agent and the other Bank Parties pursuant to the Credit Agreement, the other Loan Documents and at law or in equity, all of which rights, powers and remedies shall be cumulative and may be exercised successively or concurrently without impairing the Agent's rights hereunder. SECTION 15 CERTAIN WAIVERS. The Pledgor waives, to the fullest extent permitted by law, any right to require the Agent or the Bank Parties (i) to proceed against any Person, (ii) to exhaust any other collateral or security for any of the Secured Obligations, (iii) to pursue any remedy in the Agent's or any of the Bank Parties' power, or (iv) to make or give any presentments, demands for performance, notices of nonperformance, protests, notices of protests or notices of dishonor in connection with any of the Pledged Collateral. SECTION 16 COSTS AND EXPENSES; INDEMNIFICATION; OTHER CHARGES. (a) INDEMNIFICATION. The Pledgor shall pay, indemnify, and hold the Agent, each Bank, each Issuing Bank and each of their respective Affiliates, officers, directors, employees, counsel, agents and attorneys-in-fact harmless from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, charges, expenses or disbursements, of any kind or nature whatsoever in accordance with the terms and conditions of the Credit Agreement. -14- (b) OTHER CHARGES. The Pledgor agrees to indemnify the Agent, each Bank and each Issuing Bank against and hold each harmless from any and all present and future stamp, transfer, 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. (c) INTEREST. Any amounts payable to the Agent, each Bank and each Issuing Bank under this Section 16 or otherwise under this Agreement if not paid upon demand shall bear interest from the date of such demand until paid in full at the Post-Default Rate. SECTION 17 BINDING EFFECT; TRANSFERABILITY; NO THIRD-PARTY BENEFICIARIES. This Agreement shall be binding upon, inure to the benefit of and be enforceable by the Pledgor and the Agent, and their respective successors and assigns, PROVIDED, HOWEVER, that the Pledgor may not assign any of its rights hereunder or interests herein except as permitted by the terms of the Credit Agreement. The Pledgor acknowledges that upon any assignment or other transfer by the Agent or any other Bank Party of any of the Secured Obligations, the Agent or such other Bank Party may transfer its interest herein, or any part thereof, to the assignee or transferee, who shall thereupon become vested with all the rights, remedies, powers, security interests and liens herein granted to the Agent or such other Bank Party, or the transferred part thereof, subject, however, to the restrictions contained herein. No Persons other than the Pledgor, the Bank Parties, the Agent and the respective assignees of the Bank Parties and the Agent are intended to be benefited hereby or shall have any rights hereunder, as third-party beneficiaries or otherwise. SECTION 18 GOVERNING LAW AND JURISDICTION. (a) THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK; PROVIDED THAT THE AGENT AND THE BANKS SHALL RETAIN ALL RIGHTS ARISING UNDER FEDERAL LAW. (b) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT MAY BE BROUGHT IN THE COURTS OF THE STATE OF NEW YORK OR OF THE UNITED STATES FOR THE SOUTHERN DISTRICT OF NEW YORK, AND BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH OF THE PLEDGOR AND THE AGENT, FOR THE BENEFIT OF ITSELF, THE BANKS AND THE ISSUING BANKS, CONSENTS, FOR ITSELF AND IN RESPECT OF ITS PROPERTY, TO THE NON-EXCLUSIVE JURISDICTION OF THOSE COURTS. EACH OF THE PLEDGOR AND THE AGENT, FOR THE BENEFIT OF ITSELF, THE BANKS AND THE ISSUING BANKS, IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY ACTION OR PROCEEDING IN SUCH JURISDICTION IN RESPECT OF THIS AGREEMENT OR ANY DOCUMENT RELATED HERETO. THE PLEDGOR AND THE AGENT, FOR THE BENEFIT OF ITSELF, THE BANKS AND THE ISSUING BANKS, EACH WAIVE PERSONAL SERVICE OF ANY SUMMONS, -15- COMPLAINT OR OTHER PROCESS, WHICH MAY BE MADE BY ANY OTHER MEANS PERMITTED BY NEW YORK LAW. SECTION 19 WAIVER OF JURY TRIAL. THE PLEDGOR AND THE AGENT, FOR THE BENEFIT OF ITSELF, THE BANKS AND THE ISSUING BANKS, EACH WAIVE THEIR RESPECTIVE RIGHTS TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF OR RELATED TO THIS AGREEMENT, THE OTHER LOAN DOCUMENTS, OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, IN ANY ACTION, PROCEEDING OR OTHER LITIGATION OF ANY TYPE BROUGHT BY ANY OF THE PARTIES AGAINST ANY OTHER PARTY OR PARTIES, WHETHER WITH RESPECT TO CONTRACT CLAIMS, TORT CLAIMS, OR OTHERWISE. THE PLEDGOR AND THE AGENT, FOR THE BENEFIT OF ITSELF, THE BANKS AND THE ISSUING BANKS, EACH AGREE THAT ANY SUCH CLAIM OR CAUSE OF ACTION SHALL BE TRIED BY A COURT TRIAL WITHOUT A JURY. WITHOUT LIMITING THE FOREGOING, THE PARTIES FURTHER AGREE THAT THEIR RESPECTIVE RIGHT TO A TRIAL BY JURY IS WAIVED BY OPERATION OF THIS SECTION AS TO ANY ACTION, COUNTERCLAIM OR OTHER PROCEEDING WHICH SEEKS, IN WHOLE OR IN PART, TO CHALLENGE THE VALIDITY OR ENFORCEABILITY OF THIS AGREEMENT OR ANY PROVISION HEREOF. THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT. SECTION 20 ENTIRE AGREEMENT. This Agreement, together with the other Loan Documents, embodies the entire agreement and understanding among the Pledgor, the Banks, the Agent and each Issuing Bank and supersedes all prior or contemporaneous agreements and understandings of such Persons, oral or written, relating to the subject matter hereof and thereof. SECTION 21 SEVERABILITY. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under all applicable laws and regulations. If, however, any provision of this Agreement shall be prohibited by or invalid under any such law or regulation in any jurisdiction, it shall, as to such jurisdiction, be deemed modified to conform to the minimum requirements of such law or regulation, or, if for any reason it is not deemed so modified, it shall be ineffective and invalid only to the extent of such prohibition or invalidity without affecting the remaining provisions of this Agreement, or the validity or effectiveness of such provision in any other jurisdiction. SECTION 22 COUNTERPARTS. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute but one and the same agreement. -16- SECTION 23 INCORPORATION OF PROVISIONS OF THE CREDIT AGREEMENT. To the extent the Credit Agreement contains provisions of general applicability to the Loan Documents, including any such provisions contained in Article 10 thereof, such provisions are incorporated herein by this reference. SECTION 24 NO INCONSISTENT REQUIREMENTS. The Pledgor acknowledges that this Agreement and the other Loan Documents may contain covenants and other terms and provisions variously stated regarding the same or similar matters, and agrees that all such covenants, terms and provisions are cumulative and all shall be performed and satisfied in accordance with their respective terms; PROVIDED, in the event any terms or conditions contained herein conflict with any term or condition set forth in the Credit Agreement, such term or conditions set forth in the Credit Agreement shall control. SECTION 25 CONTINUING SECURITY INTEREST; TERMINATION. This Agreement shall create a continuing security interest in the Pledged Collateral and shall apply to all past, present and future Secured Obligations, including Secured Obligations that arise under transactions that continue any Secured Obligation, increase or decrease any Secured Obligation, or from time to time create new Secured Obligations after all or any prior Secured Obligations have been satisfied. Upon termination of the Commitments of the Banks under the Loan Documents, the surrender of any letters of credit issued by any Issuing Bank for the account of the Pledgor, the termination of all Interest Rate Contracts and currency hedging agreements with the Borrower to which any Bank is a counterparty, and the payment and performance in full of all Loans and all Secured Obligations, the security interests granted under this Agreement shall terminate and the Pledgor shall be entitled to the return, upon its request and at its expense, of such of the Pledged Collateral as shall not have been sold or otherwise applied pursuant to the terms hereof. Notwithstanding the foregoing, the obligations of the Pledgor under Sections 11(f) and 16 shall survive such termination. -17- IN WITNESS WHEREOF, the Pledgor has executed this Agreement as of the day and year first above written. LODGENET ENTERTAINMENT CORPORATION By: ______________________________________ Name: ______________________________________ Title:______________________________________ Accepted: NATIONAL WESTMINSTER BANK PLC, as Agent By: ________________________________ Name: ________________________________ Title: ________________________________ SCHEDULE 1 TO PLEDGE AGREEMENT I. PLEDGED SHARES
NUMBER NAME OF NUMBER OF NUMBER OF OF SHARES PLEDGED JURISDICTION OF CLASS OF SHARES SHARES OWED BY SUBSIDIARY INCORPORATION STOCK ISSUED OUTSTANDING PLEDGOR - ---------- --------------- -------- --------- ----------- --------- ResNet Delaware Common 1,052,520 1,052,520 1,000,000 Communications, Inc. LodgeNet Canada Class A Common 2,175,000 2,175,000 2,175,000 Entertainment (Canada) Corporation
II. PLEDGED NOTES
ISSUER ISSUE DATE PRINCIPAL AMOUNT MATURITY DATE ------ ---------- ---------------- ------------- ResNet Communications, Inc. January 10, 1996 see attached Schedule A see attached Schedule A
SCHEDULE A TO SCHEDULE 1 TO PLEDGE AGREEMENT
INTEREST MATURITY PRINCIPAL AMORTIZATION PRINCIPAL INTEREST PAYMENT INTEREST LOAN DATE DATE AMOUNT SCHEDULE PAID RATE SCHEDULE PAID - --------- -------- --------- ------------- --------- -------- -------- -------- 11/31/96 12/15/06 $237,497 N/A - 0 - 10.25% June 15 and - 0 - December 15
SCHEDULE 2 TO PLEDGE AGREEMENT PLEDGE AGREEMENT SUPPLEMENT This Pledge Agreement Supplement, dated as of __________, 199__, is delivered pursuant to Section 3(d) of the Pledge Agreement referred to below. The undersigned hereby agrees that this Pledge Agreement Supplement may be attached to the Pledge Agreement, dated as of _____________, 199__ (as amended, restated, modified, renewed, supplemented or extended from time to time, the "PLEDGE AGREEMENT"; the terms defined therein and not otherwise defined herein being used as therein defined), made by the undersigned in favor of National Westminster Bank Plc, as Agent for the Banks referred to therein, and that the shares of capital stock, promissory notes or other securities listed on Annex A to this Pledge Agreement Supplement shall be and become part of the Pledged Collateral referred to in the Pledge Agreement and shall secure all Secured Obligations. The undersigned agrees that the shares of capital stock, promissory notes and other securities listed below shall for all purposes constitute Pledged Collateral and shall be subject to the security interest created by the Pledge Agreement. The undersigned hereby certifies that the representations and warranties set forth in Section 4 of the Pledge Agreement are true and correct with respect to the Pledged Shares listed below on and as of the date hereof. LODGENET ENTERTAINMENT CORPORATION By: ______________________________________ Name: ______________________________________ Title: ______________________________________ Accepted: NATIONAL WESTMINSTER BANK PLC, as Agent By: ________________________________ Name: ________________________________ Title: ________________________________ ANNEX A TO PLEDGE AGREEMENT SUPPLEMENT I. PLEDGED SHARES NUMBER
NUMBER NAME OF NUMBER OF NUMBER OF OF SHARES PLEDGED JURISDICTION OF CLASS OF SHARES SHARES OWED BY SUBSIDIARY INCORPORATION STOCK ISSUED OUTSTANDING PLEDGOR - ---------- ------------- -------- --------- ----------- ---------
II. PLEDGED NOTES ISSUER ISSUE DATE PRINCIPAL AMOUNT MATURITY DATE ------ ---------- ---------------- ------------- SCHEDULE 3 TO PLEDGE AGREEMENT IRREVOCABLE PROXY KNOW ALL MEN BY THESE PRESENTS that the undersigned does hereby make, constitute and appoint NATIONAL WESTMINSTER BANK PLC, its successors and assigns, as Agent (the "AGENT") for the Banks (the "BANKS") and the Issuing Banks (the "ISSUING BANKS") signatory to the Credit Agreement referred to below, and each of the Agent's officers and employees, its true and lawful attorneys, for it and in its name, place and stead, to act as its proxy in respect of all of the shares of capital stock of ________________________, a __________________ corporation (hereinafter referred to as the "CORPORATION"), that it now or hereafter may own or hold, including, without limitation, the right, on its behalf, to demand the call by any proper officer of the Corporation pursuant to the provisions of the Corporation's Certificate of Incorporation or By-Laws and as permitted by law of a meeting of the Corporation's shareholders and at any such meeting of shareholders, annual, general or special, to vote for the transaction of any and all business that may come before such meeting, or at any adjournment thereof, including, without limitation, the right to vote for the sale of all or any part of the assets of the Corporation and/or the liquidation and dissolution of the Corporation; giving and granting to its said attorneys full power and authority to do and perform each and every act and thing whether necessary or desirable to be done in and about the premises, as fully as it might or could do if personally present with full power of substitution, appointment and revocation, hereby ratifying and confirming all that its said attorneys shall do or cause to be done by virtue hereof. This Proxy is given to the Agent and to its officers and employees in consideration of (i) the Loans made by the Banks to the undersigned and (ii) the letters of credit issued by the Issuing Banks to the undersigned, and in order to carry out the covenant of the undersigned contained in that certain Pledge Agreement dated December 19, 1996 between the undersigned and the Agent, for the ratable benefit of the Banks and the Issuing Banks, and this Proxy shall not be revocable or revoked by the undersigned, shall be binding upon the undersigned and its successors and assigns until the payment in full of all of the Secured Obligations (as defined in the aforesaid Pledge Agreement) and may be exercised only after an Event of Default under the Credit Agreement (as such terms are defined in the aforesaid Pledge Agreement). IN WITNESS WHEREOF, the undersigned has executed this Irrevocable Proxy this _____ day of _______, 199_. LODGENET ENTERTAINMENT CORPORATION By: ______________________________________ Name: ______________________________________ Title: ______________________________________ -21- EXHIBIT H PATENT AND TRADEMARK SECURITY AGREEMENT This PATENT AND TRADEMARK SECURITY AGREEMENT (this "Agreement") is made this 19th day of December, 1996, by and between LODGENET ENTERTAINMENT CORPORATION, a Delaware corporation ("BORROWER"), having an office at 808 West Avenue North, Sioux Falls, South Dakota 57104, RESNET COMMUNICATIONS, INC., a Delaware corporation ("RESNET", and together with the Borrower, the "GRANTORS", and each individually, a "GRANTOR"), having an office at 808 West Avenue North, Sioux Falls, South Dakota 57104, and NATIONAL WESTMINSTER BANK PLC, a United Kingdom public limited company, as Agent for the Banks and the Issuing Banks referred to below (in such capacity, hereinafter referred to as the "AGENT"), with a place of business located at 175 Water Street, New York, New York 10038; W I T N E S S E T H: WHEREAS: (A) Borrower has entered into that certain Amended and Restated Credit Agreement of even date herewith (such agreement, as it may from time to time be amended, modified and/or supplemented, is hereinafter referred to as the "CREDIT AGREEMENT") with the several financial institutions from time to time party thereto (collectively, the "BANKS"), the Agent (also in its capacity as an Issuing Bank and Bank) and National Westminster Bank of Canada, as an Issuing Bank, providing for extensions of credit to be made to Borrower by the Banks and the Issuing Banks; (B) All of the indebtedness, liabilities and obligations of the Borrower to the Banks, the Issuing Banks and the Agent, whether now existing or hereafter arising, and whether or not currently contemplated, under or arising out of the Credit Agreement and all other instruments and Loan Documents executed and delivered in connection with any of the foregoing are hereinafter referred to collectively as the "OBLIGATIONS"; (C) In order to secure the performance of the Obligations, ResNet has executed that certain Guaranty of even date herewith (as such agreement may from time to time be amended, modified and/or supplemented, hereinafter referred to as the "GUARANTY") (D) Each of Borrower and ResNet has adopted, has used and is using the service marks and/or trademarks described on Schedule A and Schedule B attached hereto, respectively, is the owner of the U.S. Patent and Trademark Office trademark and/or service mark registrations and applications listed on Schedule A and Schedule B attached hereto, respectively, and is a party to the trademark and/or service mark licenses, listed on Schedule A and Schedule B attached hereto, respectively (collectively, the "SERVICE MARKS"), along with the goodwill of the business associated therewith; (E) Each of Borrower and ResNet owns the patents and the U.S. Patent and Trademark Office patent applications listed on Schedule C and Schedule D attached hereto, respectively, and is a party to the patent licenses, listed on Schedule C and Schedule D attached hereto, respectively (collectively, the "PATENTS", and together with the Service Marks, the "INTELLECTUAL PROPERTY COLLATERAL"); (F) The Obligations and the Guaranty are secured by the grant by the Grantors to the Agent, for the benefit of itself, the Banks and the Issuing Banks, of liens on and security interests in the properties and assets of the Grantors including, without limitation, the Intellectual Property Collateral, pursuant to that certain Security Agreement of even date herewith (as such agreement may from time to time be amended, modified and/or supplemented, hereinafter referred to as the "SECURITY AGREEMENT") between the Grantors, the other grantor party thereto and the Agent; (G) It is a condition precedent to the obligations of the Banks and the Issuing Banks under the Credit Agreement that the Grantors execute and deliver this Agreement; and (H) All capitalized terms used herein without definition shall have the respective meanings ascribed thereto in the Credit Agreement; NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, and subject to the terms and conditions set forth in the Security Agreement, the parties hereto hereby agree as follows: 1. Each Grantor hereby grants unto the Agent, for the benefit of itself, the Banks and the Issuing Banks, on the terms and conditions contained in the Security Agreement, which are incorporated herein and made a part hereof, and as additional security for the Obligations, a security interest and first Lien upon all of such Grantor's right, title and interest in, to and under (i) the Service Marks and the goodwill of the business symbolized by the Service Marks, (ii) all products and proceeds of the Service Marks and the goodwill of the business symbolized by the Service Marks, including, without limitation, any claim by such Grantor against third parties for past, present or future (a) infringement or dilution of any trademark and/or service mark, any trademark and/or service mark registration, any trademark and/or service mark registration issued with respect to any trademark and/or service mark application, or any trademark and/or service mark licensed under any trademark and/or service mark license or (b) injury to the goodwill associated with any trademark and/or service mark, any trademark and/or service mark registration, any trademark and/or service mark registration issued with respect to any trademark and/or service mark application, or any trademark and/or service mark licensed under any trademark and/or service mark license, (iii) the Patents and (iv) all products and proceeds of the Patents, including, without limitation, any claim by such Grantor against third parties for past, present or future infringement of any patent, any patent issued pursuant to a patent application and any patent licensed under any patent license. -2- 2. Each Grantor shall take all action, under both statutory and common law, which in its reasonable business judgment, may be necessary or useful to perfect title to the Intellectual Property Collateral and to maintain and/or defend the Intellectual Property Collateral including, without limitation, the defense of the Intellectual Property Collateral, surveillance of marks or patents owned and/or used by third parties which may be related to the Intellectual Property Collateral, bringing actions against infringing marks, patents and uses, and bringing cancellation or opposition proceedings in order to enforce rights in the Intellectual Property Collateral, all as determined to be appropriate in such Grantor's reasonable business judgment. 3. This Agreement shall terminate upon written notice from the Agent to the Grantors that all of the Obligations secured hereby have been fully paid and performed and, upon such termination, the Agent shall promptly execute and deliver to the Grantors such release documents or instruments as the Grantors may reasonably request in furtherance and in evidence of such termination. 4. This Agreement shall be binding upon the Grantors, their successors and assigns and shall inure to the benefit of the Agent and its successors and assigns. 5. This Agreement may not be amended or modified except with the written consent of the Agent. 6. The Grantors will provide any additional documentation to support or confirm the security interest created under this Agreement as the Agent may request. [SIGNATURE PAGE FOLLOWS] -3- IN WITNESS WHEREOF, the Grantors and the Agent have caused this Agreement to be executed by their officers thereunto duly authorized on the day and year first above written. LODGENET ENTERTAINMENT CORPORATION By:_______________________________________ Name:_____________________________________ Title:______________________________________ RESNET COMMUNICATIONS, INC. By:_______________________________________ Name:_____________________________________ Title:______________________________________ NATIONAL WESTMINSTER BANK PLC, as Agent By:_______________________________________ Name:_____________________________________ Title:______________________________________ -4- BORROWER'S ACKNOWLEDGMENT STATE OF NEW YORK ) : SS.: COUNTY OF NEW YORK) I, ___________________, a Notary Public in and for said County, in the State aforesaid, DO HEREBY CERTIFY that __________________, personally known to me to be ___________ of LODGENET ENTERTAINMENT CORPORATION, and personally known to me to be the same person whose name is subscribed to the foregoing instrument, appeared before me this day in person and acknowledged that (s)he signed and delivered said instrument as ___________ of said corporation, as his(her) free and voluntary act, and as the free and voluntary act and deed of said corporation, for the uses and purposes therein set forth. GIVEN under my hand and notarial seal this ____ day of __________, 1996. ___________________________________ NOTARY PUBLIC My Commission Expires:_____________ RESNET'S ACKNOWLEDGMENT STATE OF NEW YORK ) : SS.: COUNTY OF NEW YORK) I, ___________________, a Notary Public in and for said County, in the State aforesaid, DO HEREBY CERTIFY that __________________, personally known to me to be ___________ of RESNET COMMUNICATIONS, INC., and personally known to me to be the same person whose name is subscribed to the foregoing instrument, appeared before me this day in person and acknowledged that (s)he signed and delivered said instrument as ___________ of said corporation, as his(her) free and voluntary act, and as the free and voluntary act and deed of said corporation, for the uses and purposes therein set forth. GIVEN under my hand and notarial seal this ____ day of __________, 1996. ___________________________________ NOTARY PUBLIC My Commission Expires:_____________ NATIONAL WESTMINSTER BANK PLC ACKNOWLEDGMENT STATE OF NEW YORK ) : SS.: COUNTY OF NEW YORK) I, _______________, a Notary Public in and for said County, in the State aforesaid, DO HEREBY CERTIFY that _____________, personally known to me to be a _______________ of NATIONAL WESTMINSTER BANK PLC, and personally known to me to be the same person whose name is subscribed to the foregoing instrument, appeared before me this day in person and acknowledged that (s)he signed and delivered said instrument as a ____________ of said corporation, as (her)his free and voluntary act, and as the free and voluntary act and deed of said corporation, for the uses and purposes therein set forth. GIVEN under my hand and notarial seal this ____ day of _________, 1996. _________________________________ NOTARY PUBLIC My Commission Expires: _________ SCHEDULE A TO PATENT AND TRADEMARK SECURITY AGREEMENT BORROWER TRADEMARK REGISTRATIONS MARK REG. NO. ---- -------- LodgeNet 1,378,457 LodgeNet Entertainment Class 41, (and Design) Serial No. 74/669,535 LodgeNet Entertainment Class 38, (and Design) Serial No. 74/669,533 LodgeNet Class 38, Serial No. 74/669,534 BORROWER TRADEMARK APPLICATIONS Traveler's TV Mall, Serial No. 74/615,989 TV Mall, filed November 6, 1995 LodgeNet Passport, filed February 15, 1996, Serial No. 75/058,170 ResNet, Serial No. 75/016091 ResNet Communications, filed March 14, 1996, Serial No. 75/072,868 B-LAN, filed October 31, 1996 BORROWER TRADEMARK LICENSES Name of Agreement Parties Date of Agreement - ----------------- ------- ----------------- Technology License Borrower and ResNet January 10, 1996 Agreement -5- SCHEDULE B TO PATENT AND TRADEMARK SECURITY AGREEMENT RESNET TRADEMARK REGISTRATIONS MARK REG. NO. ---- -------- None. RESNET TRADEMARK APPLICATIONS None. RESNET TRADEMARK LICENSES Name of Agreement Parties Date of Agreement - ----------------- ------- ----------------- Technology License Borrower and ResNet January 10, 1996 Agreement SCHEDULE C TO PATENT AND TRADEMARK SECURITY AGREEMENT BORROWER PATENTS U.S. Patent No. Date Issued Title - --------------- ----------- ----- 5455619 October 3, 1995 Video Distribution System Addressing Device for Identifying Remote Locations 5,506,572 April 9, 1996 Low Battery Detection System 4,502,098 February 26, 1985 Circuit Assembly 4,920,432 April 24, 1990 System for Random Access to an Audio/Video Data Library with Independent Selection and Display at each of a Plurality of Remote Locations BORROWER PATENT APPLICATIONS Serial No. Date Filed Title - ---------- ---------- ----- 08/288,626 August 10, 1994 System for Collecting and Processing User Inputs BORROWER PATENT LICENSES Name of Agreement Parties Date of Agreement - ----------------- ------- ----------------- None. SCHEDULE D TO PATENT AND TRADEMARK SECURITY AGREEMENT RESNET PATENTS U.S. Patent No. Date Issued Title - --------------- ----------- ----- None. RESNET PATENT APPLICATIONS Serial No. Date Issued Title - ---------- ----------- ----- None. RESNET PATENT LICENSES Name of Agreement Parties Date of Agreement - ----------------- ------- ----------------- None. EXHIBIT I BORROWER U.S. LEGAL OPINION 1. Each of the Borrower and ResNet 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 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 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. 2. The execution, delivery and performance of each of the Loan Documents to which the Borrower or ResNet is a party have been duly authorized by the Borrower and ResNet (as applicable), and each of the Loan Documents constitutes the legal, valid and binding obligation of the Borrower and ResNet (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 of the Loan Documents to which it is a party, nor the consummation by each of the Borrower and ResNet of the transactions contemplated thereby: (i) violates any provision of the Borrower's or ResNet'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; (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 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 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 other than (a) the filing of the Financing Statements and (b) those which have been obtained. 4. To our knowledge, there are no judgments outstanding against the Company or ResNet. 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 is in default with respect to 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 or used by the Borrower or its Subsidiaries in the conduct of their respective businesses is affected. 6. Neither the Borrower nor ResNet 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 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 provisions of the Security Agreement are sufficient to create in the Agent's favor a security interest in all right, title and interest of the Borrower and ResNet in those items and types of Collateral in which a security interest may be created under Article 9 of the Code. The description of the Collateral set forth in the Financing Statements is sufficient to perfect a security interest in the items and types of Collateral in which a security interest may be perfected by the filing of a financing statement under the Code. Assuming that the Financing Statements have been filed in the offices set forth on Schedule __ hereto and have not subsequently been released, terminated or modified, the Agent's security interest in the Collateral has been perfected, to the extent such security interest may be perfected under the Code by the filing of the Financing Statements. 9. Assuming that the Agent has taken and is retaining possession of the stock certificates evidencing the shares of stock described in the Pledge Agreement (the "Pledged Stock") and the Agent has taken such Pledged Stock in good faith without notice (actual or constructive) of any adverse claim within the meaning of the Code, there has been created under the Pledge Agreement, and there has been granted to the Agent a valid and perfected first priority security interest and lien upon the Pledged Stock to the extent a security interest may be obtained by possession under the Code. 10. Assuming that the Agent has taken delivery of the intercompany notes that are negotiable instruments within the meaning of Article 3 of the Code (the "Pledged Notes") in good faith and without notice or knowledge that any item thereof is overdue or has been dishonored or of any defense against a claim to any item thereof on the part of any Person, and that such Pledged Notes have been drawn, issued or endorsed to the Agent as such or to the order of the Agent as such or to bearer or blank, there has been created under the Pledge Agreement, and there has been granted to the Agent a valid and perfected first priority security interest and lien upon the Pledged Notes. 11. There are no state or local taxes, fees or other charges payable in connection with the execution or delivery of the Loan Documents or the recordation, filing or enforcement of the Financing Statements other than nominal recording fees in the appropriate state or county offices. 12. 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. 2 SCHEDULE 3.1 TO AMENDED AND RESTATED CREDIT AGREEMENT ORGANIZATION LODGENET ENTERTAINMENT CORPORATION (i) State of Incorporation: Delaware (ii) Capitalization: (a) Common Stock, $.01 par value 20,000,000 Shares authorized; 11,045,369 Shares outstanding (b) Preferred Stock, $.01 par value 5,000,000 Shares authorized; none outstanding (iii) States of Qualification All fifty (50) states (iv) Business Providing video-on-demand, network-based video games, cable television programming and other interactive entertainment and information services to the lodging and multi-family residential dwelling unit markets. 1 RESNET COMMUNICATIONS, INC. (i) State of Incorporation: Delaware (ii) Capitalization: (a) Common Stock, $.01 par value 10,000,000 Shares authorized; 1,052,520 Shares outstanding (b) Preferred Stock, $.01 par value 5,000,000 Shares authorized; none outstanding (iii) States of Qualification Presently qualified in all states other than Connecticut, Louisiana, Mississippi, Missouri, Montana, and Wisconsin (iv) Business Providing video-on-demand, network-based video games, cable television programming and other interactive entertainment and information services to the multi-family residential dwelling unit markets. 2 LODGENET ENTERTAINMENT (CANADA) CORPORATION (i) Jurisdiction of Incorporation: Canada (ii) Capitalization: (a) Common Stock, $1.00 par value Class A (voting): no maximum authorized; 2,175,000 Shares outstanding Class B (voting): no maximum authorized; none outstanding (iii) Jurisdictions of Qualification British Columbia New Brunswick Nova Scotia Ontario Quebec (iv) Business Providing video-on-demand, network-based video games, cable television programming and other interactive entertainment and information services to the lodging market. 3 SCHEDULE 3.5 TO AMENDED AND RESTATED CREDIT AGREEMENT PROPERTIES PROPERTIES LEASED 1. 808 West Avenue North (Headquarters) Sioux Falls, SD 57104 2. 1700 West Russell Street Sioux Falls, SD 57104 3. 1200 West Avenue North Sioux Falls, SD 57104 4. 704 West Avenue North (Headquarters of ResNet Communications, Inc.) Sioux Falls, SD 57104 5. 1408 D. Avenue Sioux Falls, SD 57104 6. 909 E. Las Colinas Boulevard Suite 1950 Irving, TX 75039 7. 3313 Vincent Road Suite 110 Pleasant Hill, CA 94523 8. 1020 Auahi Building 6 Bay 7B Honolulu, HI 96814 9. 6225 Harrison Drive #6 Las Vegas, NV 89120 10. 250 W. Beaver Creek Road Unit 15 Richmond Hill, ON CANADA L4B 1C7 11. 5061 W. 161st Street Brook Park, OH 44142 12. 521 A Flint Trail Jonesboro, GA 30236 13. 121 Division Street Suite A Clermont, FL 34711-7700 14. 708 N. Valley Street Suite C Anaheim, CA 92801 PROPERTIES SUBLEASED, ETC. None. PROPERTY OWNED Approximately 23 acre parcel of land on Maple Lane and Markey Avenue in Sioux Falls, South Dakota on which is being constructed the Company's National Headquarters and Distribution Center. PURCHASE OPTIONS, ETC. There are no unexpired 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. SCHEDULE 3.6 TO AMENDED AND RESTATED CREDIT AGREEMENT LITIGATION On February 16, 1995, On Command Video Corporation filed a lawsuit in Federal District Court in Northern California asserting patent infringement by the Company relating to its on-demand video system. The complaint requests an unspecified amount of damages and injunctive relief. The Company has carefully reviewed the allegations of infringement and is of the opinion that the Company does not infringe on the patent and the allegations are without merit. The company filed an answer and counterclaim to the lawsuit on April 17, 1995, denying the claims, asserting affirmative defenses and asserting a counterclaim for declaratory relief. The Company is currently engaged in litigation with respect to this matter and is continuing to vigorously defend itself. On February 28, 1996, On Command Video Corporation filed a related lawsuit in Superior Court of the State of California, County of San Francisco, alleging interference with prospective economic advantage and misappropriation of trade secrets. The state court action has been stayed pending resolution of the federal litigation. The Company believes that this lawsuit is also groundless and without merit. SCHEDULE 3.11 TO AMENDED AND RESTATED CREDIT AGREEMENT INTELLECTUAL PROPERTY TRADEMARKS/SERVICE MARKS: - ------------------------ 1. LodgeNet, Reg. No. 1, 378, 457 (Registered) 2. LodgeNet Entertainment (& Design), Class 41, Serial No. 74/669,535 3. LodgeNet Entertainment (& Design), Class 38, Serial No. 74/669,533 4. LodgeNet, Class 38, Serial No. 74/669,534 5. Traveler's TV Mall, Serial No. 74/615,989 (Applied) 6. TV Mall, filed 11/6/95 (Applied) 7. LodgeNet Passport, filed 2/15/96, Serial No. 75/058,170 (Applied) 8. ResNet, Serial No. 75/016091 (Applied) 9. ResNet Communications, filed 3/14/96, Serial No. 75/072,868 (Applied) 10. B-LAN (Applied 10/31/96) PATENTS AND PATENTS PENDING: - --------------------------- 1. Video Distribution System Addressing Device for Identifying Remote Locations Patent No. 5455619 (issued 10/3/95) 2. Low Battery Detection System Patent No. 5506572 (issued 4/9/96) 3. System for Collecting and Processing User Imputs Application No. 08/288,626 (filed 8/10/94) 4. Circuit Assembly Patent No. 4502098 (issued 2/2/85) 5. System for Random Access to an Audio/Video Data Library with Independent Selection and Display at each of a Plurality of Remote Locations Patent No. 4,920,432 (issued 4/24/90) Patent/Trademark Lst December 18, 1996 SCHEDULE 3.13 TO AMENDED AND RESTATED CREDIT AGREEMENT NAME CHANGES, MERGERS October, 1993: LodgeNet Entertainment Corporation, a South Dakota corporation, merged into LodgeNet Entertainment Corporation, a Delaware corporation. October, 1993: LNET, Inc., a Delaware corporation, changed its name to LodgeNet Entertainment Corporation, a Delaware corporation. September, 1991: Satellite Movie Company Incorporated, a South Dakota corporation, changed its name to LodgeNet Entertainment Corporation, a South Dakota corporation. SCHEDULE 3.19 TO AMENDED AND RESTATED CREDIT AGREEMENT MATERIAL AGREEMENTS CONTRACTS NOT FREELY ASSIGNABLE 1. Confidential License Agreement for Use of Super Nintendo Entertainment System with Integrated Hotel Entertainment and Hotel Guest Related Communications System dated as of March 12, 1993 by and between the Company and Nintendo of America, Inc. MASTER AGREEMENTS 1. See attached Exhibit A (Studio Contracts). EQUIPMENT LEASES None. MATERIAL LICENSES AND PERMITS 2. See attached Exhibit B (Programming Agreements). EXHIBIT A STUDIO AGREEMENTS STUDIO AGREEMENTS STUDIO NAME DATE OF AGREEMENT COLUMBIA PICTURES PAY TELEVISION 10/16/86 HBO ENTERPRISES 10/5/92 PARAMOUNT PICTURES CORPORATION 7/24/86 SHOWTIME NETWORKS INC 1/18/90(MISSING) SHOWTIME NETWORKS INC 10/8/94(AMENDMENT) TWENTIETH CENTURY FOX 5/1/96 UNIVERSAL PAY TELEVISION, INC 5/30/91 WALT DISNEY PICTURES AND TELEVISION 10/10/90 WARNER BROTHERS, INC. UNDATED(AMENDMENT) Page 1 EXHIBIT B INDEX OF NETWORK/PROGRAMMING AGREEMENTS - -A- ARTS & ENTERTAINMENT CABLE NETWORK SMATV Affiliate Agreement - June 27, 1989 ARTS & ENTERTAINMENT CABLE NETWORK SMATV Amendment (Extension) - March 1, 1990 ARTS & ENTERTAINMENT CABLE NETWORK SMATV Amendment (Extension) - June 26, 1993 ARTS & ENTERTAINMENT CABLE NETWORK SMATV Amendment (Extension) - October 18, 1995 - -B- BLACK ENTERTAINMENT TELEVISION SMATV Affiliation Agreement - (Unexecuted) - -C- Residential and Non-Residential Distribution Agreement for CARTOON NETWORK - (Unexecuted) CNBC - SEE FINANCIAL NEWS NETWORK CABLE NEWS NETWORK, INC. SMATV Private Cable Distribution Agreement - August 5, 1991 Terms and Conditions for Cablecast of CABLE NEWS NETWORK and HEADLINE NEWS - August 17, 1995 Residential and Non-Residential Distribution Agreement for CABLE NEWS NETWORK and HEADLINE NEWS - (Unexecuted) Residential and Non-Residential Distribution Agreement for CABLE NEWS NETWORK INTERNATIONAL - (Unexecuted) COUNTRY MUSIC TELEVISION Hotel/Motel Affiliate Agreement - May 17, 1994 1 Affiliation Agreement (SMATV System) between Lodge Net Entertainment and National Cable Satellite Corporation, d/b/a C-SPAN - November 9, 1995 - -D- The DISNEY CHANNEL Hotel/Motel Distribution Agreement - July 1, 1988 DISNEY CHANNEL letter modifying Subscription Fee - September 30, 1991 DISNEY CHANNEL Letter Agreement amending 1988 Agreement - October 3, 1991 DISNEY CHANNEL Letter Agreement amending 1988 Agreement - October 31, 1991 DISNEY CHANNEL Letter Agreement extending term of 1988 Agreement - April 21, 1993 DISNEY CHANNEL Letter Agreement amending 1988 Agreement - March 30, 1995 DISNEY CHANNEL letter increasing Subscriber Fee - September 15, 1995 - -E- ESPN, Inc. letter discussing volume discount - January 20, 1993 ESPN2 Hotel Affiliation Agreement - August 1, 1993 ESPN, Inc. Hotel Affiliation Agreement - September 1, 1993 ESPN/ESPN2 letter detailing Charter Affiliate Benefits - September 1, 1993 ESPN, Inc. Hospital Affiliation Agreement - April 1, 1994 ESPN, Inc. letter discussing fee increase - September 30, 1994 ESPN, Inc. letter discussing fee increase - September 30, 1994 ESPN, Inc. letter discussing fee increase - December 13, 1995 ESPN, Inc. letter granting temporary authorization to LodgeNet to receive ESPN and ESPN2 through PrimeStar Partners, L.P. - June 6, 1996 ESPN, Inc. Hotel Affiliation Agreement - September 1, 1996 2 - -F- The FAMILY CHANNEL SMATV Distribution Agreement - August/September 1990 The FAMILY CHANNEL Rate Card Rider B-1 Extension - December 20, 1995 FINANCIAL NEWS NETWORK, INC. Cable Affiliation Agreement - November 28, 1990 CNBC letter increasing CNBC's distribution - May 23, 1995 CNBC - Agreement Term Sheet Among LodgeNet Entertainment Corporation, CNBC, Inc. and National Broadcasting Company, Inc. - September 16, 1996 - -G- The GOLF CHANNEL Private Cable Affiliation Agreement - September 9, 1996 - -H- HBO-CINEMAX Service Affiliation Agreement for Lodging Industry Distributors - January 1, 1993 HBO Service Affiliation Agreement - June 1, 1986 HBO Letter Agreement - June 1, 1986 HBO Letter Agreement - January 1, 1989 HBO Letter Agreement - August 1, 1990 HBO Letter Agreement amending 8/1/90 Letter Agreement - August 1, 1990 HBO Letter Agreement - November 2, 1992 HBO letter - December 22, 1995 - -J- JNG (JAPAN NETWORK) Service Affiliation Agreement for Lodging Industry Distribution - June 29, 1993 Maintenance Agreement (JNG) - June 29, 1993 3 Amendment to JNG Service Affiliation Agreement for Lodging Industry Distributor - - -L- SMATV and Non-Residential TVRO Distribution Agreement (LIFETIME Network) - January 1, 1994 - -N- The NASHVILLE NETWORK Hotel/Motel Affiliate Agreement - August 30, 1990 - -P- License Agreement (Hotel/Motel) (PLAYBOY) January 1, 1988 Satellite Master Antenna Television License Agreement between PLAYBOY Video Entertainment Group, Inc. and Satellite Movie Company Incorporated - October 20, 1988 - -S- Science Fiction Channel Agreement for Distribution to SMATV Affiliates - Five Year - SMATV Service Agreement (Southern Satellite Systems, Inc) (WTBS) - September 1, 1993 - -T- Turner Network Television, Inc. National Hotel/Motel/Hospital Distribution Agreement - April 12, 1991 Turner Cable Network Sales, Inc. CABLE NEWS NETWORK INC. SMATV Private Cable Distribution Agreement - August 5, 1991 Residential and Non-Residential Distribution Agreement for Turner Classic Movies - 4/25/95 (Unexecuted) Residential and Non-Residential Distribution Agreement for Turner Network Television - 5/23/95 (Unexecuted) December 18, 1996 4 8/15/95 Letter from Verna Page of Turner Network Sales Inc. Terms and Conditions for Distribution of CABLE NEWS NETWORK and HEADLINE NEWS - - 12/1/95 Terms and Conditions for Distribution of Turner Network Television - April 13, 1996 - (Unexecuted) - -U- Cable Affiliation Agreement (Univision) - (Unexecuted) Agreement for Distribution of the USA Network Service to SMATV Affiliates - 10/12/95 Broadcast Basic Tier/Cable Programming Services SMATV Distributor Satellite Transmission Service Agreement (United Video/WGN) - November 22, 1995 - -W- The WEATHER CHANNEL Affiliation Agreement SMATV - November 15, 1995 Star Jr. Addendum (The WEATHER CHANNEL)- November 15, 1995 Equipment Agreement (The WEATHER CHANNEL) - November 15, 1995 December 18, 1996 5 SCHEDULE 7.1 TO AMENDED AND RESTATED CREDIT AGREEMENT OUTSTANDING INDEBTEDNESS There is no Indebtedness outstanding, except as provided in subsections (a), (b), (c), (d), (e), (g), (h), (i), and (j) of Section 7.1 of the Credit Agreement. SCHEDULE 7.2 TO AMENDED AND RESTATED CREDIT AGREEMENT LIENS There are no Liens other than those provided for in subsections (a), (b), (c), (e), and (f) of Section 7.2 of the Credit Agreement. EX-10.24 9 EXHBIT 10.24 1ST AMEND. TO CONF. LICENSE AGMT EXHIBIT 10B FIRST AMENDMENT TO CONFIDENTIAL LICENSE AGREEMENT FOR USE OF SUPER NINTENDO ENTERTAINMENT SYSTEM WITH INTEGRATED HOTEL ENTERTAINMENT AND HOTEL GUEST RELATED COMMUNICATIONS SYSTEM THIS FIRST AMENDMENT ("Amendment") dated October 17, 1996, is between NINTENDO of America Inc., having a place of business at 4820 150th Avenue N.E., Redmond, Washington 98052, USA ("NINTENDO") and Lodgenet Entertainment Corporation, having a place of business at 808 West Avenue North, Sioux Falls, South Dakota 57104, USA ("LICENSEE"). RECITALS I. Effective May 12, 1993, the parties entered into a Confidential License Agreement for Use of Super Nintendo Entertainment System With Integrated Hotel Entertainment and Hotel Guest Related Communications System ("Agreement"). Defined terms which are capitalized herein shall be deemed to have the same definitions as set forth in the Agreement unless specified otherwise herein. II. NINTENDO and LICENSEE wish to amend the Agreement in accordance with the terms and conditions of this Amendment. AGREEMENT NOW, THEREFORE, in consideration of the foregoing recitals and other good and valuable consideration, NINTENDO and LICENSEE hereby agree as follows: A. The following shall be added to Section 2 of the Agreement: 2.8 "Territory" shall mean Brazil, Canada, South Korea and the United States, together with any other countries that the parties may mutually agree upon in writing. 2.9 "Approved Sub-Distributor(s)" shall mean and be limited to those accounts of LICENSEE which specialize in selling the Licensed Products to Licensed Hotels in all or a specified portion of the Territory. All Approved Sub-Distributors must be approved, in writing, by NINTENDO (NINTENDO shall make its best efforts to review and respond to such request for approval within thirty (30) days of receipt thereof) and must have delivered to NINTENDO a fully executed original Approved Sub-Distributor Acknowledgment prior to performing such services. Those accounts of LICENSEE listed on attached Exhibit A are hereby approved by NINTENDO for the portion of the Territory described therein; provided, such accounts of LICENSEE must deliver to NINTENDO fully executed original Approved Sub-Distributor Acknowledgment prior to performing such services. LICENSEE may terminate any Approved Sub-Distributor without NINTENDO's consent or approval. 2.10 "Approved Sub-Distributor Acknowledgment" shall mean a written acknowledgment in the form attached hereto as Exhibit B, which sets forth the conditions applicable to Approved Sub-Distributors. 2.11 "Licensed Hotel Acknowledgment" shall mean a written acknowledgment in the form attached hereto as Exhibit C, which sets forth conditions applicable to Licensed Hotels. FIRST AMENDMENT SNES INTEGRATED HOTEL LICENSE AGMT LODGENET / NOA October 9, 1996 Page 1 B. Sections 4.1 and 4.2 of the Agreement are hereby deleted in their entirety and replaced with the following: 4.1 GRANT. NINTENDO hereby grants to LICENSEE and LICENSEE hereby ------ accepts under the terms and conditions herein stated, a nonexclusive right and license to solicit placement of the Licensed Products in conjunction with LICENSEE's placement of the LodgeNet System in the Licensed Hotels in the TERRITORY. To this end, the Modified Super NES units shall be sold to LICENSEE by NINTENDO, and the Licensed Software shall be licensed to LICENSEE by NINTENDO. NINTENDO hereby grants LICENSEE the right to appoint Approved Sub-Distributors for the distribution and sale of the Licensed Products to Licensed Hotels in the Territory, with NINTENDO's prior written approval. 4.2 SUBLICENSING. LICENSEE shall have the right to sublicense the ------------- rights granted herein with the Territory to Licensed Hotels and Approved Sub-Distributors. Subject to Section 4.2.1, Licensed Hotels added after the effective date of this Amendment shall execute and deliver a Licensed Hotel Acknowledgment. All Approved Sub-Distributors shall execute and deliver to LICENSEE an Approved Sub-Distributor Acknowledgment. Notwithstanding the foregoing, LICENSEE shall enforce all applicable and material restrictions, conditions and limitations of the Agreement and shall ensure that all Approved Sub-Distributors and Licensed Hotels shall comply with the terms of the Agreement. If LICENSEE does not undertake such enforcement efforts, NINTENDO, upon twenty (20) days' written notice to LICENSEE, may undertake such enforcement efforts and LICENSEE shall provide reasonable assistance as may be requested by NINTENDO. No rights with respect to the Licensed Products shall vest in any Approved Sub-Distributor appointed after the date hereof until it has executed and delivered an Approved Sub-Distributor Acknowledgment or Licensed Hotel Acknowledgment, as the case may be. 4.2.1 Exception to Requirement to Obtain Licensed Hotel ------------------------------------------------- Acknowledgment. LICENSEE or an Approved Sub-Distributor is not required to - --------------- obtain a Licensed Hotel Acknowledgment from a Licensed Hotel if the following conditions apply: i) The Licensed Hotel has not purchased or otherwise acquired title or an ownership interest of any kind whatsoever to all or part of the Licensed Products; and ii) The LICENSEE continuously maintains the ability to render the Licensed Products inoperable by the Licensed Hotels; and iii) The LICENSEE shall render the Licensed Products inoperable by the Licensed Hotels in the event of default by the Licensed Hotel, any termination of the License Agreement (between NINTENDO and LICENSEE) or the business relationship between LICENSEE and Licensed Hotel. C. The following additions shall be made to Section 9 of the Agreement: 9.4 Approved Sub-Distributor Records Retention. All Approved ------------------------------------------- Sub-Distributors shall maintain during the Term of the Agreement and for a period of two (2) years thereafter, complete and accurate books and records as well as copies of all correspondence between LICENSEE, the Licensed Hotels and NINTENDO and all other correspondence of any kind relating to obligations assumed by Approved Sub-Distributors under the Agreement. 9.5 Approved Sub-Distributor Record Audits. NINTENDO or its --------------------------------------- authorized agent, upon reasonable notice to Approved Sub-Distributor, reserves the right to conduct audits of all Approved Sub-Distributors' records during the Term of the Agreement to verify Royalty Reports. NINTENDO shall be FIRST AMENDMENT SNES INTEGRATED HOTEL LICENSE AGMT LODGENET / NOA October 9, 1996 Page 2 allowed to make examinations of books, records and correspondence reasonably relating to verification of such Royalty Reports and calculations. The provisions of Section 9.3 apply to such audits. D. Section 11.5 of the Agreement is hereby deleted in its entirety and replaced with the following: 11.5 Hold Harmless. LICENSEE agrees to indemnify and hold harmless -------------- NINTENDO against any and all losses, claims, demands, damages, liabilities and expenses, including reasonable attorney fees, which are based in whole or in part upon any act or omission, whether negligent or otherwise, of LICENSEE or its employees, agents, sub-licensees, or sub-distributors including, but not limited to, claim of products liability with respect to (a) the LodgeNet System, the Modified LodgeNet System or Licensed Products, (b) failure to comply with applicable laws, regulations or orders relating to or in any way affecting this Agreement, (c) the performance by LICENSEE of this Agreement as provided herein, (d) the performance by any Approved Sub-Distributor of their obligations pursuant to the Approved Sub-Distributor Acknowledgment and/or (e) the performance by any Licensed Hotel of their obligations pursuant to the Licensed Hotel Acknowledgement, where required. The foregoing indemnifications shall not extend to any losses, claims, demands, damages, liabilities or expenses to the extent arising out of NINTENDO's negligence or matters included in NINTENDO's indemnification of LICENSEE set forth in Section 11.2 herein. E. Section 13 of the Agreement is hereby deleted in its entirety and replaced with the following: 13. Compliance With Applicable Laws, Duties, Tariffs ------------------------------------------------ 13.1 Nintendo /Licensee. 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. 13.2 Approved Sub-Distributor. Licensee shall require that the ------------------------- Approved Sub-Distributor shall abide all federal, state, local laws, orders and regulations in the Territory relating to its activities as an Approved Sub-Distributor. NINTENDO shall not be responsible for any taxes, duties, tariffs, fees or costs assessed upon the purchase, importation or sale by Approved Sub-Distributor of the Licensed Products. The royalties payable to Nintendo shall be net of any taxes, duties, tariffs, fees or costs assessed upon the purchase, importation or sale by Approved Sub-Distributor of the Licensed Products. F. Royalty Report. Nintendo and Licensee acknowledge and agree that --------------- Licensee has provided and shall continue to provide Nintendo a royalty report on use of the Licensed Products by Licensed Hotels substantially in the form attached as Exhibit D. G. Miscellaneous. References in the Agreement to the "Agreement" shall -------------- mean the Agreement as modified by this Agreement. Exhibits A, B, C and D are attached hereto and are hereby incorporated by reference. Except as specifically set forth herein, all terms and conditions of the Agreement shall remain in full force and effect. This Amendment shall be effective as of the last signature date below. For convenience of the parties, authorized signatures may be transmitted via facsimile in counterparts. FIRST AMENDMENT SNES INTEGRATED HOTAL LICENSE AGMT LODGENET/NOA October 9, 1996 Page 3 IN WITNESS WHEREOF, NINTENDO and LICENSEE have entered into this Amendment as of the last date set forth below. NINTENDO: LICENSEE: NINTENDO OF AMERICA INC. LODGENET ENTERTAINMENT CORPORATION By: /s/ PHILIP ROGERS By: /s/ LISA FERRIS ----------------------------- ---------------------------- Title: E.V.P. Ops Title: Contract Administrator ----------------------------- ---------------------------- Date: 11/1/96 Date: 10-17-96 ----------------------------- ---------------------------- FIRST AMENDMENT SNES INTEGRATED HOTAL LICENSE AGMT LODGENET/NOA October 9, 1996 Page 4 EXHIBIT A APPROVED SUB-DISTRIBUTORS DISTRIBUTOR NAME/ADDRESS DISTRIBUTOR TERRITORY - ------------------------ --------------------- GTV South Korea 22 Jeong-Dong, Chung-Gu Seoul Korea 100-702 Attn.: Mr. Michael Cho Telephone No.: Facsimile No.: TVA Brazil Rua do Rocio 313 Sao Paulo Brazil Attn.: Ms. Katia Murgell Telephone No.: Facsimile No.: FIRST AMENDMENT SNES INTEGRATED HOTEL LICENSE AGMT LODGENET/NOA October 9, 1996 Page 5 EXHIBIT B - ------------------------------------- (Date) - ------------------------------------- (Name of Approved Sub-Distributor) - ------------------------------------- (Address of Approval Sub-Distributor) RE: Approved Sub-Distributor Acknowledgment Dear Approved Sub-Distributor: As you know, Lodgenet Entertainment Corporation ("Lodgenet") is an authorized licensee of select NINTENDO brand video game products for commercial 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 sub-distributor for the territory of ____ _______________ (insert territory) and to your use of certain proprietary information and intellectual property rights associated with Nintendo products. In order to induce Nintendo to approve your appointment, we ask that you acknowledge and agree as follows: 1. Lodgenet Agreement. You are a sub-distributor 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 under this letter agreement, and Nintendo has reserved the right to enforce Nintendo's rights directly. 2. Approved Sub-Distributor Responsibilities. In the event that: (a) ----------------------------------------- any Licensed Hotel purchases or otherwise acquires title or an ownership interest of any kind in Nintendo products, and (b) you do not continuously maintain the ability to render the Nintendo products inoperable by the Licensed Hotel, then it is your responsibility to obtain a Licensed Hotel Acknowledgment (form attached) from each such 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, including the modified Super NES consoles and licensed Nintendo games, belong to Nintendo and are licensed to Lodgenet and granted to you, as an Approved Sub-Distributor, on a nonexclusive basis by Nintendo. 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 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 shall not modify the ------------------------------------------ Nintendo products, including the modified Super NES console or licensed Nintendo games. You acknowledge and agree that the modified Super NES consoles may only be used with the licensed Nintendo games provided by Nintendo. 5. Security of Nintendo Game Disks. You shall keep the licensed -------------------------------- Nintendo games and game disks in a secure location and shall not copy or permit copying thereof. 6. Termination; No Continuing Use. Unless otherwise agreed in writing ------------------------------- by Nintendo, you must return all copies of the licensed Nintendo games, game disks and documents containing Nintendo's proprietary information or intellectual property rights to Nintendo and all of your rights therein terminate upon termination of your agreement with Lodgenet or upon notification of termination of the agreement between Nintendo and Lodgenet. FIRST AMENDMENT SNES INTEGRATED HOTEL LICENSE AGMT LODGENET/NOA October 9, 1996 Page 6 7. Guest Information. You agree to provide to Nintendo (through ------------------ Lodgenet) information on use of the Nintendo products and licensed Nintendo games by your hotel customers. The information shall be in a form substantially similar to that in the report form attached as Schedule 1. 8. Records Audit. For Nintendo's benefit, you shall retain and use -------------- reasonable commercial efforts to 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 1 and shall include: (a) total number of Nintendo Super NES boards installed and the total number of guest rooms serviced by such Super NES boards, by hotel; (b) the date of installation and use by hotel; and, (c) the licensed Nintendo software titles offered to 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 or your hotel customers must be approved in advance of use by Nintendo. Such materials may be transmitted to Lodgenet (Fax: ____________ Attn: ____________). Nintendo has advised us that they will use their best efforts to review and provide approval and/or corrections for such materials within thirty (30) days. Approved Sub-Distributor may utilize pre-approved art solely in connection with the advertising and promotion of the licensed products without prior submission to or approval of Nintendo so long as the Approved Sub-Distributor does not modify the pre-approved art. Sub-Distributor shall properly attribute all intellectual property rights. 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 that use of Nintendo's products, or its intellectual property rights will not infringe upon the rights of others. 11. Hold Harmless. You shall 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. 12. No Effect on Other Agreement. This letter is executed solely at the --------------------------------- request of and solely for the benefit of Nintendo and Lodgenet and this letter agreement does not alter or amend in any respect the obligations of the Approved Sub-Distributor to Lodgenet under the Equipment Supply and Technology License Agreement executed by Approved Sub-Distributor and Lodgenet. Please acknowledge your understanding and acceptance of the provisions set forth above by signing and returning two (2) copies of this acknowledgment to Lodgenet. We will forward the acknowledgment to Nintendo and retain a signed copy for our files. Lodgenet Entertainment Corporation By: ----------------------------------- Its: ---------------------------------- Acknowledged and Accepted this ____ day of _______ 1996. Approved Sub-Distributor By: ----------------------------------- Its: ---------------------------------- Schedule 1, Royalty Report Form is attached FIRST AMENDMENT SNES INTEGRATED HOTEL LICENSE AGMT LODGENET/NOA October 9, 1996 Page 7 MONTHLY ROYALTY REPORTING FOR MONTH: # OF GAMES AVAILABLE: # OF DAYS IN MONTH AVAILABLE: --------------------------- - --------------------------------------------------------------------------------- CURRENT CURRENT (New installations) # OF # OF # OF DAYS MONTH MONTH HOTEL/NAME ROOMS SNES AVAILABLE BUYS GROSS SALES - ------------------------------------------------------------------------------------------------------------ Beginning Balance 150 4 31 60 $239.40 235 6 31 95 $379.05 125 3 31 50 $199.50 (Include any monthly adjustments in this section. Should an existing hotel increase or decrease room count.) - ------------------------------------------------------------------------------------------------------------ Monthly Totals 360 9 $817.95 - ------------------------------------------------------------------------------------------------------------ - -------------------------------------------------------------------- Cumulative Totals 510 13 205 - -------------------------------------------------------------------- (Beginning Balance + Monthly Totals)
# of Total Avg. Min. Played # of Rooms Games Titles Bays Minutes Played (Total Min/# Buys) Available ------------ ---- -------------- ------------------ ---------- Vegas Stakes 20 1100 55 510 Super Punch Out 20 1200 60 510 F-Zero 12 1000 83 510 Super Play Action Football 10 1200 120 510 Ken Griffey Major Leag. Baseball 20 900 45 510 Super Mario World 30 800 27 510 Tetris & Dr. Malro 30 1200 40 510 The Legend of Zelda 10 1200 120 510 Donkey Kong Country 35 1200 34 510 Super Soccer 18 1200 67 510 Totals 205 11000
Schedule 1 EXHIBIT C LICENSED HOTEL ACKNOWLEDGMENT Lodgenet Entertainment Corporation ("Lodgenet") is an authorized licensee of select NINTENDO brand video game products for commercial use in authorized hotel guest rooms. In certain circumstances Lodgenet has granted a portion of its rights with regard to a specified territory to an approved sub-distributor, such as __________________________ (if applicable, insert name of approved sub-distributor) ("Sub-Distributor"). You are permitted to use certain proprietary information and intellectual property rights associated with Nintendo products only on condition that you acknowledge and agree as follows: 1. 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, including the modified Super NES consoles and licensed Nintendo games, belong to Nintendo and are sublicensed to you on a nonexclusive basis by Nintendo. 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 information related to the Nintendo products confidential and to permit only those employees having a need to know such information to have access thereto. 2. Modification and Use of Nintendo Products. You shall not modify the ------------------------------------------ Nintendo products, including the modified Super NES console or licensed Nintendo games. You acknowledge and agree that the modified Super NES consoles may only be used with the licensed Nintendo games. 3. Security of Nintendo Game Disks. You shall keep the licensed -------------------------------- Nintendo games and game disks in a secure location and shall not copy or permit copying thereof. 4. Termination; No Continuing Use. Unless otherwise agreed in writing ------------------------------- by Nintendo, you must return all copies of the licensed Nintendo games, game disks and documents containing Nintendo's proprietary information or intellectual property rights to Nintendo and all of your rights therein terminate upon termination of your agreement with Lodgenet or its Sub-Distributor, as the case may be, or upon notification of termination of the agreement between Nintendo and Lodgenet. 5. 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 must be approved in advance of use by Nintendo. Such materials should be transmitted to Lodgenet or its Sub-Distributor, as the case may be, (Lodgenet Fax: ________________ Attn: _______________, Sub-Distributor Fax: ______________ Attn: ____________). Nintendo has advised us that they will promptly review and provide approval and/or corrections for such materials. 6. 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 that use of Nintendo's products, or its intellectual property rights will not infringe upon the rights of others. FIRST AMENDMENT SNES INTEGRATED HOTEL LICENSE AGMT LODGENET/NOA October 9, 1996 Page 9 Please acknowledge your understanding and acceptance of the provisions set forth above by signing and returning a copy of this acknowledgment to Lodgenet or its Sub-Distributor, as the case may be. --------------------------------------- (Print Name of Licensed Hotel) By: ------------------------------------ Its: ----------------------------------- Date: ---------------------------------- FIRST AMENDMENT SNES INTEGRATED HOTEL LICENSE AGMT LODGENET/NOA October 9, 1996 Page 10 Monthly Royalty Reporting FOR MONTH: # OF GAMES AVAILABLE: # OF DAYS IN MONTH AVAILABLE: ---------------------------- - --------------------------------------------------------------------------------- CURRENT CURRENT (New Installations) # OF # OF # OF DAYS MONTH MONTH HOTEL/NAME ROOMS SNES AVAILABLE BUYS GROSS SALES - ------------------------------------------------------------------------------------------------------------- Beginning Balance 150 4 31 60 $239.40 235 6 31 95 $379.05 125 3 31 50 $199.50 (Include any monthly adjustments in this section. Should an existing hotel increase or decrease room count.) - ------------------------------------------------------------------------------------------------------------ Monthly Totals 360 9 $817.95 - ------------------------------------------------------------------------------------------------------------ - -------------------------------------------------------------------- Cumulative Totals 510 13 205 - -------------------------------------------------------------------- (Beginning Balance & Monthly Totals)
# of Total Avg. Min. Played # of Rooms Games Titles Bays Minutes Played (Total Min/# Buys) Available ------------ ---- -------------- ------------------ ---------- Vegas Stakes 20 1100 55 510 Super Punch Out 20 1200 60 510 F-Zero 12 1000 83 510 Super Play Action Football 10 1200 120 510 Ken Griffey Major Leag. Baseball 20 900 45 510 Super Mario World 30 800 27 510 Tetris & Dr. Malro 30 1200 40 510 The Legend of Zelda 10 1200 120 510 Donkey Kong Country 35 1200 34 510 Super Soccer 18 1200 67 510 Totals 205 11000
Exhibit "D" EX-11.1 10 EXHIBIT 11.1 STATEMENT OF COMPUTATION OF EARNINGS EXHIBIT 11.1 LODGENET ENTERTAINMENT CORPORATION AND SUBSIDIARIES STATEMENT REGARDING COMPUTATION OF NET LOSS PER SHARE OF COMMON STOCK (UNAUDITED) (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31, ---------------------------------------- 1994 1995 1996 ------------ ------------ ------------ Loss before extraordinary loss.......................................... $(3.326) $(7,026) $(13,357) Extraordinary loss...................................................... (1,324) -- (3,253) ------------ ------------ ------------ Net loss attributable to common stock................................... $(4,650) $(7,026) $(16,610) ------------ ------------ ------------ ------------ ------------ ------------ Weighted average shares outstanding: Shares outstanding.................................................... 7,275,481 7,337,147 9,570,779 Additional equivalent shares issuable from assumed exercise of common stock options (1)................................................... 51,267 45,324 53,447 ------------ ------------ ------------ 7,326,748 7,382,471 9,264,226 ------------ ------------ ------------ ------------ ------------ ------------ Per share amounts: Loss before extraordinary loss........................................ $(0.45) $(0.95) $(1.39) Extraordinary loss.................................................... (0.18) -- (0.34) ------------ ------------ ------------ Net loss attributable to common stock................................. $(0.63) $(0.95) $(1.73) ------------ ------------ ------------ ------------ ------------ ------------
- ------------------------ (1) Includes the effect of options issued during the twelve months preceding the Company's initial public offering. Other options and warrants have not been included because their effect would be anti-dilutive EX-12.1 11 EXHIBIT 12.1 STATEMENT OF COMPUTATION OF RATIOS EXHIBIT 12.1 LODGENET ENTERTAINMENT CORPORATION AND SUBSIDIARIES STATEMENT REGARDING COMPUTATION OF RATIOS (UNAUDITED) (DOLLAR AMOUNTS IN THOUSANDS)
COMPUTATION OF COVERAGE OF FIXED CHARGES - ------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ------------------------------------------------------ 1992 1993 1994 1995 1996 --------- --------- --------- --------- ---------- Net loss................................................... $ (3,797) $ (2,057) $ (4,650) $ (7,026) $ (16,610) Add: Extraordinary loss (1)................................. -- -- 1,324 -- 3,253 Provision for income taxes............................. -- -- -- 66 28 Add fixed charges (2): Interest expense....................................... 1,783 2,096 966 4,522 8,243 Interest portion of rentals............................ -- 27 74 106 159 --------- --------- --------- --------- ---------- Earnings available to cover fixed charges.................. (2,014) 66 (2,286) (2,332) (4,927) Less fixed charges....................................... 1,783 2,123 1,040 4,628 8,402 --------- --------- --------- --------- ---------- Deficiency in the coverage of fixed charges................ $ (3,797) $ (2,057) $ (3,326) $ (6,960) $ (13,329) --------- --------- --------- --------- ---------- --------- --------- --------- --------- ----------
- ------------------------ (1) In 1994--loss on early termination of the Company's bank credit facility. In 1996--loss on early redemption of 9.95% and 10.35% Senior Notes. (2) Fixed charges consist of interest on all indebtedness, including amortization of debt expense, and one-third of rental expense (which is estimated to represent the approximate interest portion thereof). EX-21.1 12 EXHIBIT 21.1 SUBSIDIARIES OF THE COMPANY EXHIBIT 21.1 SUBSIDIARIES OF THE COMPANY LodgeNet Entertainment (Canada) Corporation, a Canadian corporation ResNet Communications, Inc., a Delaware corporation EX-27.1 13 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF LODGENET ENTERTAINMENT CORPORATION AND ITS SUBSIDIARIES AS OF DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 86,177 0 19,213 (785) 0 106,540 234,265 (70,108) 279,768 21,796 179,233 0 0 111 120,539 279,768 97,721 97,721 44,379 58,428 0 0 8,243 (13,329) 28 (13,357) 0 (3,253) 0 (16,610) (1.73) 0
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